Annual Report • May 4, 2011
Annual Report
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Group Annual Report 2010
Gross written premium * in EUR billion
All figures as per IFRS
* Due to the restructuring in primary insurance only the figures for 2009 and 2010 can be shown for these segments
The Talanx Group is Germany's third-largest insurance group. Talanx operates as a multi-brand provider in the primary insurance and reinsurance sectors. Its brands include HDI and HDI-Gerling, providing insurance solutions for retail and industrial customers, Hannover Re, one of the industry's leading reinsurers, the bancassurance specialists Targo Versicherungen, PB Versicherungen and Neue Leben as well as the investment fund provider AmpegaGerling. The Group transacts business in the areas of property/casualty and life insurance as well as non-life and life/health reinsurance. Based in Hannover, Germany, the Group is active in 150 countries and enjoys excellent fi nancial strength.
| Group key figures | 2010 | 2009 | +/– % | |
|---|---|---|---|---|
| IFRS | ||||
| Gross written premium | EUR m | 22,869 | 20,923 | +9.3 |
| Net premium earned | EUR m | 18,753 | 17,323 | +8.3 |
| Underwriting result | EUR m | –2,036 | –1,031 | –97.5 |
| Combined ratio (property/casualty insurance and non-life reinsurance) 1) |
% | 100.9 | 96.7 | +4.2 points |
| Net investment income | EUR m | 3,177 | 2,658 2) | +19.5 |
| Operating profit (EBIT) | EUR m | 1,032 | 1,497 2) | –31.1 |
| Net profit (after tax) | EUR m | 670 | 893 2) | –25.0 |
| Group net income (after minorities) | EUR m | 220 | 485 2) | –54.6 |
| Return on equity after tax 3) | % | 4.6 | 11.8 2) | –7.2 points |
| Policyholders' surplus | EUR m | 10,782 | 9,156 2) | +17.8 |
| Total shareholders' equity | EUR m | 4,956 | 4,574 2) | +8.4 |
| Minority interests | EUR m | 3,035 | 2,579 2) | +17.7 |
| Hybrid capital | EUR m | 2,791 | 2,003 | +39.3 |
| Investments under own management | EUR m | 72,461 | 67,036 2) | +8.1 |
| Total investments | EUR m | 83,422 | 76,385 2) | +9.2 |
| Return on investment 4) | % | 4.2 | 3.7 | +0.5 points |
| Total assets | EUR m | 111,368 | 101,565 | +9.7 |
| Staff (full-time equivalents as at 31.12. of the financial year) | 16,874 | 16,921 | –0.3 |
For mathematical reasons rounding diff erences of ± one unit may arise in the tables.
1) Combined ratio adjusted for deposit interest received
2) Adjusted on the basis of IAS 8
3) Group net income for the period excluding minorities relative to average shareholders' equity excluding minority interests
4) Investment income excluding deposit interest received relative to average investments under own management
Key figures Segments and brands at a glance
27 Detailed index
Contacts Talanx worldwide
The Talanx Group is a place where people come together on a daily basis. It is here that they work together for the company, delivering services for customers and creating value for investors. Yet the Talanx Group is also a place for living together, for co-existence, diversity and communication. Along with its basic function as a place of business, it is also at once a human habitat, social structure and cultural space – just like a city. Indeed, comparing Talanx with a city opens up some astonishing perspectives. Correlations within the Group suddenly appear in a fresh light and become clearer. The parallels with a city make it possible to capture in visual form just what Talanx is: we warmly invite you to join our city tour in this annual report!
The Talanx Group operates as a multi-brand provider in the insurance and fi nancial services industry. Our major brands in primary insurance and reinsurance as well as for fi nancial services are set out on the opposite page. As in the past, the Talanx brand stands for the company at the head of the Group – namely Talanx AG, which performs the functions of a management and fi nancial holding company within the Group but is not itself active in insurance business.
A new feature, however, is that several other Group companies now also bear the Talanx name: they include the service companies Talanx Service AG and Talanx Systeme AG, the latter of which is still in the process of establishment. The divisional companies Talanx Deutschland AG and Talanx International AG bring together the operational companies operating under various brands in Germany and abroad. Similarly, the asset management and real estate management companies will also trade under the Talanx name going forward. Not only that: the Group's own professional reinsurance broker, handling the reinsurance business ceded by the Talanx Group, will in future operate under the Talanx brand: Protection Re is to become Talanx Reinsurance Broker.
Letter from the Chairman Boards and Committees Report of the Supervisory Board Talanx City City News dean esrdtywsup
HDI-Gerling
HDI-Gerling operates worldwide in retail insurance and industrial lines. The product range extends from property, casualty and accident covers to life insurance, occupational retirement provision and individual solutions for old-age provision.
HDI
HDI Direkt Versicherung AG operates under this brand in the Retail Germany division. Some companies outside Germany transacting retail business and industrial lines also trade under the HDI name.
Hannover Re, E+S Rück The Hannover Re Group, one of the largest and most profitable reinsurers in the world, transacts all lines of non-life and life/health reinsurance and maintains business relations with more than 5,000 insurance companies in around 150 countries. E+S Rück is a specialist reinsurer serving the German market.
AmpegaGerling One of the largest independent asset managers in Germany, responsible for fi nancial services within the Group. From funds business to asset management activities for private and institutional investors, AmpegaGerling covers the complete value-added chain in asset management.
Targo Versicherungen
In the bancassurance sales channel the Targo insurers operate exclusively for their partner TARGOBANK and deliver a service for their customers that is geared to the easy and comfortable handling of all banking, fi nancial and insurance transactions.
PB Versicherungen
The PB insurers are active in the bancassurance sales channel exclusively for their partner Postbank: embedded into its market profi le and geared to the needs of its customers, they off er attractive insurance products at reasonable prices.
The Neue Leben insurers are positioned in the bancassurance sales channel as provision specialists for Sparkasse savings institutions. They off er their customers and sales partners innovative insurance products on attractive terms.
Posta Biztosító
The high-growth bancassurance cooperation with the Hungarian postal service. The readily comprehensible and transparent range of products off ering outstanding value for money spans the life and property/casualty lines.
When it comes to delivering a verdict on the Talanx Group's 2010 fi nancial year, it is important not to base it simply on fi rst appearances, but rather to look behind the façade: 2010 was not a bad year for Talanx, even though at fi rst glance our result may suggest otherwise. Yet this appearance is deceiving – in operational and structural terms our Group took another major step forward!
That this is not evident at fi rst glance can be attributed to two developments. In the fi rst place, our insurance business was overshadowed by a considerably higher burden of losses than in the previous year: 2010 saw an accumulation of natural catastrophes and man-made major claims. The Talanx Group, too, was impacted by these losses – and the fact that the eff ect on our combined ratio was not more pronounced was thanks purely to our very prudent reserving policy and the resulting run-off profi ts.
What is more, in 2010 the Board of Management took extensive steps to establish risk provision for future years – which were adversely refl ected in the result in a number of non-recurring charges. The most appreciable eff ect derived from the merger of Aspecta Lebensversicherung AG into HDI-Gerling Lebensversicherung AG. In this connection we commuted reinsurance treaties early and calculated future income fl ows from the former Aspecta portfolio considerably more prudently than in the past. In foreign retail business the confi dence level of the loss reserves was adjusted at some companies in line with the reserving standard of the Talanx Group and units that were unable to fulfi ll our performance expectations were wound up. These two measures also led to one-off expenditures. The fi nal item on this list is the expense associated with the restructuring of central functions and the accompanying IT costs. If these non-recurring charges – together with one-off tax income – are eliminated, the 2010 result posted by Talanx was on the level of the record fi gure generated in the previous year.
City Guide Letter from the Chairman Boards and Committees Report of the Supervisory Board Talanx City City News
This second perspective reveals the economic reality of the Group: the true operational development of the Talanx Group shows that the 2010 result was not the consequence of structural defi ciencies, but rather a refl ection of targeted measures designed to position Talanx even better for the future and to further improve its capital market fi tness. This is also evident from the premium income, investments and fi nancing costs: the pleasing increase in premium income stems from areas in which we are seeking to grow strategically – international retail business and life/health reinsurance. Investment income was also boosted appreciably thanks to both larger asset holdings and improved extraordinary income. We were able to reduce our fi nancing costs by buying back bonds that we had issued on favorable terms.
Talanx continues to rank among the fi nancially strong insurers! The capital strength of the Group is demonstrated by the increase in Group shareholders' equity – which rose 12% to EUR 8 billion – and the further improvement in our solvency ratio, which was almost twice as high as the legally required level.
In structural terms, the Group again boosted its effi ciency and performance capability in 2010. Aft er just one and a half years of preparation and implementation, the primary insurance sector has been operating with joint central functions since January 2011. Not only does this bring effi ciency enhancements, it also delivers appreciable cost savings.
We are continuing to follow this path systematically and have now begun to reorganize the Retail Germany division. The bywords here are benefi ts to the customer, effi ciency and performance culture. In this division, too, our goal is to chart a course for long-term, profi table growth and to make the undertaking equally attractive to staff , customers and shareholders alike. With this in mind, we shall succeed in laying the foundation for successful development, since this division off ers considerable potential for the future.
The fi rst fruits of the restructuring will be evident in 2011, but overall they will not yet make themselves felt in the result. Heavy major losses will again make their mark on our performance in 2011. This is especially true of the devastating earthquake and tsunami in Japan, the human consequences of which are almost impossible to grasp. It is for this reason that in 2011 we again do not expect to match up to the excellent result of 2009. Yet we are by no means dissatisfi ed with the outlook. There are signs that conditions for insurers are improving across a broad front; both on the reinsurance side and in the motor and industrial insurance lines the markets would appear to be picking up. Similarly, early successes of our structural measures – such as the gratifying increase in new life insurance business – encourage us to look to 2011 with confi dence.
I would like to take this opportunity to express my appreciation to all the members of staff who again worked with considerable dedication in the fi nancial year just-ended. Not only that, my thanks are also due to our customers and cooperation partners for the trust that they again placed in us in 2010. Along with our commitment to continuing the successful development of Talanx, living up to this trust remains our paramount mission for 2011.
Yours sincerely,
Herbert K. Haas
Herbert K. Haas
Dr. Immo Querner
Dr. Thomas Noth
Dr. Heinz-Peter Roß
Torsten Leue
Dr. Christian Hinsch
Ulrich Wallin
| Responsible on the Talanx | ||
|---|---|---|
| Herbert K. Haas | Chairman of the Board of Management | Board of Management for Corporate Development |
| Chairman | HDI Haft pfl icht verband der Deutschen Industrie V. a. G., | Investor Relations |
| Hannover | Public Relations | |
| Legal Aff airs | ||
| Internal Auditing | ||
| Executive Staff Functions/Compliance | ||
| Dr. Christian Hinsch | Deputy Chairman of the Board of Management | Division: Industrial Lines |
| Deputy Chairman | HDI Haft pfl ichtverband der Deutschen Industrie V. a. G., | Facility Management |
| Chairman of the Management Board | Human Resources | |
| HDI-Gerling Industrie Versicherung AG, Hannover | Procurement | |
| Reinsurance Purchasing | ||
| Norbert Kox | Chairman of the Management Board | Former Domestic and Foreign |
| (until 31.05.2010) | ProACTIV Holding AG, Hilden | Bancassurance Division |
| Torsten Leue | Chairman of the Management Board | Division: Retail International |
| (from 01.09.2010) | Talanx International AG, Hannover | |
| Dr. Thomas Noth | Chairman of the Management Board | Information Services |
| Talanx Systeme AG, Hannover | ||
| Dr. Immo Querner | Member of the Board of Management | Finance/Participating Interests/ |
| HDI Haft pfl ichtverband der Deutschen Industrie V. a. G., | Real Estate | |
| Hannover | Investments | |
| Controlling | ||
| Collections | ||
| Risk Management | ||
| Accounting/Taxes | ||
| Dr. Heinz-Peter Roß | Chairman of the Management Board | Division: Retail Germany |
| Talanx Deutschland AG, Hannover | Business Organization | |
| Ulrich Wallin | Chairman of the Executive Board | Division: Reinsurance |
| Hannover Rückversicherung AG, Hannover |
Talanx Group 9
City Guide Letter from the Chairman Boards and Committees Report of the Supervisory Board Talanx City City News
Chairman Former Chairman of the Board of Management of Talanx AG, Berg
Deputy Chairman Employee, HDI-Gerling Vertrieb Firmen und Privat AG, Raesfeld
Deputy Chairman Former Chairman of the Board of Management of ThyssenKrupp Technologies AG, Hamburg
Managing Director, Hannover Rückversicherung AG, E+S Rückversicherung AG, Hannover
(from 01.02.2011) Employee, HDI-Gerling Leben Betriebsservice GmbH, Bergisch Gladbach
(until 31.01.2011) Employee, HDI-Gerling Leben Betriebsservice GmbH, Brühl
Trade union secretary, Norderstedt
Chairman of the Board of Management of Groz-Beckert KG, Albstadt
Employee, HDI-Gerling Industrie Versicherung AG, Oberhausen
Employee, Hannover Rückversicherung AG, Hannover
Former Member of the Board of Management of Deutsche Post AG, Inning
Chairman of the Foundation Council of Hanns-Voith-Stift ung, Heidenheim
Employee, Talanx Service AG, Hannover
Former Member of the Board of Management of E.ON AG, Hannover
Member of the Board of Management of Daimler AG, Stuttgart
Professor at Leibniz University, Hannover
Former Chairman of the Board of Management of Bayer AG, Leverkusen
Composition as at 31.12.2010
| Finance and Audit Committee |
Personnel Committee | Mediation Committee | Nomination Committee |
|---|---|---|---|
| Wolf-Dieter Baumgartl Chairman |
Wolf-Dieter Baumgartl Chairman |
Wolf-Dieter Baumgartl Chairman |
Wolf-Dieter Baumgartl Chairman |
| Dr. Thomas Lindner | Prof. Dr. Eckhard Rohkamm | Ralf Rieger | Dr. Thomas Lindner |
| Ralf Rieger | Dr. Michael Rogowski | Prof. Dr. Eckhard Rohkamm | Dr. Michael Rogowski |
| Prof. Dr. Eckhard Rohkamm | Prof. Dr. Ulrike Wendeling Schröder |
Katja Sachtleben-Reimann | |
| Dr. Erhard Schipporeit |
The Supervisory Board has formed four committees from among its ranks. They support the full Supervisory Board in the performance of its tasks.
| Finance and Audit Committee |
Personnel Committee | Mediation Committee | Nomination Committee |
|---|---|---|---|
| Preparation of fi nancial decisions for the full Supervisory Board |
Preparation of personnel matters for the full Supervisory Board |
Proposal for the appoint ment of a Board member if the necessary two-thirds majority is not achieved in |
Proposal of suitable candi dates for the Supervisory Board's nominations to the General Meeting |
| Decisions in lieu of the full | Decisions in lieu of the full | the fi rst ballot (§ 31 Para. 3 | |
| Supervisory Board on cer tain fi nancial matters, in cluding the establishment of companies, acquisition of participations and capi tal increases at subsidiaries within defi ned value limits |
Supervisory Board on cer tain personnel matters for which the full Supervisory Board is not required to assume responsibility |
Co-Determination Act) |
City Guide Letter from the Chairman Boards and Committees Report of the Supervisory Board Talanx City City News
In the 2010 fi nancial year the Supervisory Board performed its functions and duties at all times in accordance with statutory requirements, the Articles of Association and the Rules of Procedure. We considered at length the economic situation, risk position and strategic development of Talanx AG and its major subsidiaries. We advised the Board of Management on the direction of the company, monitored the management of business and were directly involved in decisions of fundamental importance.
In the year under review we came together for four ordinary meetings of the Supervisory Board, which were held on 26 March, 28 May, 31 August and 13 November 2010. As in the previous year, the Federal Financial Supervisory Authority (BaFin) exercised its legal powers and sent two representatives to attend one of these meetings. The Finance and Audit Committee of the Supervisory Board met four times and the Personnel Committee met on three occasions. The Mediation Committee formed in accordance with the requirements of the Co-Determination Act again had no reason to meet in 2010. The full Supervisory Board was briefed on the work of the various committees. In addition, we received quarterly written reports from the Board of Management on the course of business and the position of the company and the Group. At no point in the year under review did we consider it necessary to conduct audit measures pursuant to § 111 Para. 2 Sentence 1 German Stock Corporation Act (AktG). Insofar as transactions requiring approval arose between meetings, the Board of Management submitted these to us for a written resolution. The Chairman of the Supervisory Board also remained in constant contact with the Chairman of the Board of Management and was regularly advised of all important business transactions within the company and the Talanx Group. All in all, within the scope of our statutory responsibilities and those prescribed by the Articles of Association we assured ourselves of the lawfulness, expediency, regularity and effi ciency of the actions of the Board of Management.
The Board of Management provided us with regular, timely and comprehensive information about the business and fi nancial situation – including the risk situation and risk management –, about major capital expenditure projects and fundamental issues of corporate policy as well as about transactions that – while not subject to the approval of the Supervisory Board – nevertheless need to be reported in accordance with the requirements of the Rules of Procedure. At our meetings we considered at length the reports provided by the Board of Management and put forward suggestions and proposed improvements.
The business development of the company and the individual Group segments, the reorientation of the Group and optimization of its structures as well as the planning for 2011 formed the primary focus of the reporting and were discussed in detail at our meetings. The reasons for divergences between the business experience and the relevant plans and targets in the fi nancial year just-ended were explained to us, and we were able to satisfy ourselves accordingly with the explanations provided.
At the end of 2009, as part of the Group's reorientation and the optimization of its structures, we approved a modifi ed allocation of responsibilities for the Board of Management – which came into eff ect progressively in the course of 2010 – and adopted the necessary resolutions for implementation of the target structure.
A further focus of our deliberations was risk management within the Group. The risk reporting by the Board of Management was a matter for discussion at each meeting of the Supervisory Board. In addition, we considered a number of acquisition, disposal and cooperation projects, which the Board of Management presented to us for discussion and adoption of a resolution. Specifi cally, reference may be made here to the sale of the US-based Clarendon National Insurance Company and its subsidiaries, the establishment of a cooperation arrangement with Meiji Yasuda Life Insurance Company, the purchase of an insurance company in the Netherlands and the acquisition of a minority stake in an Austrian investment company. Not only that, the strategic orientation of the new division of Retail Germany as well as the globalization strategy pursued in Industrial Lines were considered by the Supervisory Board. In this connection various acquisition projects were explored in 2010, inter alia in Vietnam, Canada and Argentina; we were kept informed of the status of these deliberations and discussions.
With an eye to § 87 Para. 1 Stock Corporation Act (AktG) as amended by the Act on the Adequacy of Management Board Remuneration (VorstAG), the full Supervisory Board considered the specifi cation of the bonuses for the members of the Board of Management and reviewed the fi xed remuneration of individual members of the Board of Management; in this context it drew inter alia on horizontal and vertical remuneration aspects and concepts as a means of comparison and orientation. Considerable attention was also devoted to the reorganization of the system of remuneration for the Board of Management and the adjustment of the contracts of service with the members of the Board of Management. These revisions were approved at the meeting of the Supervisory Board held on 13 November 2010. In addition, at this meeting the Supervisory Board was informed about the structure of the remuneration systems within the Group as required by § 3 Para. 5 of the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (Versicherungs-Vergütungsverordnung).
The transactions and measures subject to approval in accordance with legal requirements, the company's Articles of Association and its Rules of Procedure were agreed with the Board of Management following examination and discussion. The Supervisory Board gave the necessary consent to the control and profi t transfer agreement of Talanx AG with HDI-Gerling Gesellschaft für IT-Dienstleistungen mbH – now Talanx Systeme AG – on the basis of the written and verbal explanations provided by the Board of Management.
Along with preparations for discussion and adoption of resolutions in the full Supervisory Board, the Finance and Audit Committee of the Supervisory Board considered at length the company's quarterly fi nancial statements compiled on a voluntary basis. Furthermore, the Finance and Audit Committee discussed the fi ndings of an actuarial audit of the net loss reserves for non-life insurance business within the Talanx Group as well as the profi tability trend at the individual Group companies as at 31 December 2009 and considered the internal control system, the risk reports, the work of the internal auditing department and the annual report submitted by the Chief Compliance Offi cer.
The Personnel Committee, together with external advisers, prepared the review of the remuneration system for the Board of Management – including the major contractual elements –
at a number of meetings. It presented to the full Supervisory Board a proposal for the reorganization of the remuneration system with a view to satisfying, in the fi rst place, the supervisory standards and, subsequently, in the course of 2010 – following the entry into force of the legal bases and specifi cations handed down by lawmakers – the new legal requirements as well. In a written procedure the Committee – following approval of the new remuneration system by the full Supervisory Board – defi ned the targets for the individual members of the Board of Management in the 2011 fi nancial year. Furthermore, recommendations were made to the full Supervisory Board with respect to upcoming reappointments and in the context of the setting of bonuses and the review of the fi xed remuneration for members of the Board of Management.
The Supervisory Board again devoted special attention to the issue of Corporate Governance. In accordance with the provisions of the German Corporate Governance Code, the existing Supervisory Board remuneration consisting exclusively of fi xed components was extended to include a variable component and the amount of remuneration was reviewed with an eye to its appropriateness and brought more closely into line with the level of relevant competitors.
The deductibles in the D&O cover were revised and adjusted in line with the changed legal environment.
The annual fi nancial statements of Talanx AG submitted by the Board of Management, the fi nancial statements of the Talanx Group – drawn up in accordance with International Financial Reporting Standards (IFRS) – as well as the corresponding management reports and the bookkeeping system were audited by KPMG AG, Wirtschaft sprüfungsgesellschaft , Hannover. The General Meeting appointed the auditors; the Finance and Audit Committee awarded the concrete audit mandate. In addition to the usual audit tasks, the Committee placed special emphasis on the implementation of the Act on the Modernization of Accounting Law (BilMoG) as well as – in the case of the consolidated fi nancial statements – on the
measurement of the deferred acquisition costs, the determination of the fair values of investments with a special eye to the fair value hierarchy and on taxes. The audit concentrations of the Financial Reporting Enforcement Panel (FREP) were also the subject of the audit procedures carried out by the auditors.
The audits conducted by the auditors gave no grounds for objection. The unqualifi ed audit certifi cates that were issued state that the accounting, annual fi nancial statements and consolidated fi nancial statements give a true and fair view of the net assets, fi nancial position and results and that the management reports suitably refl ect the annual and consolidated fi nancial statements.
The fi nancial statements and the audit reports of KPMG were distributed to all the members of the Supervisory Board in due time. They were examined in detail at a meeting of the Finance and Audit Committee on 16 May 2011 and at a meeting of the Supervisory Board on 17 May 2011. The auditor took part in the deliberations of the Finance and Audit Committee and of the full Supervisory Board regarding the annual and consolidated fi nancial statements, reported on the conduct of the audits and was available to provide the Supervisory Board with additional information. In accordance with the fi nal outcome of our own examination of the annual fi nancial statements, the consolidated fi nancial statements, the corresponding management reports and the audit reports, we concurred with the opinion of the auditors and approved the annual and consolidated fi nancial statements drawn up by the Board of Management.
The annual fi nancial statements are thus adopted. We ap prove of the statements made in the management reports regarding the further development of the company. Aft er examination of all relevant considerations we agree with the Board of Management's proposal for the appropriation of the disposable profi t.
The report on the company's relations with affi liated companies drawn up by the Board of Management in accordance with § 312 German Stock Corporation Act (AktG) has likewise been examined by KPMG Aktiengesellschaft , Wirtschaft sprüfungsgesellschaft , Hannover, and given the following unqualifi ed audit certifi cate:
"Having audited the report in accordance with our professional duties, we confi rm that
We have examined the report on relations with affi liated companies; we reached the same conclusion as the auditors and have no objections to the statement reproduced in this report.
With eff ect from 1 September 2010 Mr. Torsten Leue was appointed as a new member of the company's Board of Management; from this date onwards he assumed responsibility for the newly formed Retail International division. In addition, the Supervisory Board decided to renew the Board mandates of Dr. Hinsch, Dr. Querner and Dr. Noth – which were due to expire in 2011 – as well as to renew the mandate of Mr. Haas, which was set to expire at the beginning of 2012.
With eff ect from the end of 31 January 2011 Mr. Hans-Ulrich Hanke stepped down from the company's Supervisory Board as a representative of the employees. The Supervisory Board expressed its appreciation and recognition of his constructive and dedicated contribution. With eff ect from 1 February 2011 Ms. Jutta Hammer succeeded him as a member of the Supervisory Board for the remainder of the current term of offi ce.
The Board of Management and staff worked and acted with dedication and prudence in an environment that continued to be challenging. The Supervisory Board would like to express its special appreciation of their eff orts.
Hannover, 17 May 2011
For the Supervisory Board
Wolf-Dieter Baumgartl (Chairman)
Urban planning and urban development are time-tested cultural techniques. Long before our calendar began geographers, architects, engineers, landscape and area planners have dedicated themselves to the art of how a place of co existence should look and what role it should play in a larger geographical space. They have drawn up plans as to how the place should be designed and how it must be further developed in order to off er a secure and pleasant quality of life while at the same time serving as a center of attraction for people. me-tested geogrea ow place
Talanx stands on a solid fi nancial foundation, exerts considerable appeal and has excellent fi nancial strength! With a view to making sure that this remains the case, plans for the future of Talanx City are already in place. Urban development
means managing the entire development of the city, i. e. also with an eye to social, economic, cultural and ecological considerations. City planners work on an interdisciplinary and integrated basis with a forward-looking gaze. This also applies to the Group strategy, which shows the way forward for the entire Group and defi nes clear goals. Building upon this foundation, each division – each district – has a development plan tailored exactly to its needs – one which enhances the particular locality and helps the city as a whole to perform more successfully in the competitive environment. uld play in p plans as means managing the entire development of the city i e also
This planning is intended to ensure that Talanx City preserves its appeal and continues to handle its tasks effi ciently and successfully. This is precisely what constitutes the backdrop for our latest urban planning activities. Following the rapid and successful incorporation of the Gerling companies, the most pressing task facing the city fathers was to optimize the structure of the Talanx Group. At the core of this planning is a reconfi guration of the city's districts, the various parts that make up its primary insurance business. They
are to be geared to our customer segments: specifi cally, to industrial lines worldwide and to German and international retail business, in the latter cases spanning the various lines of insurance. The city fathers have identifi ed here a great opportunity to strengthen the characteristic features of each new district as well as the unchanged district of reinsurance and to further enhance their appeal to visitors and residents alike – i. e. to customers, investors and employees. For the city as a whole, this means that its power of attraction will continue to grow and it will climb higher in the rankings relative to its rivals. and German international
Hot spot
City Guide Letter from the Chairman Boards and Committees Report of the Supervisory Board Hot Spot City News
Diversity promotes attraction
What gives a city its power to draw people? Its name must fi ll us with longing, since it is not for nothing that the mere mention of Vienna, Paris and Rome conjures up certain connotations in our minds. It must represent a culture. Every district must have its own sights, and it must know how to profi le them correctly to specifi c target groups. What the zoo means to children, the opera means to lovers of classical music.
Talanx City has tailored its urban development to precisely fi t its target groups, investors and defi ned customer segments:
The Reinsurance district is home to some 2,100 people. It is planned that Hannover Re will continue to expand the attractions that investors and clients so value: it will strive to remain not only one of the most eff ective and largest non-life reinsurers in the world, but also one of the most profi table. In life and health reinsurance it plans to become one of the three major, globally operating players of aboveaverage profi tability within the next fi ve years.
In the Industrial Lines district, roughly 2,000 employees in 29 markets all around the globe are already working to keep their customers satisfi ed – something which they do in more than 130 countries. The plan for further enhancing the appeal of this district envisages the creation of a global player present and able to act throughout the world on the basis of its own resources.
Some 6,600 people live in the Retail Germany district. This part of town is facing quite an upheaval: the market share is to be profi tably enlarged, the expense ratio made more competitive and the value to the customer optimized. This is to be accomplished by rebuilding structures to suit today's requirements. Only in this way can appropriate solutions geared to specifi c target groups be developed in this district – solutions that will make it a real crowd puller.
The Retail International district also has an ambitious urban plan: home to some 5,200 residents, this area is expected to grow in the strategic target markets of Central and Eastern Europe as well as Latin America, to optimize its activities in existing markets and to tap into new markets. In this part of town, despite all the diff erences between the target markets, it is possible to transfer experiences, approaches and products to other markets. Through its familiarity with a broad range of international retail markets, this district will evolve into a know-how carrier and hence fi nd it easier to expand its business or enter lucrative new markets.
At best, a city without functioning infrastructure quickly loses its appeal. At worst, it collapses. An inadequate infrastructure obstructs the city's growth and smooth co-existence. A poorly developed health system with no effi cient hospitals or lack of specialist physicians, traffi c jams, a public transport system that fails to work, inadequate supply and disposal networks for water, sewage, electricity, gas, telecommunications and garbage not only have a diminishing eff ect on the quality of life. In the long run, such symptoms cause stress and illness. What is more, they have a detrimental impact on business.
This is why it is vital for an urban center such as Talanx City to ensure through effi cient central functions that its infrastructure is state-of-the-art or – even better – a little ahead of its time. Talanx is therefore overhauling the infrastructure for its central functions: when it comes to the Group's most valuable internal commodity, namely information, the transportation system – the information technology – simply has to work. That is the job of the IT departments, which are to be concentrated in the course of the year at Talanx Systeme AG. Working in cooperation with the various districts, it will be ensured through development and space utilization plans that the districts are able to fulfi ll their tasks and objectives and boost their performance capability.
Equally indispensable for the proper functioning of the city are effi cient processes in other key infrastructure tasks – a role covered by Talanx Service AG. As the central pivot point in primary insurance business, it will enhance the effi ciency of the original functions in the districts, harmonize, render transparent and standardize services for users and provide the districts with consistent fi nancial data. The districts will, however, retain certain service functions that are particularly closely related to their operational business. For it remains the case going forward, as in the past, that full profi t and cost responsibility rests with the districts.
Talanx AG is extending its function from that of a pure fi nancial holding company to a fi nancial and management holding company. This means that the city will be directed more closely from Talanx AG. The latter will continue to exercise its previous strategic functions, but it will also exert a greater infl uence on the positioning and performance of the divisions in order to safeguard adherence to the overall strategy.
A city and its inhabitants have a symbiotic relationship – the city shapes its residents, the residents shape their city and in this way enhance its appeal to people who would like to live there. And those who enjoy living in their city also take pride in it.
With a population of 17,000, Talanx City ranks among Europe's largest "insurance metropolises". The inhabitants are a thoroughly international mix – people from 40 countries and fi ve continents live in Talanx City. For the German residents – and only for this part of the population detailed surveys are available – the proportion of female employees stood at 47%, the average age was 43.5. Both these fi gures are slightly above the average. The period of residence, i.e. the length of service with the company, is also above average at 14.2 years and testifi es to just how much people enjoy living in Talanx City.
What must a city off er its residents? Pleasant living conditions, a healthy environment, good infrastructure, cultural life. To put it another way, good working conditions, appropriate remuneration, adequate opportunities for training and development, a healthy working atmosphere. Conditions such as these attract highly skilled, well educated, creative and motivated people.
In the future, Talanx City wants to further boost its appeal as it competes with other "cities" for this clientele. The districts and head offi ce have therefore developed a series of measures designed to publicize largely undiscovered career openings and interesting entry opportunities and hence attract immigrants. In addition to enhancing its attraction for new settlers, the city is also working constantly on improvements for its current residents. Even now, a broad variety of part-time working models are intended to make work and family life more compatible – inter alia by increasingly ensuring that childcare facilities are available in the immediate vicinity of the workplace. Yet the city also supports its residents in their leisure time: Talanx City sponsors numerous team sports events by covering registration fees and supplying jerseys; the inhabitants of all parts of the city are only too happy to take up such off ers of assistance.
Talanx City 21
City Guide Letter from the Chairman Boards and Committees Report of the Supervisory Board Quality of Life City News
The highly diverse cultural off erings of a large city can be crucial to a resident's decision to live there rather than moving out into the countryside or a small town. The opportunities for education and training – from primary school to university level – can also be richer.
In Talanx City training and personnel development activities are included among the measures designed to make urban life more promising. Members of staff receive targeted support for their demanding duties with the aim of consolidating and extending their above-average skills set. In this way, the idea is to optimally prepare the city for fresh competitive challenges. In addition to the fostering of specialist qualifi cations, wide-ranging training activities in methodological and social skills are regularly off ered right across all the districts.
On the Group level the most notable innovation is the establishment of the Talanx Corporate Academy. Working in cooperation with leading European business schools, this off ers a particularly high-caliber training program for senior managers at all Group companies worldwide. Supplementing the off erings of the divisions and national companies, the Corporate Academy serves in particular to convey the strategy and management methods of Talanx. Professors from highly reputed business schools and members of the Talanx Board of Management complement one another as speakers and discussants.
Considerable importance also attaches to initial training in Talanx City: for young people, solid training is essential for getting off to a successful start in working life. For the city, it means an enduring supply of skilled, qualifi ed and motivated residents.
Talanx City 23
City Guide Letter from the Chairman Boards and Committees Report of the Supervisory Board Urban Culture City News
Performing together
Education and training is a matter of such fundamental importance to Talanx that it has placed it front and center of its responsibility to society. As a key element in its range of corporate social responsibility activities, the Group has set up the Talanx Foundation. This makes funds available for the awarding of scholarships to students. And so we already fi nd ourselves right in the midst of the diverse array of measures relating to corporate social responsibility, a concern that is perceived within the city in three ways: operating according to sustainable business practices, developing products that promote environmental protection, effi cient energy consumption or social responsibility, and observing such criteria in our own investments. Each of these considerations is refl ected in numerous examples – whether it be power-saving measures in our own buildings, solutions that respond to environmental concerns such as photovoltaic systems or fueleffi cient vehicles, or investment products that take account of sustainability or ecological aspects.
PUBLISHED BY THE TALANX GROUP 1 € TAL WWW.TALANX.COM
Cologne, 13 October. Ampega-Gerling Asset Management GmbH is acquiring a stake in C-QUADRAT Investment AG. AmpegaGerling will hold an interest of 25.1% in C-QUADRAT on a long-term basis. An independent quantitative asset manager, C-QUADRAT is promisingly positioned and has won multiple awards for its outstanding management of investment funds.
Essen, 19 March. The Talanx Foundation, which was established in 2009, has awarded its first ten scholarships. The recipients are top-flight students from various insurancerelated disciplines at selected universities. The scholarship funding lasts for 12 months and may be extended until the end of the regular period of study. In launching this program Talanx AG is actively taking responsibility for the emphasis that it has chosen to place on "Education and training".
Hiroakai Tonooka (Senior Managing Executive Officer Meiji Yasuda) and Herbert K. Haas (CEO Talanx)
Hannover/Tokyo, 4 November. The fourth-largest Japanese life insurer Meiji Yasuda and Talanx AG are sealing a long-term strategic cooperation with the goal of leveraging joint business opportunities in foreign markets. Meiji Yasuda is entering into a capital participation of EUR 300 million in Talanx AG. To this end, it is buying a convertible bond that converts to common shares of Talanx if the company goes public. Meiji Yasuda Life will then become a major shareholder of Talanx AG. The special feature of the bond is its recognition as regulatory Tier 1 capital (equity substitute) under Solvency II. With this bond issue the Talanx Group has succeeded in pulling off a true capital market innovation.
Hilden/Dusseldorf, 7 October. Assekurata has given Targo Lebensversicherung a rating of A+ for the seventh consecutive time. The company's security was singled out for special praise. This is reflected in
above-average own funds and unrestricted surplus funds, which at 21.99% are more than double the market figure of 8.89%. The company's risk management is also assessed as excellent.
Hannover/Pavia, 23 September. Hannover Re has entered into a partnership agreement with the "Global Earthquake Model" (GEM) Foundation. It will contribute EUR 1 million and technical expertise in support of the development of the first global earthquake risk model on an open-source basis. GEM, which was launched by the OECD in
2009, is working on a global model that will provide a diverse user community with consistent information on seismic hazards, earthquake risks and the socioeconomic effects of earthquakes. Hannover Re can incorporate this data into its risk management and its assessment of earthquake risks.
Cologne, 22 November. The highly reputed rating agency Standard & Poor's has confirmed HDI-Gerling Lebensversicherung AG's long-standing
very good rating. With a grade of "A+" with "stable" outlook the company was able to reassert both its financial strength and credit status.
Cologne, 12 May. The children's provision product KÄNGURU.invest offered by HDI-Gerling Lebensversicherung has been rated "very good" by the Institut für Vorsorge und Finanzplanung. The criteria considered were security, flexibility, return and transparency.
Hilden, 22 February. With immediate effect Citibank is to begin trading as TARGOBANK. As the exclusive insurance partners of TARGOBANK, the former CiV insurers have also taken on the bank's new name. The Targo insurers will continue to offer their customary insurance protection products.
Hannover, 2 December. Almost exactly one year after the foundation stone was laid for the new building on Riethorst, HDI-Gerling is holding its topping-out ceremony. Jörg Bode, Minister for Economics of the state of Lower Saxony, expressed his satisfaction that Germany's third-largest insurance group is headquartered in Hannover.
The new head office will use renewable energy resources: by way of example, natural geothermic energy will cover basic energy needs for heating and cooling. In the fall of 2011 some 1,900 staff will move into the new premises.
Hannover, 12 April. The insurer HDI-Gerling has been honored as the best motor fleet insurer in 2010. More than 6,000 readers of the trade journal "Autoflotte" voted on the best vehicles, products and service providers in the fleet industry and crowned HDI-Gerling as best fleet insurer.
Hannover, 7 September. Hannover Re is placing a subordinated bond of EUR 500 million on the European capital market. The hybrid bond carries a fixed coupon of 5.75% p.a. (return of 5.75%) in the first ten years, after which the interest basis changes to a floating rate of 4.235% above 3-month EURIBOR. Hannover Re is making the most of the favorable interest rate level to raise additional hybrid capital, further optimize its capital structure and back future growth with capital resources.
2010 was a year of light and shade for the Talanx Group. Gross premium income again showed vigorous growth, although the rate of increase varied widely across the diff erent divisions. Investment income was also sharply higher thanks to enlarged asset holdings and improved extraordinary income. The operating profi t (EBIT) failed to keep pace, however, and fell well short of the level of previous years. This was due in part to heavy loss expenditure from natural catastrophes and man-made major claims. In addition, extensive steps towards risk provision for future years also left their mark on the result.
The restructuring of central functions similarly gave rise to one-off charges, among other things owing to IT costs. Over the mid- to long-term, though, this means good news: the new structure will boost the Group's effi ciency and performance capability. This will bring appreciable cost savings going forward.
Gross written premium
Operating profit (EBIT) in EUR million
Investments (excluding funds held by ceding companies) in EUR billion
71 Rating of the Group and its major subsidiaries
73 Overall assessment of the economic situation
The Talanx Group is the third-largest German insurance group measured by gross premium income and operates as a multi-brand provider in the insurance and fi nancial services sector. At the end of 2010 we employed around 18,000 staff worldwide. The Group is headed by the Hannover-based fi nancial and management holding company Talanx AG, the sole owner of which is HDI V. a. G., a mutual insurance company that can look back on more than a hundred years of history.
Group companies transact the insurance lines and classes specifi ed in the Ordinance Concerning the Reporting by Insurance Undertakings to the Federal Insurance Supervisory Offi ce (BerVersV), in some cases in direct written insurance business and in some cases in reinsurance business, with various areas of concentration: life insurance, accident insurance, liability insurance, motor insurance, aviation insurance (including space insurance), legal protection insurance, fi re insurance, burglary insurance, water damage insurance, plate glass insurance, windstorm insurance, comprehensive householders insurance, comprehensive homeowners insurance, hail insurance, livestock insurance, engineering insurance, omnium insurance, marine insurance, credit and surety business (reinsurance only), extended coverage for fi re and fi re loss of profi ts insurance, business interruption insurance, travel assistance insurance, aviation and space liability insurance, other property insurance, other indemnity insurance.
Talanx is represented by its own companies or branches in 40 countries worldwide. Including its cooperation arrangements, the Group is active in altogether 150 countries. In retail business Germany is one area of concentration, while internationally the principal focus markets are the growth regions of Central and Eastern Europe as well as Turkey and Latin America. Industrial lines and especially reinsurance are also transacted in a number of other markets, including for example North America, South Africa, Australia and some Asian countries.
The confi guration of the segments changed substantially in the year under review in comparison with the previous year. The organization, which had become highly complex as a consequence of several intermediate holding companies and operating/sales companies, had to be put on a competitive footing for the future in order to ensure that growth and profi tability targets could be successfully accomplished. Functions which had previously been performed in multiple parts of the Group are now being concentrated with the clear goal of working more effi ciently.
Primary insurance – previously split into the Property/Casualty Primary Insurance and Life Primary Insurance segments – was therefore split into three divisions oriented towards customer segments that span the various lines of business: Industrial Lines, Retail Germany and Retail International. One member of the Talanx Board of Management takes responsibility for each of these divisions.
Industrial Lines will be the platform for a Global Player that is present and able to act worldwide on the basis of its own resources: as independent as possible from third parties and equipped with the capability to lead international consortia. Such a player must be in a position to leverage economies of scale in portfolios and it must have suffi cient fi nancial resources to make substantial insurance capacities available on a sustained basis.
The German companies transacting business with private and commercial customers are interlinked in the Retail Germany segment. The traditional line-of-business distinctions between life insurance and property/casualty insurance are being eliminated in order to become even more attractive to policyholders through comprehensive customer management: processes will be optimized, and the brand and product strategy will be tailored more closely to customer needs.
The Retail International segment is charged with growing in the strategic target markets of Central and Eastern Europe as well as Latin America both through its own eff orts and by way of acquisitions; it is also tasked with optimizing activities in existing markets and cultivating new markets. Despite the diff erences in the various target markets, experience, practices and products can be transferred to other markets. This division will thus evolve into a source of know-how that will fi nd it easier to expand its business or enter lucrative new markets.
The Reinsurance segment, led by Hannover Re, remains unchanged.
The Corporate Operations segment has been enlarged through the addition of two companies: the service company Talanx Service AG and the IT service provider Talanx Systeme AG, which is to commence operational activities in the course of 2011. As before, the segment also includes the Financial Services sector, which along with the Group's own internal reinsurance broker Protection Reinsurance Intermediaries consists primarily of the asset management companies. Talanx AG, which is also assigned to this segment, is extending its function from that of a pure fi nancial holding company to a fi nancial and management holding company as part of the restructuring. Going forward, then, the Group will be steered more centrally from Talanx AG. The latter will continue to perform its previous strategic tasks, but will also exert a greater infl uence on the positioning and performance of the divisions in order to ensure adherence to the overall strategy.
The Talanx Group is internationally active in primary insurance (with the exception of the health and credit lines) and reinsurance business. In its domestic market our Group is a major player in shaping the insurance industry. At Talanx, we optimize the interplay of insurance and reinsurance as an integral component of our business model with the aim of consistently enhancing the opportunity/risk profi le, increasing capital effi ciency and leveraging growth and profi t opportunities more fl exibly. What is more, this composition of the Group portfolio ensures that even in diffi cult market phases our Group has at its disposal suffi cient independent risk capacities to support its clients reliably and over the long term, tap into interesting markets and thereby safeguard and enhance the independence and underlying value of the Group for investors and employees on a lasting basis.
The Group is headed by Talanx AG as a fi nancial and management holding company. Its primary task is to lead and steer the Group. In its management of the Group, Talanx AG relies on the organizational principle of centralized Group steering functions and concentrated Group service functions, on the one hand, combined with local profi t responsibility on the part of the divisions, on the other. The success enjoyed by the Talanx Group is attributable in special measure to this organizational structure, which accords the individual divisions a very high level of entrepreneurial freedom and profi t responsibility. In this way the various units are best able to act on their growth and profi t opportunities.
While the Talanx brand – as the name given to the fi nancial and management holding company, the service companies and the management companies of individual divisions – is oriented exclusively towards the capital market, on the operating side our considerable international product expertise, our forward-looking underwriting policy and our distribution resources are refl ected in a multi-brand strategy. This enables us to optimally align ourselves with the needs of diff erent customer groups, regions and cooperation partners. Furthermore, it promotes the effi cient integration of new companies and/or business sectors into the Group. Not only that, this structure facilitates a highly developed capacity for cooperation which can be harmonized with a diverse range of partners and business models.
A crucial factor in the success of our multi-brand strategy is the optimal support that it is given through lean, effi cient and standardized business processes combined with a stateof-the-art and – as far as possible – uniform IT structure.
The paramount strategic objectives of the Talanx Group are safeguarding a lasting majority interest of HDI V. a. G. and hence extensive independence from unsustainable capital market interests with a short-term orientation as well as focusing on stakeholder value. This is driven by the fi rm conviction that only on this basis can the Group's policy be geared to reliable continuity, above-average profi table growth and hence long-term value enhancement. This is done with the intention of living up to the interests of both shareholders and – so to speak as a prerequisite – customers and staff in a balanced manner and generating the greatest possible benefi t for these groups. We accomplish these aspirations through a strong Talanx Group that is continuously able to provide the best possible risk protection by consistently consolidating and optimizing its equity base and capital allocation. As a mandatory guiding principle, these strategic objectives form the basis from which all other Group goals are derived.
Our strategy for human resources management is described at length in the section "Non-fi nancial performance indicators", pages 74 et seqq. while the management of opportunities and risks is described in the "Opportunity and risk report" pages 83 et seqq. These two aspects are therefore not discussed further here.
The Talanx Group strives for continual, above-average value enhancement of the invested capital in keeping with the risk exposure. We seek to rank among the fi ve most profi table of Europe's 20 largest insurance groups – measured by our return on equity under IFRS. Our Group's minimum target in relation to the Group net profi t aft er tax and before minorities is an IFRS return on equity 750 basis points in excess of the average risk-free interest rate. This is defi ned as the average market rate over the past fi ve years for 10-year German government bonds.
The utilization of the Group net income is geared both to any necessary strengthening of the Group's capital base and to the distribution expectations of investors. Reinforcement of our capital base makes us less dependent upon movements on primary and reinsurance markets and enables us to generate a sustainable attractive dividend yield commensurate with market standards. The distribution policy of the divisions is centrally managed by Talanx AG in compliance with the pertinent legal framework conditions, always guided by the twin goals of optimizing capital effi ciency at the Group companies and satisfying the liquidity and capital requirements of the Group and Talanx AG. Building upon this, we are able to pay our shareholders an attractive competitive dividend on a sustained basis.
The capital management of the Talanx Group is geared to an optimized risk-adequate capital structure in order to reinforce the Group's fi nancial strength.
This is achieved in two ways: fi rstly, we optimize the capital structure by using appropriate equity substitutes and fi nancing instruments; secondly, we align our equity resources such that they at least meet the requirements of Standard & Poor's capital model for an "AA" rating. Equity resources in excess of this requirement are established to boost our earnings potential above and beyond the return on reinvested funds, e.g. through improved provision of risk capacity and protection or through greater independence from reinsurance and retrocession markets.
Capital resources are, as a general principle, allocated to those areas that promise the highest risk-adjusted posttax profi t over the medium term. In this context we make allowance for the desired portfolio diversifi cation and the required risk capital as well as the general regulatory framework. Allocation is based on the expected intrinsic value creation (IVC), arrived at from coordinated business plans.
In recent years Talanx AG has opened up to the capital market in order to be able to boost its fi nancial strength even before going public. The next logical step as part of this progressive capital market orientation is an initial public off ering (IPO) with the aim of placing a maximum 49.9 percent of the voting equity of Talanx AG on the stock market. This stock market fl otation will be implemented by way of a capital increase in order to maximize the strengthening of our asset base and the resulting strategic options.
In order to preserve and further improve our competitiveness, we strive for profi t-oriented growth within the Talanx Group while preserving the optimal segmental and regional diversifi cation of the portfolio and keeping a close eye on the risk-adjusted return. This is achieved organically, by way of strategic and complementary acquisitions as well as through cooperation arrangements.
The target structure, measured by the value contribution of the individual divisions to the total value of the Group aft er minorities, breaks down as follows:
In the medium term it is envisaged that the proportion of gross premium from primary insurance generated outside Germany (Industrial Lines and Retail) should amount to half the total gross premium volume in primary insurance.
In view of the varying risk profi les of our divisions we set ourselves exclusively profi t targets in volatile segments. In less risk-exposed segments we defi ne both profi t and volume targets.
More extensive elaboration of this strategic framework – in terms of products, customer groups, sales channels and countries – is provided by our individual divisions.
Within the Talanx Group we have set ourselves the following core tasks, which must be fulfi lled on a sustained basis: providing reliable support for our customers, maintaining suffi cient independent capacity in all market phases, cultivating new markets and safeguarding as well as increasing the intrinsic value of the Group for stakeholders for the long term. At the same time, the extent of the requirements placed on insurance groups by the regulatory environment and by capital markets and rating agencies is growing. The point of departure determined by these internal and external infl uencing factors causes us to defi ne the following goals:
We pursue these goals with the aid of our holistic, integrated management system, in which we devote special attention to the four fundamental management processes that govern the interplay between the holding company Talanx AG and the Group's various divisions: capital management, performance management, risk management and mergers & acquisitions (M&A).
Performance management is the centerpiece of our array of steering tools. Under our systematic approach a clear strategy geared to ensuring the Group's long-term survival and the consistent implementation of this strategy are fundamental to effi cient enterprise and group management. Since instances of mismanagement are very oft en due to the inadequate implementation of strategy, we devote particularly close attention to the process steps that enable targeted alignment of our entrepreneurial actions with the strategic objectives.
The major stages of strategy implementation consist of the drawing up of strategic program planning, i.e. the breaking down of the strategic objectives into subgoals, and the subsequent breaking down of these subgoals into operational goals that are backed by concrete measures.
Performance management and the steering of segments/ divisions are guided by the following basic principles:
We link our strategic planning with the operational planning using the performance metric by setting out our strategy measurably in structured overviews and monitoring its execution.
planning of the segments/divisions:
From Group parameters and strategic program Operational requirements from the segments/divisions:
| IVC, xRoCC | Financial perspective Finance |
Market and customer perspective Market/Customers |
|---|---|---|
| Dividend | ||
| Internal perspective | Learning and development perspective | |
| Risk budget, capital adequacy ratio (CAR) |
Processes | Staff |
■ IVC – Intrinsic Value Creation
Value creation of the segment/division in accordance with value-based management (as an absolute amount)
■ xRoCC – Excess Return on Company's Capital
Value creation of the segment/division in accordance with value-based management (relative to the company's capital)
Definition of available risk capital per segment/division
■ Capital adequacy ratio (CAR) Minimum solvency level of the segment/division (ratio of company's capital to risk-based capital)
Group holding company and Group segments/divisions use a consistent performance metric to manage business.
As part of our performance management we measure economic value creation from strategic planning to operational management using our central management indicator, namely Intrinsic Value Creation (IVC).
The IVC enables us to record and consistently allocate the value contributions of the Group on diff erent hierarchical levels – Group, segment/division and company. The IVC and its methodological determination form the basis on which the value contributions of the segments/divisions and of the individual operational units can be measured in a comparable manner – making allowance for their specifi c characteristics – in order to reliably identify value-creating areas. The core management ratios, the operational management ratios and their respective degrees of goal accomplishment create the transparency needed to optimize the allocation of capital and resources, pinpoint risks and opportunities and initiate further measures.
Our value-based management tools were continuously refi ned and anchored in the Group-wide management process in 2010. A key point of emphasis – one that should also be viewed in conjunction with the relevant initiatives to regulate remuneration systems in the insurance sector – was conceptualizing the operationalization of value-based management on the levels of areas of Board responsibility, companies and lines of business. The methodological determination of the IVC – and hence of the economic value creation – is carried out unchanged according to the basic scheme for the life and non-life companies. Under this approach, the intrinsic value creation constitutes the economic net income for the period less the cost of capital.
The IVC is calculated diff erently for "life" and "non-life" on the basis of distinct specifi c ratios:
In non-life business (i.e. property/casualty insurance and non-life reinsurance) the IVC measures the diff erence between the NOPAT (net operating profi t aft er adjustments and tax) and the cost of capital for risk-based capital and excess capital.
The NOPAT is an economically informative performance and management ratio for the reporting period in question. It is comprised of the Group net income recognized under IFRS aft er tax and fair value adjustments that arise out of the change in diff erences between present values and carrying amounts in the balance sheet (loss reserve discount, excess loss reserves, fair value changes not recognized in income).
The cost of capital consists of the costs for the allocated risk-based capital and the costs of excess capital. While the risk-based capital is divided between the profi t centers in a manner commensurate with the risk using the Talanx risk model on the basis of a 99.97 percent Value at Risk, the excess capital is arrived at as the diff erence between the risk-based capital and the company's capital. The costs for the risk-based capital are determined from the following components: a risk-free basic interest rate*, frictional costs** and a risk margin to refl ect the market in question. For the excess capital, on the other hand, only the risk-free interest rate and the frictional costs are used, since the capital involved here is not at risk. On the basis of our currently
* In the context of the risk-based capital: calculated as the three-year average of ten-year swap rates
** Opportunity costs incurred by shareholders as a consequence of the fact that they invest their capital not directly in the capital market but rather by a "roundabout route" through a company and the capital is tied to the company rather than being fr eely fungible
applicable determination of the cost of capital, the investor incurs opportunity costs for the risk-based capital that are 600 basis points above the risk-free interest rate. Value is created above this rate of return. The targeted return-on-equity for the Group of at least 750 basis points above "risk-free" defi ned in our umbrella strategy thus already includes a not inconsiderable aspiration to intrinsic value creation.
Value creation in life business (i.e. life insurance and life/ health reinsurance) is measured on the basis of the change in the Market Consistent Embedded Value (MCEV), which is expressed in the MCEV earnings. The MCEV earnings are thus equivalent to the NOPAT. The MCEV is defi ned as the value of the undertaking, which is measured as the discounted present value of future earnings until fi nal run-off of the in-force portfolio plus the fair value of equity, making allowance for capital commitment costs. We chose the MCEV as the basis for value-based management of the life insurance business because it constitutes the value of the undertaking inherent in the already transacted insurance portfolio from the standpoint of the shareholder. The IVC Life is determined as the diff erence between the MCEV earnings and the roll forward; the latter corresponds to the expected cost of capital aft er allowance for the risk exposure in relation to capital market risks.
In order to measure the comparable return delivered by business units or divisions of varying size, the IVC is considered in relation to the corresponding available capital. In this way we arrive at the ratio known as the xRoCC (Excess Return on Company's Capital), which indicates the return for the shareholder in excess of the cost of capital.
As a holding company, Talanx AG does not conduct any product-related research and development of its own. However, we continuously work to refi ne methods and processes that are necessary in order to fulfi ll the business purpose, especially in the area of risk management. In the various divisions we analyze trends such as demographics or climate change and develop products tailored to our markets and customers.
The hallmarks of 2010 were the global economic recovery and the sovereign debt crisis. The picture around the world was a very mixed one: emerging markets as well as developed countries – fi rst and foremost Germany – linked with them through strong export relationships enjoyed a vigorous upturn. Growth in some countries on the Eurozone periphery, however, was curtailed by the spreading sovereign debt contagion and corresponding austerity eff orts.
The eruption of the sovereign debt crisis was triggered by the downgrading of Greece's credit rating and the rapid increase in risk premiums for Spain, Portugal and Ireland too – as well as Italy as the year progressed. The European Union and the International Monetary Fund (IMF) approved a bailout package for Greece and additionally agreed upon a safety net – comprised of credit commitments – for Eurozone countries at risk. Ireland was the fi rst country to avail itself of this assistance, taking out loans of EUR 85 billion in November.
Unemployment in the United States remained stubbornly at a historic high of 9.4%, just 0.5% lower than at the end of 2009. Convincing corporate profi ts across all reporting seasons provided a ray of light, and hence the US generated third-quarter growth of 3.2% year-on-year. The fi gure for the Eurozone was 1.9%. Germany took over as the driver of growth within the Eurozone, recording an increase of 3.6% for the full year.
| 2010 1) | 2009 | |
|---|---|---|
| % change relative to the previous year | ||
| USA | +2.9 | –2.6 |
| Eurozone | +1.7 | –4.0 |
| Germany | +3.6 | –4.7 |
| United Kingdom | +1.7 | –4.9 |
| Japan | +4.2 | –6.3 |
1) Source: Commerzbank, Economic and Market Monitor, valid: 17 January 2011; 2010: provisional fi gures
Despite monetary policy intervention by the US Federal Reserve and the European Central Bank on a massively expansionary scale, infl ation in both regions remained on a modest level. The infl ation rate in the United States in November 2010 stood at 1.1% relative to the previous year, while in the Eurozone the fi gure was 1.9% and in the United Kingdom it was 3.3%. In the latter case, however, an increase in value-added tax and exchange rate eff ects both played a signifi cant role. Core infl ation reached historic lows in 2010, standing at 0.8% in the US in November, 1.1% in the Eurozone and 2.5% in the UK.
The euro depreciated against the US dollar from 1.43 USD/ EUR to 1.19 USD/EUR. The bailout package for Greece and the subsequent establishment of a rescue fund for aff ected Eurozone countries gave the single currency some breathing space, as a result of which it had recovered to 1.34 USD/ EUR by year-end. The movement of the rate against the pound sterling was almost a mirror image: the rate slipped from 0.89 GBP/EUR as the year progressed to 0.81 GBP/EUR and then recovered by year-end to 0.86 GBP/EUR.
Central banks in the United States and the Eurozone pressed ahead with their extremely relaxed monetary policy in 2010. The US Federal Reserve left its key interest rate unchanged at virtually zero. In the third quarter the decision was taken to invest funds from maturing instruments in US treasury bonds. This was followed in November by the announcement of further monetary policy expansion through the additional purchase of government bonds. Altogether, the Federal Reserve is looking to buy up the equivalent of roughly USD 900 billion by the summer of 2011. These unprecedented steps were prompted by the fear that the US economy could slip back again into recession.
Similarly, the European Central Bank also kept its foot on the gas in 2010. The prime rate was left unchanged at 1% and tender transactions were awarded in full. Not only that, the ECB also began to buy up government bonds. As justifi cation for this move, hitherto unprecedented in the history of the ECB, the temporary impairment in the proper functioning of the markets was cited: the purpose of these measures is not to extend the money supply, but rather to hold it on a constant level through off setting transactions.
Aft er an untroubled fi rst quarter in which yields moved sideways, the debt crisis aff ecting countries on the Eurozone periphery took center stage in the following months. This prompted a fl ight to low-risk asset classes among market players. The market for government bonds issued by AAArated core countries, especially Germany, profi ted from this development. The risk aversion displayed by market participants caused yields on 10-year government bonds in the Eurozone to fall to levels barely above 2% on multiple occasions between April and August. Parallel to this, risk premiums for government bonds issued by peripheral Eurozone countries increased sharply. While the extensive bailout packages repeatedly served to calm markets for the short term in the period that followed, the skepticism prevailing among market players remains very high overall to this day.
In conjunction with implementation of a Bank Reorganization Act in Germany at the beginning of November, the market segment for fi nancial bonds also saw a signifi cant increase in risk premiums. Since developments on the economic side were looking brighter, particularly in Germany, yields rose sharply in this period on the interest rate front. 10-year German federal government bonds listed just below 3% at year-end. All relevant euro bond markets closed the year with a positive performance.
Movements on equity markets in the developed countries were driven by the sovereign debt crisis in 2010. A brief period of consolidation at the beginning of the year was followed by an upward movement from February onwards, although this quickly came to an end as the second quarter got underway owing to the emerging sovereign debt issues. Prices then moved sideways until the end of the third quarter. The closing quarter of 2010 ushered in a year-end rally in which almost all indices reached new highs.
The varying economic developments were refl ected in the equity indices. The strong performance of the German economy carried over to the DAX, which closed the year with a performance of +16%. The EURO STOXX 50, on the other hand, performed weakly in the course of the year on the back of the sovereign debt crisis aff ecting Eurozone peripheral countries and recorded a negative performance of –2%. The S&P500 Total Return beat the previous year by 14%.
While economic worries proved to be a drag on stock markets, the abundant supply of liquidity provided by central banks as well as – most signifi cantly – surprisingly strong corporate profi ts and increased M&A activities were positive drivers. The successful outcome of the stress tests performed on banks at the start of the second half-year was also a source of relief.
The dominant infl uencing factor on international insurance markets in 2010 was the global economic recovery, which off ered insurance enterprises a good opportunity to replenish their capital resources aft er the slumps prompted by the worldwide fi nancial and economic crisis. The broadly positive development of business was, however, adversely aff ected by disruptive eff ects such as the sovereign debt crisis and protracted political turmoil in several regions of the world along with the associated instabilities. Steadily growing importance also attaches to the requirements – which have become increasingly exacting in recent years – placed by regulators on insurers and fi nancial services providers; these are giving rise to a broad spectrum of new management and supervision processes that need to be implemented. The sustained low interest rate environment continues to present an enormous challenge to the ability of companies to fulfi ll insurance contracts, some of which remain in force over decades. Measured by international standards, even though the shock waves of the fi nancial crisis have still not entirely dissipated, the insurance sector nevertheless once again proved to be a major stabilizing factor in 2010. The security and provision concepts that it off ered again constituted an indispensable element of the macroeconomic cycle. As one of the most prominent investors around the globe, the international insurance industry plays a key role in growing prosperity for private households and the business community. Life insurance markets continued to recover from the setbacks of the fi nancial crisis in 2010, which had taken a particularly heavy toll on certain products such as unit-linked life and annuity insurance. The resurgence of new business helped boost premium income worldwide. On the other hand, the diminished returns in the investment sector served to curtail the profi tability of life insurers. On the life reinsurance side, products for longevity risks and sizeable block assumption transactions served as growth drivers in the industrialized nations, while sales of products covering the risks of death and disability were fl at. Demand for individual retirement provision and coverage for surviving dependants nevertheless remains strong, since the earliest possible and continuous accumulation of funded individual retirement provision constitutes an essential component of long-term wealth management.
The picture on the non-life insurance and reinsurance markets was a mixed one in 2010. Although the primary sector profi ted from rising demand as the economic gloom lift ed, premium growth – especially in saturated markets – was limited. The continued soft market conditions, particularly in the industrial and motor insurance lines, led to a worsening of the underwriting result in 2010 that refl ected an increase in the combined ratios based on claims for the fi nancial year. This was equally true of the US and major European markets. Reinsurance markets, on the other hand, were in a comparatively better state. Along with the positive run-off results from well-priced prior years and broadly intact underwriting discipline combined with an adequate rate level, this produced satisfactory results overall despite increased spending on catastrophe losses.
On the climate front 2010 will go down in the books as the warmest year since measurements began around 160 years ago. With 950 natural catastrophes – roughly 90% of them weather-related – it also recorded the second-highest number of major loss events since 1980. The probability of a correlation between the clearly measurably trend towards global warming and the increased proliferation of natural disasters to record levels is now assessed as high by georesearchers and risk researchers. It should also be noted that the number and severity of earthquakes has also grown steadily in recent years.
Compared to the previous year, the volume of total economic losses climbed in 2010 by around USD 60 billion to roughly USD 130 billion worldwide, of which approximately USD 37 (2009: 22) billion were attributable to insured losses. What is more, 2010 saw the third-most severe hurricane season – measured by number and intensity – in the past 100 years, although it produced relatively low insured losses in the order of USD 150 million owing to the fact that the hurricanes raged almost exclusively on the open seas. The rising population density and concentration of values around the world, sharply growing traffi c and shipping volumes and the close interlinking of goods and services internationally are refl ected in a steadily increasing vulnerability of people and infrastructure to natural catastrophes and man-made disasters. Despite the alarming numbers, therefore, it may be concluded that 2010 passed off reasonably innocuously.
Development of premium income in the individual insurance lines in Germany
| 2009 | |
|---|---|
| +0.7 | +0.2 |
| +6.8 | +7.1 |
| +6.0 | +3.8 |
| +4.7 | +4.2 |
| 2010 1) |
1) Provisional fi gures
With growth of a good 4% in 2010 – another slight increase on the previous year – the German insurance industry impressively maintained its positive premium trend of recent years. It should, however, be borne in mind that a not inconsiderable part of this growth derives from so-called single-premium business in life insurance. This is a product group that consists, fi rstly, of annuity insurance products and, secondly, of so-called capitalization products under which investors are able to park capital at attractive interest rates. Although there was no mistaking an appreciable caution among broad groups of buyers – especially with respect
to a long-term commitment such as for retirement provision –, the German insurance industry presented an exceptionally stable picture – even without the growth eff ect stemming from single-premium business. Despite the limited growth potential due to the high level of market saturation in Germany, the capital and reserves of the German insurance industry make it – now more than ever – a reliable guarantor for protection against the diverse risks faced in both private and business life.
In German property and casualty insurance the upturn in business was further consolidated – insofar as this was possible given the degree of market saturation reached in most lines – and led to premium growth of just under 1%. Motor insurance, the largest single line, continues to be of crucial importance to the business development in property and casualty insurance as a whole. Massive price competition had raged in this key line for numerous years; with the premium level no longer adequate, however, most providers have now begun to rethink their approach with an eye to greater commercial sense, and this has been refl ected in corresponding tariff increases for new business. This marks a fi rst step towards bringing about the urgently needed turnaround in average premiums – which are currently still falling – in motor business in the foreseeable future. The growth recorded in motor insurance in 2010 was generated above all by own damage insurance, while premiums for liability coverage continued to decline slightly. In the other property and casualty insurance lines, too, premium increases are to be expected for 2010 – with the exception of marine and general liability insurance. The picture on the claims side shows – compared with the burden of losses incurred in previous years and also with an eye to the premium growth – a disproportionately marked increase, which can be attributed not least to the major loss events recorded in the year under review (including winter storm "Xynthia"). The underwriting results are therefore likely to refl ect a rise of 1–2 percentage points in the combined ratio, which could not be off set by investment income on account of the low interest rate environment.
For the second consecutive year the German life insurance industry generated signifi cant premium growth in 2010. With an increase of 7% German life insurers (excluding providers of occupational retirement provision in the form of Pensionskassen and Pensionsfonds) boosted their gross written premium to around EUR 87 billion. As in the previous year, a signifi cant portion of this gratifying growth derived from single-premium business, which recorded a gain of some 30% to reach a volume of EUR 26 billion. Single-premium business was assisted by the prevailing climate and capital market conditions. The funds available for investment were only able to attract very low interest rates in bank deposits, as a consequence of which considerable amounts were invested in products off ered by insurers ranging from immediate and deferred private annuities through so-called "Riester" and "basic" pensions to capitalization products. Capitalization products – normally short-term fi nancial investments similar to savings accounts – at times enjoyed very brisk demand, at least as long as an appealing above-average return was off ered. Since the fourth quarter of 2010, however, the growth momentum of this form of single-premium business has slowed appreciably – a refl ection of interest rate reductions and the wide-ranging restriction of such product off erings to the maturity benefi ts of providers' own existing customers. In contrast to single-premium business, new business with regular premium payments fell away sharply owing to the fact that the willingness to enter into longer-term contracts evidently has still to re-establish itself across a broad front in the wake of the shock infl icted by the fi nancial crisis. Nevertheless, customers remain keenly interested in security. This need dovetails with the core competence of German life insurers, who are able to satisfy the diverse spectrum of return and security expectations with their extensive product range.
Despite the protracted low interest rate environment, which continues to put German life insurers to an endurance test that must be taken seriously, and despite policyholder bo nuses that are sinking market-wide, maturity benefi ts in profi tsharing new endowment and annuity business declined only very moderately, if at all. In this respect, policyholders benefi ted from the fact that the fi xing of the interest rate for the interest paid on credit balances constitutes only one of several factors that determine the total amount of surplus participation.
Particularly in the sphere of international and national supervisory law, the year under review again confronted the Group with a large number of new and sometimes complex developments in the legal environment that were not always adequately coordinated on the international level.
Most notable on the European level was the fact that the European Commission moved forward with its "Omnibus II Directive" proposal; on the one hand, this contains widereaching Solvency II transitional measures, while, on the other, it is intended – as an omnibus directive – to make amendments to other directives in order to bring them into line with the new EU regulatory architecture for fi nancial supervision.
The new European regulatory agency for the insurance industry, the Frankfurt-based European Insurance and Occupational Pensions Authority (EIOPA), commenced its work on 1 January 2011. It forms part of the newly implemented European System of Financial Supervision (ESFS), which encompasses the European Systemic Risk Board (ESRB), the three new regulatory bodies – namely the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) – and, last but not least, the national regulatory bodies.
Even though EIOPA probably will not, as a general principle, have any powers for operational supervision of the Group, its infl uence on our regulatory environment will be signifi cant. In the fi rst place, going forward it is envisaged that national regulators will have to justify divergences from EIOPA recommendations to EIOPA. Secondly, the "Omnibus II Directive" proposal includes powers to adopt so-called binding technical standards, on the basis of which EIOPA would like to develop a "single rule book" EU-wide by the end of 2011.
In general terms, particularly on the international level, an unchanged tendency – for example on the part of the Financial Stability Board – could again be observed in the year under review towards applying to the insurance sector considerations relating to the avoidance of crises in the banking sector without any discernible appreciation of the considerable material diff erences. The Group is closely tracking these tendencies and adds its appropriate critical input to the ongoing discussions.
Developments on the national level in the year under review included, for example, the replacement of the Requirements for Remuneration Systems in the Insurance Industry initially published in December 2009 in the form of a Circular by the Federal Financial Supervisory Authority (BaFin) with the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (VersVergV), which entered into force on 13 October 2010. The legal basis for adoption of such a Regulation had been lacking in 2009; the legislator created it in the year under review in the form of the new § 64 b Para. 5 Sentences 1–4 of the Insurance Supervision Act (VAG). The content of the Regulation leans very heavily on the BaFin Circular on Requirements for Remuneration Systems in the Insurance Industry published in the previous reporting period. Essentially, it remains the case that the aim of legislators with the remuneration rules is to avoid negative incentives through inappropriate variable remuneration components.
The protracted period of low interest rates in the year under review has demonstrated that the stipulations contained in § 153 Paragraph 3 of the Insurance Contract Act (VVG) governing the participation of insureds in the valuation reserves need to be adjusted. Under the current legal regulations, such low-interest rate phases lead to excessive participation of departing policyholders in the area of long-dated bonds; this is not compatible with considerations of fairness within the collective of policyholders or with the imperative that the risk-bearing capacity of life insurers should be preserved. In the year under review the Group took an active part in discussions with lawmakers regarding the urgent need for immediate adjustment of the legal situation.
The Talanx Group recorded single- to double-digit percentage growth for a number of key indicators in 2010: specifi cally, gross written premium – especially in foreign markets –, new business and investment income. The increased premium and improved investment performance did not, however, off set the decline in the underwriting result, as a consequence of which the operating profi t (EBIT) fell well short of the previous year. The reasons are varied in nature, but are associated in particular with considerably high risk provision at German life insurers and in international retail business, most notably with an eye to future capital market measures. Despite this, the Group's fi nancial strength – expressed in terms of its solvency ratio – was boosted.
in EUR billion
in EUR million
As planned, the fi rst steps in the restructuring of the Talanx Group's primary insurance sector launched in September 2009 have been completed and agreed upon with the social partner. What is more, they are already bearing the fi rst fruit: in Germany the Group was able to expand its new business in 2010 despite challenging market conditions. The fact that our measures are already working shows that we have reached our fi rst milestone in the Group restructuring without losing sight of the market. Yet we have not yet accomplished our goal. The next steps in the Group restructuring for 2011 will focus on German retail lines. Intensive preparations are already being made in order to get this division fi t for the future. The aim is to gear business processes and the organization to the needs of customers and sales partners and, with this in mind, to develop product, sales and service strategies that span the various lines of business.
The Group can report unusually strong organic growth in foreign markets, most notably in Latin America – and here especially Brazil.
The agreement of a cooperation arrangement with the Japanese life insurer Meiji Yasuda marked another success for the Group. In this connection Talanx AG issued a Solvency II-compliant bond subject to mandatory conversion at the time of the planned initial public off ering of Talanx AG. Meiji Yasuda Life took up this capital participation in a volume of EUR 300 million; at the same time the two companies entered into a strategic partnership. The pooling of both partners' strengths increases the prospects for each of them to access new markets. Joint investments are envisaged in the focus markets of Poland and Turkey. What is more, by putting in place an institutional anchor shareholder even before going public Talanx enjoys greater security in its fi nancial planning.
Gross written premium including savings elements of premium under unit-linked life and annuity policies grew by 9% to EUR 22.9 (20.9) billion. The increase stemmed from reinsurance business as well as the Retail International segment. Growth was for the most part organic; movements in exchange rates accounted for 3 percentage points of the rise in premium. The number of policies in primary insurance business climbed by 5.4% to 23.6 (22.4) million, driven chiefl y by the companies abroad.
Investment income surged by 20% to EUR 3.2 (2.7) billion. The increase was attributable to improvements in the primary insurance segments – especially Retail Germany – and in Non-Life Reinsurance. The operating profi t (EBIT) came in at EUR 1.0 (1.5) billion, a contraction of 31%. This was due principally to a poorer performance in German life insurance – driven above all by increased risk provision – as well as the poorer experience of certain companies in the Retail International division. As a further factor, aft er an exceptionally low burden of losses in the previous year, the underwriting result in Industrial Lines and Non-Life Reinsurance declined. Overall, the underwriting result deteriorated – in part also due to the participation of policyholders in the increased investment income – by 98% to –EUR 2.0 (–1.0) billion. Owing to rising combined ratios – especially in the Industrial Lines and Retail Germany divisions – the overall combined ratio moved higher: it climbed 4.2 percentage points to 100.9 (96.7)%. The other income also fell short of the previous year's level. Group net income aft er tax and minorities reached EUR 220 (485) million, corresponding to a return on equity of 4.6 (11.8)% on the considerably higher level of Group shareholders' equity relative to the previous year.
| 2009 |
|---|
| 3,077 |
| 1,405 |
| 134 |
| 240 |
| 335 |
| 90.5 |
1) Including deposit interest result
The Industrial Lines division is led by HDI-Gerling Industrie Versicherung AG. The company off ers the entire spectrum of individual products and services for its clients from eleven locations in Germany. Through subsidiaries, dependent branches in 28 countries and network partners its activities span the globe.
| HDI-Gerling Industrie Versicherung AG | Germany |
|---|---|
| HDI-Gerling Australia Insurance Company Pty. Ltd. | Australia |
| HDI-Gerling Assurances (Belgique) S. A. | Belgium |
| HDI-Gerling de México Seguros S. A. | Mexico |
| HDI-Gerling Verzekeringen N. V. | Netherlands |
| HDI Versicherung AG | Austria |
| HDI Seguros S. A. | Spain |
| HDI-Gerling Insurance of South Africa Ltd. | South Africa |
| HDI-Gerling America Insurance Company | USA |
As an internationally operating industrial insurer, HDI-Gerling Industrie supports its clients at home and abroad with bespoke solutions optimally tailored to their individual needs. The product range extends from casualty, motor, accident, fi re and property insurance to marine, special lines and engineering insurance. Industrial clients in Germany and foreign markets profi t from decades of experience in risk assessment and risk management, since the complex risks faced by industry and SMEs necessitate special protection. Comprehensive insurance solutions are assembled on the basis of customized coverage concepts, thereby providing the complete product spectrum needed to protect against entrepreneurial risks. Just as importantly, thanks to its many years of experience and proven expertise, HDI-Gerling provides professional claims management that delivers the fastest possible assistance worldwide in the event of loss or damage.
The gross written premium in the Industrial Lines segment amounted to EUR 3.1 (3.1) billion at the end of the year under review and was thus maintained on a stable level year-onyear.
Developments varied widely in the various submarkets: whereas in Germany it was possible in some instances to push through premium increases in industrial liability business for certain contracts in response to losses, lines such as marine insurance with turnover-based policies still suff ered under the aft er-eff ects of the economic crisis; supplementary premium adjustments and lower renewal premiums led to premium erosion. The assumption of a legal protection portfolio from the Retail Germany segment accounted for premium growth of around EUR 18 million.
The development of business in the various submarkets abroad was mixed: our Dutch company HDI-Gerling Verzekeringen N. V. (+EUR 16 million) and our Belgian company HDI-Gerling Assurances S. A. (+EUR 8 million) held their ground well and recorded appreciable premium gains in fi ercely competitive environments. The premium income booked by the Austrian company HDI Versicherung AG came in fractionally lower at EUR 192 (193) million. The challenging competitive state of the local market, which led to price cuts most notably in motor business and the turnover-based lines, was a factor here. The Spanish company HDI HANNOVER International España, Cía de Seguros y Reaseguros S. A. saw its premium volume contract by EUR 48 million. This can be attributed almost entirely to a fundamental change in the company's orientation: since mid-2009 it has no longer been writing any new business with retail customers. Premiums from this business – especially in motor insurance – had still been recognized in the previous year.
The reinsurance premiums written in the segment remained stable at EUR 1.7 (1.7) billion. Net premiums earned tracked this development at an unchanged level of EUR 1.4 (1.4) billion.
The net underwriting result of the Industrial Lines segment showed a loss of EUR 58 (previous year: profi t of 134) million. With a net expense ratio of 22.1 (21.9)% and a loss ratio of 82.0 (68.6)%, the combined ratio stood at 104.1 (90.5)%.
Net underwriting expenses in the Industrial Lines segment climbed by an appreciable EUR 201 million to EUR 1.5 (1.3) bil lion. This rise was driven chiefl y by the increase in claims expenditures for the fi nancial year across virtually all market segments, although this should be viewed against the backdrop of an unusually favorable experience in the previous year. In addition, extensive steps were taken in the year under review to strengthen the loss reserves, especially for existing claims in the public liability line.
The reinsurers' share of the claims and claims expenses remained on a par with the previous year at EUR 0.9 (0.9) billion despite the rise in gross expenses. On the one hand, the reinsurers participated to a disproportionately modest extent in the aforementioned strengthening of the reserves; on the other hand, reinsurers' shares of the loss reserves totaling around EUR 13 million were released in connection with commutation of the reinsurance relationship with Global Re in
the previous year. Not only that, in the 2010 fi nancial year a sizeable reinsurance quota share treaty was commuted in the motor line in Germany, resulting in derecognition of the corresponding reinsurers' shares in an amount of roughly EUR 28 million and hence reducing accordingly the relief aff orded by reinsurance arrangements.
The gross acquisition costs and administrative expenses contracted by 9% to EUR 568 (622) million; this can be attributed to HDI-Gerling Industrie Versicherung AG (decrease of EUR 43 mil lion) and HDI HANNOVER International España (decrease of EUR 16 million). The improvement at the largest company in the segment, HDI-Gerling Industrie Versicherung (HG-I), resulted from increased deferral of commissions; in the comparable period a smaller portion of the paid commissions had been deferred. The reduced acquisition costs and administrative expenses at the Spanish company were due to the drop in the business volume. The decrease of EUR 59 million in the reinsurers' shares of the acquisition costs and administrative expenses slightly overcompensated for the positive trend in the gross expenses, as a consequence of which the net expenses were almost unchanged at EUR 312 (307) million.
The investment income retreated by a modest 4% to EUR 231 (240) million. Crucial here was the fall of EUR 17 million in the investment income booked by HG-I to EUR 195 (212) million. This was due to the fact that gains from the disposal of investments were lower than in the comparable reporting period; in the previous year substantial profi ts had been realized from the sale of equity funds in a sizeable volume. The other companies in the segment posted slightly to signifi cantly higher investment income virtually across the board. The infl uence of the fi nancial crisis had all but faded in the year under review.
Other income improved to EUR 11 (–39) million. In this case, too, the change was attributable chiefl y to HG-I; in both the previous year and the year under review its other income was infl uenced by special eff ects. In the previous year income from the reversal of impairments on reinsurance recoverables had been recognized in an amount of EUR 58 million. This had, however, been virtually off set by opposing expenditures from derecognition of an asset item which stemmed from the acquisition balance of the largest property/casualty risk carrier of the Gerling Group and constituted a contra item to the loss reserves assumed at carrying values at the time of acquisition. In addition, impairments of around EUR 30 million had to be taken on reinsurance recoverables. In the year under review it was possible to release a signifi cant volume of sundry provisions, as a consequence of which the other income booked by HG-I improved to EUR 28 (–7) million.
The operating profi t generated by the Industrial Lines segment came in at EUR 185 (335) million, a reduction of 45%. The key factor in the decline in profi tability was the development of the underwriting result owing to increased claims expenditures, which – with investment income remaining on a stable level – were not off set by the improvement in other income.
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Gross written premium | 6,823 | 6,614 |
| Net premium earned | 5,507 | 5,158 |
| Underwriting result | –1,631 | –945 |
| Net investment income | 1,577 | 1,207 |
| Operating result (EBIT) | –44 | 209 |
| Combined ratio (net) 1) in % | 104.2 | 99.2 |
1) Including deposit interest result
The Retail Germany division, which brings together the German business transacted by HDI-Gerling with private and commercial customers as well as all German bancassurance activities, off ers domestic retail customers insurance protection that is tailored to their needs. In the life insurance sector the division also operates internationally in Austria. The name of the new divisional company with eff ect from December 2010 is Talanx Deutschland AG. The product range extends from non-life insurances through all lines of retirement provision to complete solutions for small and mid-sized enterprises as well as freelance professions. In this context all distribution channels are available – both a tied agents' network as well as sales through independent intermediaries and multiple agents, direct sales and bancassurance cooperations.
The functional organization ensures clear responsibilities and puts in place the foundation for operations spanning the previous line-based boundaries between property/casualty and life insurance products. This multi-line perspective is a vital prerequisite for improving processes and services to the benefi t of customers.
| HDI-Gerling Lebensversicherung AG |
|---|
| HDI-Gerling Pensionskasse AG |
| HDI Direkt Versicherung AG |
| HDI-Gerling Firmen und Privat Versicherung AG |
| HDI-Gerling Rechtsschutz Versicherung AG |
| neue leben Lebensversicherung AG |
| PB Lebensversicherung AG |
| PBV Lebensversicherung AG |
| TARGO Lebensversicherung AG |
| TARGO Versicherung AG |
Gross written premium in the Group segment of Retail Germany – including savings elements of premiums from unitlinked life insurance – increased by 3% in the 2010 fi nancial year to EUR 6.8 (6.6) billion.
The gross written premium from our property/casualty insurance products decreased by 3% year-on-year to EUR 1.5 (1.5) billion. The decrease stood at just 1.5% aft er factoring out the eff ect of the transfer of the industrial portfolio of HDI-Gerling Rechtsschutz Versicherung AG to the new Industrial Lines segment, and the fi gure was a mere 0.3% in the most signifi cant property/casualty line – namely motor business.
In life insurance sector, gross written premium including savings elements from premiums under unit-linked life insurance products was boosted by 5% in the year under review to EUR 5.4 (5.1) billion. This increase was driven in large measure by the particularly favorable development of single-premium business at Targo Lebensversicherung AG, PBV Lebensversicherung AG and neue leben Lebensversicherung AG, which together improved their gross premiums by EUR 277 million. Gross premiums of altogether EUR 2.5 billion – as in the previous year – were generated by the companies HDI-Gerling Lebensversicherung AG and Aspecta Lebensversicherung AG, which were merged with eff ect from 1 October 2010. In this case premium
erosion stemming primarily from the portfolio of policies with a regular premium payment held by the former Aspecta Lebensversicherung AG was off set by increased new business with a single premium payment. Looked at overall, then, the positive development of our life insurance products – refl ecting the market trend – derived from sharply higher single-premium business despite declining regular premiums; it should be noted in this context that our Group does not market any capitalization products. PB Lebensversicherung AG, which now only writes new business in the area of credit life, recorded a premium decrease of EUR 11 million. Measured by the internationally recognized yardstick of the Annual Premium Equivalent (APE), the new business booked by the life insurers grew to EUR 515 (462) million and thus surpassed the previous year by 11%.
The level of retained premium in the segment as a whole climbed from 89.2% to 92.6%, primarily as a consequence of the increase in single premiums combined with the drop in ceded regular premiums.
The underwriting result fell by a substantial 73% overall to –EUR 1.6 (–0.9) billion. It includes inter alia the compounding of the technical liabilities (allocation to the benefi t reserve) and the participation of our policyholders in the investment income – which increased in the year under review owing to the development of capital markets (allocation to the provision for premium refunds). The income opposing these expenses is, however, recognized in the investment income, hence causing the underwriting result to close in negative territory.
More than 9/10 of the underwriting result in the segment was determined by life insurance products: in this respect it decreased by 65% relative to the previous year to –EUR 1.6 (–1.0) billion. The reasons were partly connected with the positive trend on capital markets in comparison with the previous year, but were also associated with various special charges. Thus, for example, in the context of the retroactive merger of Aspecta into HDI-Gerling Lebensversicherung AG reinsurance
treaties were commuted, which – insofar as they were not off set by contributions from the controlling company – led to the bringing forward of a balance sheet strain in the reporting period. Strains were also incurred from the adjustment of values relating to various technical items in the balance sheet in connection with life business, especially as a consequence of capital market movements and changed cost structures as well as the associated lower contribution margins for inforce business. Not only that, the amortization of deferred acquisition costs and write-downs taken on in-force insurance portfolios also crucially impacted the performance of our life insurers. This was due principally to the capital market development in the year under review, which necessitated adjustments to the assumptions underlying the forecast of future profi ts. The underwriting result from property/casualty products fell from EUR 12 million to –EUR 56 million, fi rst and foremost on account of the claims experience. Key factors here – along with the favorable claims experience in the previous year – were the growth in motor business against a backdrop of lower average premiums. The loss reserves also had to be strengthened. The combined ratio for the segment as a whole stood at 104.2 (99.2)%.
Investment income surged by an appreciable EUR 370 million (+31%) to EUR 1.6 billion. This increase was made possible by extraordinary income that was considerably better than in the previous year. While the previous year's result had still been overshadowed by impairments on investments and losses on disposals in connection with the fi nancial crisis, gains on disposals from equity funds were the hallmark of the extraordinary profi t in the year under review. Of the total investment income, an amount of EUR 1.5 (1.1) billion is to be credited in very large measure pro rata to the holders of life insurance policies.
The operating result (EBIT) came in at –EUR 44 (+209) million. The stronger investment income did not suffi ce to off set the marked reduction in the underwriting result. The EBIT was heavily infl uenced by the decline at HDI-Gerling Lebensversicherung AG (incl. Aspecta Lebensversicherung AG), but above all by the amortization of deferred acquisition costs at PBV Lebensversicherung AG, claims-related expenditures at HDI-Gerling Firmen- und Privatversicherung AG and cost burdens associated with the reorganization of the sales companies.
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Gross written premium | 2,233 | 1,827 |
| Net premium earned | 1,742 | 1,403 |
| Underwriting result | –136 | –99 |
| Net investment income | 151 | 121 |
| Operating result (EBIT) | 27 | –42 |
| Combined ratio (net) 1) in % | 105.2 | 102.5 |
1) Including deposit interest result
The Group segment of Retail International brings together the activities of the companies transacting retail business in property/casualty insurance, life insurance and bancassurance in international markets; it serves more than 8 million customers in 12 countries. The segment is led by Talanx International AG (previously: HDI-Gerling International Holding AG).
In this division we off er private and commercial customers abroad comprehensive insurance protection tailored to their needs. The product range encompasses inter alia motor insurance, property and casualty insurance, marine and fi re insurance as well as various off erings in the life insurance sector. Seasoned, expert management combined with the considerable underwriting expertise of local staff form the backbone of the Talanx International group. By drawing upon local, industry-specifi c know-how and our presence through an extended distribution network we are able to identify our customers' particular requirements in foreign markets and provide customized solutions.
Foreign business is to a large extent written through brokers and agents. Many of our companies also use post offi ces and banks as a sales channel.
| HDI Seguros S. A. | Brazil |
|---|---|
| HDI Zastrahovane AD | Bulgaria |
| HDI Seguros S. A. | Chile |
| HDI Assicurazioni S. p. A. | Italy |
| InChiaro Assicurazioni S. p. A | Italy |
| HDI Seguros S. A. | Mexico |
| HDI-Gerling Zycie TU S. A. | Poland |
| HDI Asekuracja TU S. A. | Poland |
| OOO Strakhovaya Kompaniya | |
| "HDI Strakhovannie" 1) | Russia |
| OOO Strakhovaya Kompaniya "CiV Life" | Russia |
| CiV Hayat Sigorta A. Ş. | Turkey |
| HDI Sigorta A. Ş. | Turkey |
| HDI Strakhuvannya | Ukraine |
| Magyar Posta Biztosító Zrt. | Hungary |
| Magyar Posta Életbiztosító Zrt. | Hungary |
1) Since the third quarter of 2010; business to be written fr om 2011 onwards. The company will complement the product portfolio of CiV Life with property/ casualty products.
Along with the general statements already made regarding the international insurance markets pages 38 et seq., the following remarks may be added with respect to our highest-volume markets in this segment – Brazil, Italy and Poland: Brazil has recovered very quickly from the global economic and fi nancial market crisis. Economic output had already moved back into positive growth rates by the second quarter of 2009. With a view to countering any overheating of the Brazilian economy, spending cuts were announced in the course of 2010 and the prime rate was raised. In this market we are particularly active in motor insurance, which promises further growth in keeping with the favorable economic trend. Poland's economic output has already shown soft er, but nevertheless positive growth since 2009 – despite the global economic and fi nancial market crisis. These developments also promise further growth for the insurance market. In addition to motor insurance, we transact other lines in Poland such as casualty and general property insurance as well as life insurance. The year under review, especially the fi rst half of the year, was heavily overshadowed by the fl ooding along the rivers Oder and Vistula. On the Italian market we conduct operations both in the life insurance market and in property/casualty insurance
– predominantly motor insurance. The company noted the fi rst indications of rate increases beginning to take hold in motor insurance in 2010 aft er several years of fi erce competitive and pricing pressure.
Gross written premium in the segment climbed 22% year-onyear to EUR 2.2 (1.8) billion; adjusted for exchange rate eff ects, growth came in at 13%.
The growth in property/casualty products (+32%) derived partly from exchange rate eff ects. If these eff ects are factored out, premium growth of 19% was booked in the property/ casualty sector relative to the previous year. Most notably, the exchange rates for the Brazilian, Polish, Turkish and Mexican currencies strengthened appreciably. While the Brazilian company HDI Seguros delivered premium growth of 21% in the local currency based on its robust market position in the country, growth surged to 45% aft er translation into euros. The situation was similar at the Polish company HDI Asekuracja, into which HDI-Gerling Polska was merged in the second quarter of 2010 with retroactive eff ect from 1. January 2010. Premium growth in the local currency stood at 5% compared to the previous year (taking into account the aggregate premium of what were then two companies), while the increase amounted to 13% aft er translation into euros. Similarly, the Turkish company HDI Sigorta boosted its premium volume by 28% in the local currency thanks to intensifi ed marketing eff orts and the opening of new agencies, whereas in euros the increase was as much as 38% owing to the favorable movement in exchange rates. The contribution delivered by HDI Seguros Mexico, which was added to the Group in the fourth quarter of 2009 and was thus only included pro rata in the comparable period, amounted to EUR 62 million.
New business in our international property/casualty insurance portfolio was boosted in the 2010 fi nancial year – measured by policy numbers. The key driver here was the motor line, accounting for a portfolio around 4.3 (4.1) million of altogether roughly 7.8 (7.2) million policies.
In the fi nancial year just-ended the Italian company HDI Assicurazioni generated premium volume in the life insurance sector of EUR 325 million, a decline of somewhat more than 9% relative to the previous year. The major factor in the previous fi nancial year had been the implementation of a government tax amnesty, as a consequence of which considerable amounts were available for investment in single-premium products – a state of aff airs from which life insurance policies also profi ted as an attractive investment alternative. This trend from 2009 was sustained in 2010, albeit not on the same scale. At the same time the company booked growth of around 9% from sales of property/casualty products (especially in the motor liability line) on the back of a higher average premium, as a result of which its total premium volume remained stable.
The companies abroad transferred from Proactiv Holding AG to Talanx International Holding AG as part of the Group restructuring also played their part in premium growth. Our Hungarian life insurer, for example, boosted its premium volume by 11% from EUR 92 to 103 million thanks to its successful sales and marketing activities. Similar growth was also recorded by the companies in Russia and Turkey. Although they are still of minor importance measured by the total volume, they rank among the fastest growing companies in their markets. Our Russian company CiV Life grew its premium income by around 56% year-on-year, while our Turkish operation CiV Hayat boosted its volume by around 102% with the aid of successful sales activities – including intensive coaching measures – as well as modifi ed products. The Polish company HDI-Gerling Zycie also more than doubled its premium income year-on-year, most notably in the area of unit-linked life products, thanks to a new cooperative venture with the Polish BRE Bank launched in the middle of the year.
Measured in terms of the APE, new business in international life insurance contracted to EUR 128 million, a fall of 4% relative to the previous year. The APE is split in particular between endowment policies and unit-linked as well as nonunit-linked products.
The level of retained premium in the segment – at 90.0% – was 4.4 percentage points higher than at year-end 2009; as described in the following section, an infl uencing factor here was the cancellation of a quota share reinsurance treaty in the motor line at the Turkish company HDI Sigorta, which caused its retention to rise from 55.8% to 85.7%.
The combined ratio in international property/casualty insurance was 105.2 (102.5)%, a refl ection in part of the aboveaverage burden of losses incurred in the fi rst half of the year under review. Particularly signifi cant here were fl ood and winter-related damage, which took a heavy toll on the result of the Polish company HDI Asekuracja. As a consequence of changes in the reinsurance structure for the motor line at this company, the reinsurer's share of the paid claims decreased – leading to higher net claims expenditure. The company's underwriting result therefore fell to –EUR 28 (–3) million. Similarly, the earthquake in Chile at the end of February 2010 adversely impacted the burden of losses incurred by the Chilean company HDI Seguros. Changes in local supervisory law compelled the Turkish company HDI Sigorta to cancel a multi-year quota share reinsurance treaty in the motor line. The eff ect of cancelling this treaty is the primary reason why the company – despite growing its portfolio – closed the year under review with an underwriting defi cit of –EUR 52 (–12) million. The deterioration in the underwriting result for the segment from –EUR 99 million to –EUR 136 million was therefore driven chiefl y by the companies HDI Sigorta and HDI Asekuracja. In addition, the loss reserves at some Group companies were strengthened on the basis of an annually compiled external loss reserve assessment.
In the fi nancial year just-ended the writing of new business at the companies ASPECTA Liechtenstein and ASPECTA Luxemburg was discontinued until further notice on the basis of the Group's strategic reorientation and both companies went into run-off ; consequently, the two companies produced an underwriting defi cit of –EUR 21 million overall. Our Brazilian company, on the other hand, boosted its underwriting profi t from EUR 1 million to EUR 13 million.
In the 2010 fi nancial year investment income of EUR 150 million was generated in the Retail International segment, an improvement of 24% over the previous year – in which the investment income booked by companies was still heavily overshadowed by the aft er-eff ects of the fi nancial crisis. The increased gains realized from the disposal of equities and fi xed-income securities contrasted as at year-end 2010 with appreciably lower realized losses than in the previous year. In the case of the Italian company HDI Assicurazioni, for example, impairments of EUR 14 million had to be taken on investments at the end of 2009; at year-end 2010 they amounted to just EUR 8 million. In addition, ordinary investment income was favorably aff ected by a modest upturn in the interest rate level in a small number of countries. The Brazilian company HDI Seguros, for example, boosted its investment income by 55% year-on-year to EUR 39 (25) million.
The Retail International segment reported an operating result (EBIT) of EUR 26 (–42) million in the year under review. The amortization of goodwill for our Mexican subsidiary resulted in a charge to EBIT.
| 2010 | 2009 | 2008 1) | 2007 1), 2) | 2006 1) | |
|---|---|---|---|---|---|
| Figures in | |||||
| EUR million | |||||
| Gross written | |||||
| premium | 6,340 | 5,753 | 4,997 | 5,611 | 7,143 |
| Net premium | |||||
| earned | 5,395 | 5,237 | 4,287 | 4,631 | 5,638 |
| Underwriting result |
78 | 136 | 200 | 16 | 79 |
| Net invest ment income |
779 | 610 | 47 | 863 | 925 |
| Operating result (EBIT) |
909 | 760 | 122 | 902 | 813 |
| Combined ratio (net) 3) |
|||||
| in % | 98.3 | 96.7 | 95.0 | 98.8 | 98.2 |
1) Limited comparability due to changes in segment allocation
2) Adjusted on the basis of IAS 8
3) Including deposit interest result
By far the bulk of the non-life reinsurance transacted within the Talanx Group is written by the Hannover Re Group. Hannover Re maintains business relations with more than 5,000 insurance companies in about 150 countries. With a global network consisting of more than 100 subsidiaries, affiliates, branches and representative offices in around 20 countries, the group employs approximately 2,200 staff .
In non-life reinsurance we do not pursue any growth targets, but instead keep a close eye on rate movements: we expand our business if the rate situation is favorable and scale back our portfolio if prices are not commensurate with the risks.
The expectations expressed with regard to the treaty renewals as at 1 January 2010 were confi rmed over the course of the year: prices remained broadly stable, although they soft ened slightly in loss-free segments. Rate increases were also recorded in areas that had seen sizeable losses in 2009, such as aviation insurance or credit and surety reinsurance. The fact that prices remained on a largely stable level also refl ects the underwriting discipline practiced among reinsurers. Given the lower returns attainable on investments owing to the low interest rate level, the primary focus of attention was even more heavily on underwriting results. This was also true of the various treaty renewal phases that took place within the year.
The treaty renewals in North America were in line with our expectations, although the rate level in many areas was not adequate. We therefore exercised caution in assuming additional risks. In credit and surety business – despite growing capacity on the market – we were again able to push through signifi cantly improved conditions and expand our market position. In worldwide catastrophe business prices for reinsurance covers declined as expected owing to the relatively untroubled major loss experience in 2009 as well as the improved capital resources of primary insurers. Rate reductions in the United States were particularly marked; price increases were nevertheless obtained under loss-impacted programs in certain regions. All in all, we enjoyed very good opportunities to generate profi table business and extend our market share. The focus of our activities was on the markets
of China as well as Central and Eastern Europe, facultative reinsurance and agricultural risks. In the UK market, too, Hannover Re successfully extended its position.
The gross premium volume for our Non-Life Reinsurance segment increased as forecast, rising by 10% to EUR 6.3 (5.8) billion. At constant exchange rates, especially against the US dollar, growth would have come in at 7%. The level of retained premium fell from 94.1% to 88.9%. Net premium earned climbed 3% to EUR 5.4 (5.2) billion.
Even though the hurricane season in North and Central America again passed off very moderately in the year under review without any expenditures for our account, the major loss situation was exceptionally strained in 2010. Hannover Re's total net expenditure on catastrophe losses and major claims in the year under review amounted to EUR 662 million, compared to EUR 240 million in the previous year. It thus surpassed the expected level of EUR 500 million. Against this backdrop, the combined ratio climbed to 98.3 (96.7)%. The largest single loss event for our account in the year under review – at EUR 182 million – was the severe earthquake in Chile. The devastating earthquake in Haiti, on the other hand, produced a somewhat more modest loss amount of EUR 27 million owing to lower insured values. In Europe, too, we were impacted by a number of natural disasters in the year under review, including for example several fl ood events and a powerful winter storm ("Xynthia"). The earthquake in New Zealand, which caused destruction on a massive scale, resulted in a net strain of EUR 114 million for our account.
Along with the aforementioned natural disasters, one loss event in particular attracted worldwide attention in the year under review – namely the sinking of the "Deepwater Horizon" drilling rig, which caused extensive environmental damage. Particularly with regard to possible liability claims, very many questions remain unanswered; the loss for the insurance industry and hence also for reinsurers is therefore still diffi cult to assess. The loss reserves of EUR 85 million that we set aside in 2010 refl ect all the actual and potential exposures for our portfolio from this complex loss event that are known to us at this point in time and, as things currently stand, represent a conservative level of reserving.
In view of the substantial major loss expenditure, the underwriting result for non-life reinsurance contracted year-onyear by EUR 58 million to EUR 78 (136) million. Net investment income climbed 28% to EUR 779 (610) million. The operating profi t (EBIT) in this segment increased by 20% to EUR 909 (760) million. The very good profi t on ordinary activities was assisted by a special eff ect associated with a decision of the Federal Fiscal Court (BFH). Aft er the BFH had confi rmed that taxation of foreign-sourced investment income recorded by Irish subsidiaries was not permissible, we were able to release provisions that had been constituted in this regard. Against this backdrop, all tax risks were reassessed.
Our business fared better than expected in the year under review in our target markets of Germany and North America: the premium volume remained virtually unchanged at EUR 1,754 (1,738) million. The combined ratio stood at 97.4% in the year under review, aft er 104.7% in the previous year. The operating profi t (EBIT) for the target markets totaled EUR 301 (119) million.
The development of our specialty lines was thoroughly satisfactory. This subsegment of non-life reinsurance includes marine and aviation business, credit/surety, structured reinsurance, ILS (insurance-linked securities), the London market and direct business. The premium volume climbed from EUR 2,234 million to EUR 2,372 million. The combined ratio improved to 91.4 (96.5)%. The specialty lines segment delivered an operating profi t (EBIT) of EUR 370 (256) million.
We combine all markets worldwide under global reinsurance, with the exception of our target markets of Germany and North America and the specialty lines. This subsegment also encompasses worldwide catastrophe business, facultative reinsurance, agricultural risks and Sharia-compliant retakaful business. The development of markets in global reinsurance business was challenging in the year under review. The premium volume here surged by 25% to EUR 2,213 (1,775) million. The combined ratio soared to 106.1 (87.9)% owing to an exceptionally heavy burden of major losses. The operating profi t (EBIT) consequently shrank to EUR 112 (356) million.
| 2010 | 2009 1) | 2008 1) | 2007 | 2006 | |
|---|---|---|---|---|---|
| Figures in | |||||
| EUR million | |||||
| Gross written premium |
5,090 | 4,529 | 3,135 | 3,083 | 2,794 |
| Net premium earned |
4,654 | 4,078 | 2,785 | 2,795 | 2,374 |
| Net invest ment income |
508 | 525 | 371 | 313 | 345 |
| Operating result (EBIT) |
276 | 371 | 114 | 231 | 146 |
| 1) Adjusted on the basis of IAS 8 |
The Group segment of Life/Health Reinsurance brings together our reinsurance activities in the life, annuity and health lines under the worldwide Hannover Life Re brand name. We also write the accident line in this segment, to the extent that it is transacted by life insurers, as well as some Islamic insurance products, the so-called family takaful products.
In the year under review we moved a signifi cant step closer towards attaining our longer-term goal of becoming the number three in the worldwide life reinsurance market. Outside the US we already rank third by a wide margin.
We are able, on the one hand, to selectively tap into attractive business potential in the traditional market through conventional reinsurance off erings, while at the same time working systematically on the development of special product and sales solutions through our four specialist segments. To a signifi cant extent Hannover Life Re is thus able to decouple itself from developments on the standard reinsurance markets.
In many instances Hannover Life Re has been able to operate as a pioneer for new markets and has played a crucial role in shaping the dynamic growth of these markets – the entry into the UK private annuity sector with enhanced annuities in the years 1994/95 may be cited as a well-known example of this approach.
At the present time conventional reinsurance accounts for the lion's share of our portfolio. In the medium term, however, we anticipate stronger growth from the pillars of new markets and bancassurance; it should therefore be possible to restore the desired long-term balance between conventional reinsurance (at around 40% of the portfolio) and the other four pillars (at around 60% of the portfolio) in the next few years.
We devote particularly close attention to optimal risk diversifi cation – something which is also evident in the relevant risk models under Solvency II. The negative correlation between the biometric components of mortality and longevity plays a special role here.
The growth in longevity business diversifi es our mortality risk, while the growth on emerging markets in Asia, Africa and Latin America serves to improve the geographical spread of our portfolio from the major markets of the United States, United Kingdom and Germany; fi nancial solutions provide an additional element of structural diversifi cation.
All in all, we consider Hannover Life Re to be a superbly diversifi ed reinsurer that optimally combines the prospects for long-term growth and profi tability over the next 20 to 30 years. Certain risks that enjoy occasional demand as growth drivers in the international reinsurance markets have been considered unreinsurable by our company for quite some years. We include here derivative fi nancial options and guarantees deriving from variable annuity products, the longevity risk for affl uent socio-economic groups and life-long guarantees for morbidity products.
Our business model is founded on a concept of organic growth, although we are open to acquisitions. Going forward, as in the past, we expect to maintain our growth on an average level of 10 to 12% per year through appropriate portfolio acquisitions, thereby systematically gaining market shares in the global market without this detrimentally impacting the quality of our acceptances.
As expected, the repercussions of the international fi nancial market crisis continued to reverberate beyond 2009. On the one hand, consumers in many markets showed caution when it came to demand for long-term life insurance products; on the other hand, the persistency of older in-force portfolios deteriorated owing to an increased lapse rate. What is more, in the important US mortality market and in the Australian disability market we noted an increase in the biometric claim frequencies; in some cases they were signifi cantly higher than the comparative historical values. Aft er detailed analysis of the data it is our assumption that these are temporary phenomena. Despite this sometimes diffi cult environment, we were again able to generate a highly satisfactory result in life/health reinsurance.
We selectively strengthened our position in our relevant focus markets of the United States, United Kingdom, Germany, Australia and France.
In view of the extremely competitive market climate, we wrote new mortality and critical illness/trauma risks in the UK and Australian markets only with considerable restraint. In large parts of these markets we no longer consider the reinsurance conditions to be commensurate with the risks. On the other hand, following on from the acquisition of the ING life reinsurance portfolio in 2009, we again signifi cantly expanded our position in the US mortality market in the course of the year under review. We revived reinsurance relations with several ceding companies and are now well on track in the medium term to becoming a relevant market player in the US mortality market with a 10 to 15% share of new business.
We were similarly able to build on our leading role in the UK longevity market. We have a strong presence in new business involving personal annuities for individuals with a reduced life expectancy; in this area we support a number of particularly dynamic providers through quota share reinsurance models.
What is more, we are expanding activities relating to the reinsurance of sizeable pension funds in the United Kingdom through so-called longevity swaps – under which the reinsurer assumes the biometric risk of longevity associated with a portfolio (normally only the part of the portfolio on which benefi ts are already being paid) in exchange for payment of a regular fi xed premium.
In South Africa we continue to be the leading life reinsurer, based on our extensive support for innovative, customeroriented insurance companies. In the Indian market, in which we only established a footing in 2008 with a service offi ce in Mumbai, we moved forward with our strategic life cooperation with GIC Re and were able to acquire a number of Indian primary insurers as new clients.
In the Chinese market (Greater China) we are currently represented by three offi ces: the branch in Hong Kong serves both the market comprised of locally-based life insurers and the regional centers of large multinational insurance groups. It also operates as a regional service center for East Asia. Our service offi ce in Taipei serves the local Taiwanese market. The branch in Shanghai concentrates on business from China, where – in close cooperation with and express approval from the local regulator (CIRC) – we were able to close the fi rst two liquidity-related fi nancing transactions.
The development of our business in the Islamic insurance sector (takaful), which we write through our subsidiary Hannover ReTakaful in Manama/Bahrain, was also highly gratifying. Our retakaful cedants are located predominantly in Saudi Arabia, Bahrain and the United Arab Emirates.
The gross premium income booked in the year under review totaled EUR 5.1 billion, an increase of 12% relative to the previous year's fi gure of EUR 4.5 billion. At constant exchange rates – especially against the US dollar – growth would have come in at 7%. Net premium earned amounted to EUR 4.7 billion; this represents a slightly higher level of retained premium of 91.7% compared to the previous year.
In geographical terms, growth impetus in the year under review derived from the United States, United Kingdom, South Africa, Latin America and East Asia – particularly noteworthy is the rapid growth witnessed in China.
The core of our activities is in the life and annuity lines, which accounted for altogether 87% of worldwide premium income in the year under review.
The various covers associated with the biometric risk segment of morbidity, such as disability covers, critical illness/ trauma covers and health covers, accounted for 11%, while the modest but highly profi table portfolio of accident business contributed a share of 2%.
The experience of the biometric risks of mortality and morbidity was extremely mixed in the year under review and less favorable overall than in the two previous years. Irregularities were observed in the mortality risk in some subsegments of the US portfolio, which – especially in the second half of the year – was impacted by an unusually large number of claims with high sums insured. In total, additional expenditure in the mid-double-digit million euro range was incurred. The claims experience in Australian disability annuity business was similarly unusual: the period during which annuity recipients remained in the disability phase was longer by market standards. This prompted a strengthening of the IBNR reserves and the provision for claims already being paid out. Altogether, additional expenditure in the low-double-digit million euros was incurred.
We continued to enjoy very favorable claims experiences in the United Kingdom, Germany and France as well as in the emerging markets of South Africa, Latin America and Asia. The results of the longevity risk, which at the present time we write primarily in the United Kingdom, are inconspicuous and currently in line with our actuarial assumptions.
To a large extent we do not carry any investment risk with respect to the investments that we deposit with ceding companies under reinsurance contracts fi nanced from premiums; this is because the reinsurer is credited with fi xed interest income irrespective of whether or not the primary insurer generates this rate of return.
The situation is diff erent in the US reinsurance market, where we are exposed to a volatility risk through the market-oriented measurement of the securities deposited under ModCo reinsurance treaties. For 2010 this risk – the development of
which is refl ected on the accounting side through unrealized gains/losses – showed a slightly positive experience, compared with the profi t running into the low-triple-digit million euros that had been recognized in the previous year.
Total investment income came in at EUR 508 (525) million; of this amount, EUR 204 million derived from assets under own management and EUR 304 million was attributable to amounts credited on deposits with ceding companies. Internal administrative expenses in life/health reinsurance amounted to EUR 119 million.
The operating profi t (EBIT) for the year under review totaled EUR 276 million. The previous year, which produced a record result of EUR 371 million, had been infl uenced by special eff ects associated with the acquisition of the US ING life reinsurance portfolio as well as fair value adjustments on reinsurance deposits in the US and UK. Our lean processes, quick decision-making structures and our focus on relevant client relationships in the context of a detailed CRM strategy are key factors in the effi ciency of our business model.
| 2010 | 2009 | 2008 1) | 2007 1) | 2006 1) | |
|---|---|---|---|---|---|
| Figures in | |||||
| EUR million | |||||
| Net invest | |||||
| ment income | –97 | –56 | –96 | –67 | –49 |
| EBIT | –315 | –26 | –16 | 60 | 55 |
1) The years prior to 2009 are of only limited comparability due to changes in segment allocation
Along with Talanx AG, this Group segment essentially consists of the AmpegaGerling companies, the reinsurance broker Protection Reinsurance Intermediaries AG (Protection Re) and the Group's internal service companies, namely Talanx Service AG and the IT service provider – which will commence operational business in 2011. As a result of the restructuring within the Talanx Group the tasks assigned to the former HDI-Gerling Sach Serviceholding were reconfi gured. As Talanx Service AG, it now brings together the domestic
central functions that do not relate directly to the insurance business, such as accounting, purchasing, facility management and human resources.
The "AmpegaGerling" brand encompasses both the asset management of the Talanx Group itself as well as asset management and funds provider activities aimed at institutional and private clients. The Asset Management GmbH, Investment GmbH and Immobilien Management GmbH are grouped together under this brand. In the course of the year, as part of the restructuring measures, AmpegaGerling Asset Management is to be renamed Talanx Asset Management and AmpegaGerling Immobilien Management will begin trading as Talanx Immobilien Management. AmpegaGerling Investment GmbH remains unaff ected by the rebranding and its products will continue to bear this name on the market going forward.
AmpegaGerling Asset Management GmbH – in cooperation with the subsidiary AmpegaGerling Investment GmbH – is chiefl y responsible for handling the management and administration of Group companies' securities portfolios and performs associated services such as investment bookkeeping and reporting. The company had assets under management of EUR 67.2 billion as at 31 December 2010, compared with a volume of EUR 59.9 billion at year-end 2009.
As an investment company, AmpegaGerling Investment GmbH administers public and special funds and performs fi nancial portfolio management tasks for institutional clients. The emphasis is on portfolio management and the administration of investments for clients outside the Group. The company's retail business fared highly successfully in 2010 thanks to signifi cant cash infl ows of EUR 738 million. The volume of public funds grew by EUR 0.9 billion year-on-year to EUR 3.5 billion. The company was thus able to purposefully enlarge this strategic subsegment. While the industry as a whole posted growth of 12% in the volume of public funds in 2010, AmpegaGerling generated a disproportionately vigorous increase of 33%. Looking at the sales trend in terms of
distribution channels and customer segments, administrative business with label funds for external fund initiators proved to be the most crucial success factor. Another key sales area is the Group's own unit-linked business based on insurance policies of this type. In addition to retail business, the company engages in institutional business with third-party clients and – on the basis of its available know-how profi le – positions itself as an outsourcing partner for non-Group insurers. Existing mandates were enlarged by EUR 140 million in 2010.
The total volume of assets under management grew to EUR 14.7 billion, an increase of 11% relative to the level at the beginning of the year (EUR 13.3 billion). Of this total volume, more than half – specifi cally EUR 8.0 (7.7) billion – was administered on behalf of Group companies through special funds and direct investment mandates. The remaining portion was attributable to institutional third-party clients in an amount of EUR 3.4 (3.3) billion and retail business in an amount of EUR 3.3 (2.3) billion. The latter is off ered both through the Group's own sales channels and products such as unit-linked life insurance as well as through external asset managers and banks.
Assets of EUR 1.2 (2.4) billion were attributable to AmpegaGerling Immobilien Management GmbH as at 31. December 2010. The contraction in assets resulted from the transfer of mortgage portfolios to HDI-Gerling Lebensversicherung AG.
All in all, the volume of assets under management by all AmpegaGerling companies grew from EUR 75.5 billion to EUR 83.1 billion as at year-end 2010, of which EUR 74.5 billion was apportionable to Group companies and EUR 8.6 billion to business with third-party clients.
Protection Reinsurance Intermediaries AG (Protection Re), which is wholly owned by Talanx AG, is allocated to the Corporate Operations segment within the Talanx Group. In the course of the year Protection Re was also renamed and is now trading as Talanx Reinsurance Broker. The company serves as the professional reinsurance advisor and broker for reinsurance cessions (non-life business) of the Talanx Group. Its core
business consists of providing primary insurers with comprehensive advice on all aspects of outward composite reinsurance. Protection Re handles the complete spectrum of the reinsurance business process for each Group cedant to the extent necessary in each particular case. From portfolio analysis and advising on the structuring of reinsurance programs to administration and run-off of the placed reinsurance arrangements, specialized teams develop and support viable solutions that help Group cedants to achieve their business objectives on a lasting basis.
The reinsurance capacities required for all Group cedants served by Protection Re were again successfully obtained for 2011 on the world market. The operating profi t (EBIT) for 2010 totaled EUR 8 (12) million. The branch of Protection Re that was established in 2009 in London specifi cally for the purpose of placing the business of German cedants with reinsurance companies outside the European Union fulfi lled the requirements placed on it in 2010 and contributed to the company's good result.
The investment income and expenses in this segment encompass principally personnel and social expenditures for administration of the Group's own investments and third-party portfolios. The amount recognized is therefore frequently negative, but this has no implications for the Group's investment income. The latter is described below in the subsections entitled "Assets and shareholders' equity" and "Financial position". The operating result (EBIT) of –EUR 315 (–26) million for the segment is overshadowed this year by the defi cit posted by Talanx AG, which arose out of various contributions and provisions associated with indemnity commitments given to the segments Talanx Deutschland and Talanx International. They are for the most part connected with the merger of Aspecta Lebensversicherung into HDI-Gerling Lebensversicherung as well as the cessation of ASPECTA's new business activities in Luxembourg and Liechtenstein.
The balance sheet structure of the Talanx Group is shaped by its character as a diversifi ed fi nancial services group and its activities as a globally operating insurance group. The dominant item on the assets side is the investments, which – excluding funds held by ceding companies (EUR 11.0 billion) – accounted for 65% of total assets. They serve fi rst and foremost as security for the provisions constituted in insurance business, which – including provisions in the area of life insurance insofar as the investment risk is borne by policyholders – totaled EUR 72.5 billion. Over and above this, the most important sources of funding are the shareholders' equity (7% of the balance sheet total) and the issued subordinated debt (3% of the balance sheet total).
The assets of the Group are described on the basis of the following overview, which is based on the assets shown in the consolidated balance sheet.
| 2010 | 2009 1) | 2008 1) | ||||
|---|---|---|---|---|---|---|
| EUR million | % | EUR million | % | EUR million | % | |
| Intangible assets | 2,440 | 2 | 2,747 | 3 | 2,938 | 3 |
| Investments | 83,422 | 75 | 76,385 | 75 | 69,466 | 74 |
| Investments for the account and risk of holders of life insurance policies |
6,414 | 6 | 4,975 | 5 | 3,371 | 4 |
| Reinsurance recoverables on technical provisions | 5,523 | 5 | 5,962 | 6 | 6,989 | 7 |
| Accounts receivable on insurance business | 5,011 | 5 | 4,342 | 4 | 4,438 | 5 |
| Deferred acquisition costs | 3,715 | 3 | 3,544 | 3 | 3,509 | 4 |
| Cash | 1,265 | 1 | 1,685 | 2 | 1,408 | 1 |
| Deferred tax assets | 268 | <1 | 235 | <1 | 295 | <1 |
| Other assets | 1,781 | 2 | 1,655 | 2 | 1,736 | 2 |
| Assets of disposal groups classified as held for sale | 1,529 | 1 | 35 | <1 | 43 | <1 |
| Total assets | 111,368 | 100 | 101,565 | 100 | 94,193 | 100 |
1) Adjusted on the basis of IAS 8
The substantial increase of EUR 9.8 billion in our total assets to EUR 111.4 billion can be attributed fi rst and foremost to the marked growth in our investments of around EUR 7.0 bil lion – equivalent to 9% – to EUR 83.4 (76.4) billion. The growth in the portfolio of assets under own management (+EUR 5.4 billion) refl ects – along with the favorable development of the underwriting business – the appreciation of the US dollar against the euro and lower interest rates. The latter give rise to a positive development in the fair values of our fi xed-income
securities recognized as "available for sale". The increase in the investment portfolio was also positively infl uenced by the sharp rise of 17% in funds held by ceding companies to EUR 11.0 billion. Detailed explanations of the investments are provided below in this section as well as in the Notes, principally in the subsections "Nature of risks associated with insurance contracts and fi nancial instruments", pages 166 et seqq. of the Notes, and "Notes on the consolidated balance sheet" from page 194 of the Notes onwards.
The intangible assets shown in the balance sheet (EUR 2.4 billion) are attributable largely to insurance-related intangible assets arising out of the acquisition of past insurance portfolios (EUR 1.7 billion aft er EUR 2.0 billion in the previous year). In addition, a not insignifi cant amount of EUR 589 (593) million derived from acquired goodwill. In this context we would refer the reader to the explanatory remarks in the subsections of the Notes entitled "Goodwill" and "Other intangible assets", pages 187 et seqq.
The amortization to be taken on acquired insurance portfolios produces a charge to net income, to the extent that it is attributable to the shareholders' portion, of EUR 152 million. The recognized insurance-related assets – in relation to the policyholders' share – are opposed by corresponding provisions for premium refunds. In this context we would refer the reader to our explanatory remarks in the subsection of the Notes entitled "Other intangible assets", pages 192 et seq.
The balance sheet item "Technical provisions in the area of life insurance insofar as the investment risk is borne by policyholders" grew by EUR 1.4 billion in step with the increase in the item "Investments for the account and risk of holders of life insurance policies", which is comprised of the investments relating to unit-linked insurance products. In the case of these life insurance products, under which policyholders themselves carry the investment risk, the technical liabilities refl ect the fair values of the corresponding assets.
The subgroup Clarendon Insurance Group, Inc., Wilmington, of Hannover Rückversicherung AG in the Group segment of Non-Life Reinsurance, the sale of which is highly probable within one year, is recognized under the item "Assets of disposal groups classifi ed as held for sale". The procedure is explained in greater detail in the subsection of the Notes entitled "Non-current assets held for sale and disposal groups", pages 164 et seq.
Our investment management is geared to optimally resolving the confl icting interests of security, liquidity and return arising out of the principles of the Insurance Supervision Act by means of appropriate steering mechanisms.
In this respect, the management of the Talanx Group's assets follows a rigorous investment process, the goal of which is to defi ne an asset allocation in keeping with the risk-bearing capacity and earnings/return target of the individual company. The point of departure for the management of investments is the steering impetus delivered by the Talanx Group risk capital model, which determines the allocation of the available risk capital. Based on the risk capital released by the corresponding insurance enterprise for investment management, a company-specifi c asset allocation is developed which incorporates the specifi c requirements of the business model (cash fl ow structure and/or duration of the liabilities side, requirements for the holding of cash and for return contributions, etc.). The resulting optimal portfolio ensures a highest possible return in conformity with the set risk parameters.
In the context of the rigorous investment process, the limits set by the legislator or internally defi ned are monitored through an extensive system of limits; the internally defi ned limits are derived chiefl y from the investment strategy and the conservative investment policy of the Talanx Group. It thus remains the case that more than 90% of instruments in the asset class of fi xed-income securities are rated "A" or better. A wide-ranging system designed to limit accumulation risks results in a balanced mix of assets, the risk-reducing aspects of which have also proven their worth during the Eurozone crisis.
In addition to the framework conditions for asset management specifi ed in this way by the Group, the linkage of the underwriting portfolios on the liabilities side to the risk characteristics of the investments on the assets side gives rise to company-specifi c parameters (duration management, preserving of matching currencies) which are continuously monitored and as necessary adjusted. Oversteps and undershoots are reported on a same-day basis in order to facilitate
immediate defi nition of measures to rectify limit violations. In addition, thresholds are defi ned for signifi cant corporate performance indicators – upon attainment of which measures can be initiated in due time so as to avert at an early stage any possible jeopardizing of the performance indicators or goals. Covering the provisions constituted for our customers with assets at all times – measured both by book value and fair value – is always a focus of our activities, even in extreme market situations.
Furthermore, multi-year liquidity planning shows the annual cash fl ows. The fi ne-tuning of our asset management makes allowance for the need to be able to meet the payment obligations existing within the Group at all times.
1) Adjusted on the basIS of IAS 8
In 2010 the investment portfolio was boosted by a substantial EUR 7.0 billion to EUR 83.4 billion. The favorable trend in the asset volume, which was already emerging in the previous year, was thus sustained in 2010 with a rate of increase of 9%. While the growth in funds held by ceding companies in 2010 fell short of that recorded in 2009, the increase in the volume of assets under own management – at 8% – actually improved slightly on the previous year. This was principally due to cash infl ows from the underwriting business, which
were reinvested in accordance with the existing asset structure. In 2010, too, fi xed-income assets continued to be the dominant investment class. The reinvestment of the income generated – particularly noteworthy here is the interest income from fi xed-income investments with a profi t contribution of EUR 2.6 billion in 2010 – also promoted continuous growth in the asset holdings.
In addition to these infl uencing factors stemming from the original business, developments on the capital market also led to portfolio-increasing eff ects. Special mention should be made here of the decline in interest rates and the movement in the USD exchange rate: having listed at 1.44 as at 31 December 2009, the USD stood at 1.34 to the euro on 31 December 2010. An increase in value of almost EUR 2 billion in the USD holdings can be attributed to this eff ect.
In compliance with all legal requirements and internal Group guidelines, the diversifi cation of the investment portfolio as at 31 December 2010 was very similar to year-end 2009 with slight tendencies in favor of fi xed-income securities.
The composition of the assets under own management recognized in the balance sheet is shown below.
| 2010 | 2009 1) | Change | ||||
|---|---|---|---|---|---|---|
| EUR million | % | EUR million | % | EUR million | % | |
| Investment property | 860 | 1 | 726 | 1 | 134 | 19 |
| Investments in affiliated companies | 74 | <1 | 61 | <1 | 13 | 21 |
| Investments in associated companies | 144 | <1 | 134 | <1 | 10 | 8 |
| Loans and receivables | ||||||
| Loans incl. mortgage loans | 1,439 | 2 | 1,584 | 2 | –145 | –9 |
| Loans and receivables due from governmental or semi- governmental entities as well as fixed-income securities |
30,904 | 43 | 29,964 | 45 | 940 | 3 |
| Financial assets held to maturity | 2,999 | 4 | 2,858 | 4 | 141 | 5 |
| Financial assets available for sale | ||||||
| Fixed-income securities | 28,330 | 39 | 24,226 | 36 | 4,104 | 17 |
| Variable-yield securities | 2,305 | 3 | 2,251 | 3 | 54 | 2 |
| Financial assets at fair value through profit or loss | ||||||
| Financial assets classified at fair value through profit or loss |
||||||
| Fixed-income securities | 974 | 1 | 834 | 1 | 140 | 17 |
| Variable-yield securities | 15 | <1 | 27 | <1 | –12 | –44 |
| Financial assets – trading | ||||||
| Fixed-income securities | 69 | <1 | 64 | <1 | 5 | 8 |
| Variable-yield securities | 83 | <1 | 62 | <1 | 21 | 34 |
| Derivatives 2) | 80 | <1 | 112 | <1 | –32 | –29 |
| Other invested assets | 4,185 | 6 | 4,133 | 6 | 52 | 1 |
| Total investments under own management | 72,461 | 100 | 67,036 | 100 | 5,425 | 8 |
1) Adjusted on the basIS of IAS 8
2) Derivatives only with positive fair values
The bulk of the asset portfolio of the Talanx Group continues to be comprised of investments in fi xed-income securities and loans, which are refl ected primarily in the holding categories of "Loans and receivables", "Financial assets available for sale", "Financial assets held to maturity" and "Financial assets at fair value through profi t or loss". Total holdings of these investments grew by altogether EUR 5.2 billion in the 2010 fi nancial year to EUR 64.7 billion (+9%), while the proportion of the total portfolio attributable to these assets remained virtually unchanged year-on-year at 78%.
Whereas in 2009 the lion's share of the increase in holdings allocated to the category "Financial assets held to maturity" resulted from the reclassifi cation of instruments from the category "Financial assets available for sale" in the Reinsurance segment – prompted by a steering decision to avoid unnecessary balance sheet volatility –, the strongest growth in 2010 was recorded by the category "Financial assets available for sale". The share of these fi nancial instruments, the volatile holdings of which have an eff ect on shareholders' equity, climbed 17% or EUR 4.1 billion to EUR 28.3 billion, with roughly half this eff ect deriving from the strength of the US dollar. The balance of unrealized gains and losses on "Financial assets available for sale" declined from +EUR 498 million at year-end 2009 to +EUR 307 million despite lower interest rates, since in many business sectors the favorable development of reserves was increasingly used to realize gains. In conjunction with these activities, market opportunities in the area of industrial bonds were used in 2010 – building on a move initiated in 2009 – to enhance the yield situation of the portfolios as well as to improve diversifi cation by stepping up new investments. The proportion of fi xed-income securities attributable to industrial bonds was thus increased from 7% to 8%.
As a fundamental principle, however, the Talanx Group stands by its strategy of making new investments where possible in the category of "Loans and receivables" in order to reduce balance sheet volatility. Assets under the item "Loans and receivables" decreased by EUR 0.8 billion to EUR 32.3 billion. The reserves here increased to EUR 842 (667) million. Government bonds or instruments of similarly sound issuers continue to be the focus of our investments in fixedincome securities. At year-end 2010 they amounted to almost EUR 30.9 billion, corresponding to a share of 48% of the total volume of fi xed-income securities and loans.
The Talanx Group continues to pursue a conservative investment policy. For detailed information on the quality of our investments please see pages 177 et seqq. of the Notes.
The funds withheld by ceding companies with respect to collateral furnished for the technical reserves of cedants in the Reinsurance segment climbed from EUR 9.3 billion at year-end 2009 to EUR 11.0 billion. Allowing for increased total asset holdings, this corresponds to a ratio of 13 (12)%.
Overall, the equity portfolio held by the Talanx Group remained on a par with the previous year at EUR 1.7 billion, although appreciable movements in the portfolio were
recorded within the year: in the fi rst quarter of 2010 strategic positions in the area of equities and equity funds were reduced, inter alia owing to higher costs for the renewal of hedges. A re-entry into tactical positions was executed only on a limited scale using defi ned stop loss strategies. For the most part, the second and third quarters did not see any major changes in the portfolio. It was only in the fourth quarter that the upturn on the market was used to implement re-entry programs. Special mention should be made here of the Reinsurance division, which has built up a fresh strategic asset allocation aft er moving out of equities in 2008.
Relative to the total investment portfolio of the Talanx Group, the equity allocation at year-end 2010 remained unchanged at around 2%. Since hedges were largely implemented using dynamic stop loss strategies and derivative instruments, the equity allocations before and aft er hedges diverge by only a few basis points (at fair values: gross 2.3%, net 2.2%).
The net balance of unrealized gains and losses on holdings of equity securities within the Group classifi ed as available for sale (excluding other invested assets) amounted to +EUR 308 (+349) million.
Investment property was held with a value of EUR 860 million. This is an increase of EUR 134 million relative to the previous year, corresponding to portfolio growth of 19%. Along with scheduled depreciation of EUR 15 million, impairments of EUR 6 million were taken in the year under review on the basis of market valuations. An amount of EUR 6 million was written off real estate funds held in the portfolio.
The real estate allocation, which also includes investments in real estate funds, was unchanged at 2%.
| 2010 | 2009 | Change | |
|---|---|---|---|
| Figures in EUR million | |||
| Ordinary investment income |
2,782 | 2,607 | 175 |
| thereof current income from interest |
2,616 | 2,457 | 159 |
| thereof profit/loss from shares in asso ciated companies |
2 | –6 | 8 |
| Realized net gains on investments |
385 | 236 | 149 |
| Write-ups/write-downs on investments |
–78 | –332 | 254 |
| Unrealized net gains/ losses on investments |
–12 | 52 | –64 |
| Other investment expenses |
180 | 145 | 35 |
| Income from invest ments under own management |
2,897 | 2,418 | 479 |
| Interest income on funds withheld and |
|||
| contract deposits | 280 | 240 | 40 |
| Net investment income | 3,177 | 2,658 | 519 |
The net investment income for the year under review of EUR 3.2 billion surpassed the previous year's level by 19.5%. While current income from interest was again the main driver in 2010, its share of total investment income declined from 92% to 82%. This can be attributed to the higher realized net gains as well as lower write-down requirements, which on balance contributed EUR 403 million more to investment income than in the previous year. The unrealized net gains deteriorated, on the other hand, by EUR 64 mill ion to –EUR 12 million. Interest income and expenses on funds withheld and contract deposits totaled EUR 280 (240) million.
The increase in ordinary investment income – in this case excluding income from funds held by ceding companies – to EUR 2,616 million (+EUR 159 million) went hand-in-hand with the growth in the volume invested in fi xed-income securities. While this portfolio increased by almost 9%, however, the income interest showed a rise of just 6%. Along with the fact that some investments were only completed in the course of the year and their infl uence on profi tability was
not fully felt in 2010, the portfolios for investment had to be newly purchased on the capital market at lower returns as a consequence of the low interest rate level. Forward purchases were made as part of the hedging of the reinvestment risk – especially in the case of the life insurers operating in the Retail Germany segment. On the fi nancial implications see item 12 of the Notes "Derivative fi nancial instruments and hedge accounting", pages 207 et seqq. of the Notes. The average coupon of the portfolio of fi xed-income securities remained virtually unchanged in the 2010 fi nancial year at 4.1 (4.2)%.
Whereas the aft er-eff ects of the fi nancial market crisis had still been very heavily refl ected in write-downs taken on both equities and fi xed-income securities in the 2009 fi nancial year, a marked recovery was recorded in 2010. Impairments of EUR 45 (112) million were taken on equities; the impairments on fixed-income positions amounted to EUR 17 (101) million. Owing to bailout mechanisms existing on the European level (so-called Eurozone safety net), no default risk that would justify taking an impairment loss existed with respect to bonds issued by the PIIGS quintet of countries; decreases in value were therefore considered temporary and impairments were almost entirely avoided.
The write-downs were opposed by write-ups of EUR 37 million that resulted from the reversal of impairments taken on instruments in prior years.
The net gains realized on investments totaled EUR 385 million at the end of 2010. The low level of interest rates was used by many units to realize the reserves consequently inherent in fi xed-income assets, as a result of which the total amount of realized gains and losses from sales of fi xedincome investments surpassed the net gains recorded in the previous year by a comfortable EUR 149 million.
The net investment income generated in 2010 is shown below broken down into Group segments. All segments show a signifi cant recovery in profi tability, which can be attributed chiefl y to the fact that impairment items have returned to a normal level.
1) Presentation aft er elimination of intra-Group relations
2) Figures for the previous year adjusted on the basis of modifi ed segment reporting pursuant to IFRS 8
The investment income reported by the Group segment of Corporate Operations consists principally of the costs of managing all assets – both the Group's own and third-party holdings.
The Talanx Group enters into various commitments. Of material signifi cance in this context to the assessment of its assets are letters of credit and trust accounts put up as security for technical liabilities (EUR 5,727 million), guarantee payments under issued subordinated bonds (EUR 2,131 million), blocked custody accounts and other trust accounts (EUR 1,902 mil lion), outstanding commitments under existing capital
participations (EUR 553 million), obligations under §§ 124 et seq. of the Insurance Supervision Act (VAG) as a member of the Security Fund for Life Insurers (EUR 372 million) and commitments arising out of rental/lease agreements (EUR 492 mil lion). In addition, there were "Other liabilities" of EUR 796 mil lion as at 31 December 2010.
Furthermore, the Talanx Group is subject to contingent liabilities due to its involvement in court proceedings and arbitration procedures. All these liabilities are set out in the subsections of the Notes entitled "Other information – Contingent liabilities and other fi nancial commitments" on pages 251 et seq. and "Other information – Rents and leases" on page 253.
The capital structure and composition of the liabilities of the Talanx Group are shaped by its primary insurance and reinsurance business. The technical provisions, which in accordance with the requirements of regulators are to be covered by assets, account for the largest share. In addition, the Group fi nances itself most notably through shareholders' equity as well as through subordinated debt and liabilities, which also represent our most important sources of funds.
The fi nancial position of the Group is illustrated by the following overview, which we have based on the liabilities shown in the consolidated balance sheet.
| 2010 | 2009 1) | 2008 1) | ||||
|---|---|---|---|---|---|---|
| EUR million | % | EUR million | % | EUR million | %% | |
| Shareholders' equity | 7,991 | 7 | 7,153 | 7 | 5,718 | 6 |
| Subordinated liabilities | 2,791 | 3 | 2,003 | 2 | 2,074 | 2 |
| Technical provisions – gross | 77,778 | 70 | 73,531 | 72 | 69,612 | 74 |
| Technical provisions in the area of life insurance insofar as the | ||||||
| investment risk is borne by policyholders | 6,414 | 6 | 4,975 | 5 | 3,371 | 4 |
| Other provisions | 2,751 | 2 | 2,644 | 3 | 2,416 | 3 |
| Liabilities | 10,829 | 10 | 9,750 | 10 | 9,625 | 10 |
| Provisions for deferred taxes | 1,433 | 1 | 1,509 | 1 | 1,377 | 2 |
| Debts of disposal groups classified as held for sale | 1,381 | 1 | — | — | — | — |
| Total liabilities | 111,368 | 100 | 101,565 | 100 | 94,193 | 100 |
1) Adjusted on the basis of IAS 8
Currency-related interdependencies inevitably exist between the assets and fi nancial position in view of the international orientation of the insurers brought together in the Talanx Group.
In principle, however, the internationally operating insurers normally receive payments and reimburse claims in their respective national currency. This means that assets to cover liabilities are also held in foreign currencies. Matching currency coverage is required for this purpose. In this regard we would refer the reader to our remarks in the risk report. For the purposes of the consolidated fi nancial statement the relevant national currencies are presented as explained in the Notes under "Accounting policies – Currency translation" on pages 142 et seq.
In the fi nancial year just-ended the shareholders' equity in creased by EUR 838 million – or 12% – to EUR 7,991 (7,153) mil lion. The Group's share amounted to EUR 4,956 (4,574) million.
Through the issue of two subordinated bonds the volume of subordinated liabilities grew by 39% relative to the previous year to reach EUR 2.8 billion.
A new subordinated debt with a nominal value of EUR 500 million was placed by Hannover Rückversicherung AG through its subsidiary Hannover Finance (Luxembourg) S. A. along with another bond of nominally EUR 300 million placed by Talanx AG, Hannover. The features of the bonds are described in the subsection of the report entitled "Analysis of debt" as well in the remarks on item 17 of the Notes "Subordinated liabilities" on pages 216 et seq.
In addition, a line of credit is available to Talanx AG with a volume of nominally EUR 1.5 billion, of which – as in the previous year – an amount of EUR 550 million was utilized. The available fl oating-rate loan has a term ending at the latest on 31 July 2012.
With respect to further loan agreements and letters of credit we would refer the reader to the presentation of off -balance sheet fi nancial instruments as well as the explanatory remarks in the Notes on page 186.
The provisions connected with the insurance business aft er consolidation can be broken down as follows:
| 2010 | 2009 1) | 2008 | |
|---|---|---|---|
| Figures in EUR billion | |||
| Benefit reserve | 42.5 | 39.8 | 36.4 |
| Loss and loss adjust ment expense |
|||
| reserve | 28.5 | 27.3 | 27.2 |
| Unearned premium | |||
| reserve | 5.4 | 5.0 | 4.9 |
| Provision for premium refunds |
1.1 | 1.2 | 0.9 |
| Other technical | |||
| provisions | 0.3 | 0.2 | 0.2 |
| Total | 77.8 | 73.5 | 69.6 |
1) Adjusted on the basis of IAS 8
Aft er allowance for the shares of reinsurers, the breakdown is as follows:
| 2010 | 2009 1) | 2008 | |
|---|---|---|---|
| Figures in EUR billion | |||
| Benefit reserve | 41.5 | 39.0 | 35.5 |
| Loss and loss adjust ment expense |
|||
| reserve | 24.5 | 22.5 | 21.7 |
| Unearned premium reserve |
5.0 | 4.6 | 4.5 |
| Provision for premium refunds |
1.1 | 1.2 | 0.9 |
| Other technical provisions |
0.3 | — | — |
| Total | 72.4 | 67.3 | 62.6 |
1) Adjusted on the basis of IAS 8
In this respect, the existing liabilities to policyholders are to be covered by assets in at least the same amount. The proportion of net provisions connected with the insurance business relative to the total assets as at the balance sheet date – including funds held by ceding companies – stood at 87 (88)%. Surplus coverage of the provisions thus exists in an amount of EUR 11.0 (9.0) million.
The provisions are available to the Group in accordance with the corresponding time to maturity. We would refer the reader here to the presentation of maturities – especially of the benefi t reserve and the loss and loss adjustment expense reserve (see the Notes, item 19 "Benefi t reserve" and item 20 "Loss and loss adjustment expense reserve", pages 218 and 219 et seqq.).
The gross amounts of the technical liabilities aft er consolidation are crucially determined by the benefi t reserve and the loss and loss adjustment expense reserve. As at the balance sheet date 55 (55)% of the total provisions were attributable to the benefi t reserves.
The gross provisions (aft er consolidation) were divided as follows among the segments:
| Benefit reserve |
Loss and loss adjustment expense reserve |
||
|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 |
| — | — | 7,746 | 7,388 |
| 32,311 | 30,899 | 2,695 | 2,772 |
| 1,752 | 1,527 | 1,130 | 936 |
| — | — | 14,577 | 14,163 |
| 8,403 | 7,328 | 2,390 | 1,991 |
| — | — | — | 6 |
| 42,466 | 39,754 | 28,538 | 27,256 |
The benefi t reserve is a mathematically calculated value for future liabilities (present value of future obligations less the present value of future incoming premiums), above all in life insurance.
Altogether, the gross provisions increased by 6% or EUR 4.3 bil lion relative to the previous year. This growth was driven largely by the rise in the benefi t reserve (+7% or EUR 2.7 billion) and in the loss and loss adjustment expense reserve (+5% or EUR 1.3 billion).
The increase in the benefi t reserve can be attributed to the natural aging of the in-force portfolios as well as pleasing organic growth. Of the total increase of EUR 2.7 billion, EUR 1.4 bill ion was apportionable to the Retail Germany segment and EUR 1.0 billion to the Life/Health Reinsurance segment.
The rise in the loss and loss adjustment expense reserve resulted from higher claims burdens in all primary insurance segments. In relation to Non-Life Reinsurance a modest decrease from 73% to 72% was observed.
We recognized the planned sale of the US subgroup Clarendon Insurance Group, Inc., Wilmington, to Enstar Group Ltd., Hamilton, Bermuda, in the Non-Life Reinsurance segment in accordance with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" in the year under review. The assets and liabilities attributable to the disposal group are presented unoff set.
For further details please see our explanatory remarks in the section of the Notes entitled "Non-current assets held for sale and disposal groups" on pages 164 et seq.
Contingent liabilities exist as described on page 251 of the Notes.
The structure of our technical provisions and other liabilities essentially establishes the basis for the Talanx Group's investment strategy. The focus here is on asset/liability management: changes in the value of investments should as far as possible off set changes in the technical liabilities and requirements on the liabilities side. This stabilizes our positions against fl uctuations on capital markets.
To this end we refl ect important properties of the liabilities such as the maturity and currency structure – as well as the infl ation sensitivity – on the assets side by acquiring, wherever possible, investments that respond in a similar manner. In this regard we would also refer the reader to our remarks in the risk report from page 83 onwards.
The duration (average period of capital commitment) of the entire investment portfolio of fi xed-income securities held within the Talanx Group has been maintained on a stable level at 5.5 years since the end of 2009. The duration management of the individual segments is guided by the needs arising out of the underwriting business. Thus, for example, the asset duration in the Retail Germany division (7 years) is relatively long compared to that of the Industrial Lines division (3.4 years) in order to satisfy the capital commitment period, especially with respect to life insurance products. The assets-side duration is reconciled with the requirements of the liabilities side at regular intervals between the insurance carriers and AmpegaGerling.
With an eye to matching currency coverage USD-denominated investments continue to account for the lion's share – at 14% – of the foreign currency portfolio within the Talanx Group. Sizeable positions are also held in GBP and AUD, although in total they do not account for more than 5% of all assets.
An infl ation swap was taken out by the Hannover Re subgroup to hedge the infl ation risk. This derivative fi nancial instrument is intended to hedge the loss reserves against infl ation risks.
We also use derivative fi nancial instruments in order to structure asset management activities as eff ectively as possible (see here our remarks in subsection 12 of the Notes entitled "Derivative fi nancial instruments and hedge accounting", pages 207 et seqq.).
Bringing transparency to the actual capitalization
Determining the required capital
Optimizing the required capital Optimizing the capital structure
Implementing capital measures
Capital management is based on a process geared to optimizing the steering and use of capital within the Group that is structured according to clear guidelines and workflows.
Eff ective and effi cient capital management is a vital component of the Group's holistic set of management tools. We diff erentiate between three fundamental capital concepts: "Company's Capital", "Risk-Based Capital" and "Excess Capital".
We refer to the company's capital as the economic capital available in a business unit that is allocated to the shareholder. It is composed of the IFRS shareholders' equity and the so-called soft capital. We count as soft capital, which includes unrealized gains/losses on the assets and liabilities sides aft er taxes, inter alia the loss reserve discount, a level of overreserving in property/casualty insurance that goes beyond best estimate reserving, the non-capitalized value of in-force business in life insurance and life/health reinsurance and the unrealized gains/losses in the asset category of "loans and receivables". In the context of our value-based management the company's capital serves as a basis for establishing the cost of capital as well as the shareholder's return expectation above and beyond the cost of capital (cf. also the explanation of xRoCC on pages 33 and 35).
Risk-based capital is the amount of capital required for operation of the insurance business in order to ensure that the probability of capital erosion is less than 0.03% (cf. risk report). This confi dence level corresponds to a 99.97% Value at Risk. The capital required for this purpose is calculated for the primary insurance companies on the basis of the Talanx risk capital model.
Excess capital is the residual of the company's capital and risk-based capital; it thus consists of capital that is not at risk. Since it is not required for coverage of business risks and insofar as it also cannot be utilized for additional risk carrying, it can be withdrawn without overstraining the risk-bearing capacity. The ratio of company's capital and risk-based capital further indicates the capital adequacy. Given that excess capital is a component of company's capital, it does not contain any borrowed funds whatsoever but is instead directly allocable to the shareholder. There are, however, restrictions on the repatriation of excess capital associated with both regulatory/legal considerations and rating requirements.
The general goal of capital management within the Talanx Group – an optimized risk-appropriate capital structure of the Group – is explicitly anchored in the strategy ( pages 30 et seqq.). In addition to satisfying legal requirements and the capital requirements of rating agencies, the capital allocation within the Group is therefore also – as a collateral condition – systematically guided by risk-return aspects and the target portfolio to which Talanx aspires. In this way investments are channeled into preferred growth markets/business segments, also with an eye to considerations of diversifi cation.
A central task of capital management therefore lies in identifying the capital that exceeds the required risk-based capital on the defi ned confi dence level or – in the opposite case – that falls short of this level. The Value at Risk defi nes the estimated maximum loss that with a specifi ed probability will not be exceeded within a specifi ed holding period. In the event of over- or undercapitalization, the next step is to rectify or at least alleviate it by taking appropriate corrective actions. In the case of signifi cant overcapitalization at the company level, for example, capital management measures may be geared to systematically reducing free excess capital in order to allocate it to more effi cient reinvestment elsewhere within the Group. Our stated aim is to achieve the most effi cient possible utilization of our capital while at the same time ensuring appropriate capital adequacy and making allowance for the eff ects of diversifi cation.
Another major objective is the substitution of shareholders' equity with equity surrogates such as hybrid capital, which positively aff ects the capital structure of the Group as well as the ability of Talanx AG to make own funds available to the operational units.
By optimizing the Group's capital structure, our capital management safeguards the adequacy of our capital resources both from a rating standpoint and in light of solvency and economic considerations. At the same time, it ensures that the return on the invested capital can be generated for shareholders on a sustainable basis in accordance with the Talanx strategy. Not only that, the capital structure must continue to facilitate action on organic and inorganic growth opportunities at both the Group and company level and it must off er the certainty that volatilities on the capital markets and in insurance business can be absorbed without undershooting the desired confi dence level. The effi cient handling of capital resources is a crucial indicator for existing and potential investors that Talanx utilizes the capital made available to it in a responsible and effi cient manner.
The Group steering function of capital management thus enables us to
Within the scope of the communicated profi t targets the Talanx Group sets itself the goal of generating a continuous, above-average increase in the value of the invested capital that takes account of the risk position.
The equity ratio, defi ned as the sum total of the equity components relative to total assets, has changed as follows:
| 2010 | 2009 1) | 2008 1) | 2007 1) | ||
|---|---|---|---|---|---|
| Total equity as shown in the |
|||||
| balance sheet | EUR million | 7,991 | 7,153 | 5,718 | 6,163 |
| thereof | |||||
| minorities | EUR million | 3,035 | 2,579 | 2,092 | 2,431 |
| Total assets | EUR million 111,368 | 101,565 | 94,193 | 95,395 | |
| Equity ratio | % | 7.2 | 7.0 | 6.1 | 6.5 |
1) Adjusted on the basIS of IAS 8
Allowing for equity components recognized by regulators such as subordinated liabilities, the modifi ed equity ratio was as follows:
| 2010 | 2009 1) | ||
|---|---|---|---|
| Regulatory capital | EUR million | 1,469 | 1,117 |
| Modified equity ratio | % | 8.5 | 8.1 |
1) Adjusted on the basIS of IAS 8
The return on equity, defi ned as the result for the period excluding minority interests in relation to the average equity excluding minority interests, has changed as follows:
| 2010 | 2009 1) | 2008 1) | 2007 | ||
|---|---|---|---|---|---|
| Net income 2) | EUR million | 220 | 485 | 183 | 477 |
| Return on equity | % | 4.6 | 11.8 | 5.1 | 13.1 |
| Risk-free | |||||
| interest rate | % | 3.5 | 3.6 | 3.7 | 3.9 |
| Target value | % | 11.0 | 11.1 | 11.2 | 11.4 |
| Performance | % | –6.4 | 0.7 | –6.1 | 1.7 |
1) Adjusted on the basIS of IAS 8
2) Net income excluding minorities
In this context, the performance represents the over- or underfulfi llment of the target value. In the years 2009 and 2007 we accomplished the goals that we had set ourselves. The profi tability of the Talanx Group was crucially impacted in the 2008 fi nancial year by the worldwide fi nancial market crisis and the associated slump on equity markets. The consequences of this crisis on international capital markets were a considerable drag on net income.
With regard to developments in the current fi nancial year, please see our remarks in the section entitled "Business development" on pages 41 et seqq.
The major movements in shareholders' equity were driven by the following factors:
The Group net income apportionable to our shareholders contracted sharply by 55% to EUR 220 (485) million and was allocated in full to retained earnings.
"Cumulative other comprehensive income and other reserves" increased by a substantial 85% year-on-year to EUR 388 million. Crucial to this growth was, fi rst and foremost, the rise in gains/losses from currency translation (+EUR 144 million) as well as in the other changes in shareholders' equity (+EUR 279 million; principally changes in policyholder participation/ shadow accounting). The increase of the gains/losses from currency translation was driven in particular by the appreciation of the US dollar against the euro. The "gains/losses on investments" moved in opposite directions. The unrealized gains/losses on investments declined on balance by EUR 174 million to EUR 522 (696) million. The cash fl ow hedge reserve decreased appreciably to –EUR 123 (–23) million.
The minority interests in shareholders' equity increased by EUR 456 million – or 18% – to EUR 3.0 billion. The minority interest in net income amounted to EUR 615 (491) million. The dividends paid to non-Group shareholders, principally from the Hannover Re Group, produced an opposing eff ect in an amount of EUR 162 million.
1) Adjusted on the basIS of IAS 8
The unrecognized valuation reserves shown in the following table make no allowance for technical liabilities. The valuation reserves are attributable principally – in an amount of EUR 842 (667) million – to loans and receivables. Please see our remarks in the Notes on the items "Investment property", "Loans and receivables", "Financial assets held to maturity", "Other assets" and "Subordinated liabilities".
| 2010 | 2009 1) | 2008 1) | 2007 1) | |
|---|---|---|---|---|
| Figures in EUR billion | ||||
| Group shareholders' equity |
8.0 | 7.1 | 5.7 | 6.2 |
| Valuation reserves not recognized in the bal ance sheet before taxes, including the shares of policy holders and minority interests |
1.2 | 1.1 | 1.6 | –1.2 |
1) Adjusted on the basIS of IAS 8
We generate liquidity primarily from our operational insurance and reinsurance business, the current income on our investments and from fi nancing measures. Through regular liquidity planning and an investment strategy geared inter alia to liquidity requirements, we ensure that the Talanx Group is able to make the necessary payments at all times. Liquidity shortages consequently did not arise.
In the case of the Talanx Group the consolidated cash fl ow statement can be regarded as having minimal informational value. The Group's cash fl ow is shaped fi rst and foremost by the business model of an insurer and reinsurer. Normally, we fi rst receive premiums for the agreed risk acceptance in order to be able to make payments at a later date in the event of a claim. Until such time we invest the funds in interest-bearing instruments and thus earn current income from our investments. For us, therefore, the cash fl ow statement is not a substitute for either liquidity planning or fi nancial planning, nor is it used as a management tool.
The cash fl ows are shown in full in the cash fl ow statement on page 113; they are presented in summary form in the table below:
| 2010 | 2009 1) | |
|---|---|---|
| Figures in EUR million | ||
| Cash flow from operating activities | 4,584 | 5,472 |
| Cash flow from investing activities | –5,586 | –5,072 |
| Cash flow from financing activities | 553 | –129 |
| Change in cash | ||
| and cash equivalents | –449 | 271 |
1) Adjusted on the basis of IAS 8
The cash fl ow from operating activities, which also includes infl ows from the generated investment income, fell sharply year-on-year to EUR 4,584 (5,472) million. The calculation adjusts the net income of EUR 670 (893) million in the consolidated cash fl ow statement to allow for the increase in the technical provisions (net perspective) (EUR 3.9 billion). The most notable factor in this development was the signifi cant rise in the benefi t reserves, especially in the Retail Germany and Life/Health Reinsurance segments (see here also our explanatory remarks in the section describing the fi nancial position). The appreciable decrease with respect to the "Changes in funds held and in accounts receivable and payable" in an amount of –EUR 1.2 billion is off set by the "Changes in other non-cash expenses and income as well as adjustments to net income". The changes in funds held result from the furnishing of collateral by reinsurers. Please see the comments on the development of investments.
The cash outfl ow from investing activities is determined by payments made to purchase investments. As in the previous year, the outfl ows associated with the purchase of investments amounting to EUR 4.2 (2.7) billion exceeded the infl ows from sales and maturities. In addition, there were "Changes in investments for the account and risk of holders of life insurance policies" totaling EUR 1.4 (1.6) billion. Of these cash outfl ows, an amount of EUR 1.2 billion derived from increased investments in these assets in the Retail Germany segment.
The cash infl ow from fi nancing activities was shaped in the year under review by the "Net changes from other fi nancing activities" amounting to EUR 719 (–123) million. The increase was attributable above all to the issue of subordinated bonds as well as to the bank borrowings and notes payable. The dividends paid in the year under review climbed by EUR 144 mil lion year-on-year to EUR 162 million. Cash infl ows from fi nancing activities increased by EUR 682 million on balance.
Cash and cash equivalents were reduced by altogether EUR 420 million in the year under review to EUR 1.3 billion. An amount of EUR 27 million was deducted from the cash and cash equivalents for disposal groups pursuant to IFRS 5.
For further information on our liquidity management please see the section of the risk report on the liquidity risk, page 93.
Along with the assets available to cover provisions and liabilities, the Group has at its disposal the following additional lines of credit that can be drawn upon as required:
Unsecured letter of credit facilities with various terms (maturing at the latest in 2017) and a total volume equivalent to EUR 1,207 million (EUR 802 million) exist on a bilateral basis with fi nancial institutions.
In the Life/Health Reinsurance and Non-Life Reinsurance segments facilities exist with various fi nancial institutions for letters of credit, including two syndicated guarantee facilities from 2005 and 2006. Following the contractual maturity of the fi rst half of the line from 2005 in January 2010, it amounted to an equivalent of EUR 755 (1,395) million as at the balance sheet date. The other half of this line matures in January 2012. The line from 2006, the amount of which as at the balance sheet date was equivalent to EUR 1,509 (1,395) million, matures in January 2013.
Furthermore, a long-term unsecured line of credit with a total volume equivalent to at most EUR 566 (523) million was concluded in December 2009. It is intended specifi cally for US life reinsurance business. For further information on the letters of credit provided please see our explanatory remarks in the item of the Notes entitled "Other information – Contingent liabilities and other fi nancial commitments", pages 251 et seq.
A number of LoC facilities include standard market clauses that grant rights of cancellation to the banks in the event of material changes in our shareholding structure or trigger a requirement on the part of Hannover Re to furnish collateral upon materialization of major events, for example if our rating is signifi cantly downgraded.
Further information on our liquidity management is provided in the subsection of the risk report concerning liquidity risks.
With the aim of optimizing the capital structure, our subordinated bonds and debentures (abbreviated to: subordinated debt) complement our shareholders' equity and help to ensure liquidity at all times. We refer to this subordinated debt and other bank borrowings that serve to fi nance corporate acquisitions as "strategic debt".
Talanx AG has concluded a fi rm agreement with a broad consortium of banks regarding an available fl oating-rate line of credit that may be drawn upon as necessary. At the end of 2009 we had used one tranche amounting to altogether EUR 550 million. The nominal amount of the line of credit was EUR 1.5 billion as at the balance sheet. The line of credit matures at the latest in 31 July 2012 and can be called at three months' notice. Furthermore, several Group companies have taken up long-term debt – principally in the form of mortgage loans – amounting to EUR 188 (116) million.
On 14 September 2010 Hannover Re placed a new subordinated bond on the European capital market through its subsidiary Hannover Finance (Luxembourg) S. A. This subordinated debt with a nominal value of EUR 500 million has a maturity of 30 years with a fi rst scheduled call option aft er ten years. The bond carries a fi xed coupon of 5.75% p.a. in the fi rst ten years, aft er which the interest basis changes to a fl oating rate of three-month EURIBOR +423.5 basis points.
On 18. November 2010 Talanx AG issued a subordinated, in principle perpetual, bond with a nominal volume of EUR 300 million and an initially fi xed coupon, with a fi rst scheduled call option aft er ten years for the entire bond. At the end of this period the interest basis changes to a fl oating rate and the bond may then be called in its entirety on a quarterly basis by Talanx AG. There is a contractual obligation to convert the bond to shares of Talanx AG at the issue price in the event of an initial public off ering.
Eff ective 14 March 2011 the subordinated debt of nominally EUR 350 million issued in September 2001 through Hannover Finance (Luxembourg) S. A. was called as scheduled. The calling of the bond results in a reduction of our debt leverage. This notifi cation was published on 1 February 2011 in the newspaper "Luxemburger Wort".
Issued debt was repurchased only to a minimal extent in 2010.
The changes in the strategic debt were as follows:
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Subordinated bonds of Hannover Finance (Luxembourg) S. A. |
1,869 | 1,365 |
| Subordinated bonds of HDI-Gerling Industrie Versicherung AG |
265 | 269 |
| Subordinated bonds of HDI-Gerling Lebensversicherung AG |
115 | 105 |
| Subordinated bonds of Talanx Finanz |
242 | 264 |
| Subordinated bonds of Talanx AG | 300 | — |
| Bank borrowings of Talanx AG | 550 | 550 |
| Mortgage loans of Hannover Re Real Estate Holdings, Inc., Orlando |
188 | 116 |
| Other bank borrowings of Talanx AG |
— | 57 |
| Total | 3,529 | 2,726 |
For further explanation please see our remarks in the Notes on items 16 "Shareholders' equity", 17 "Subordinated liabilities", 25 "Notes payable and loans", 26 "Other liabilities" as well as under "Other information – Contingent liabilities and other fi nancial commitments".
As an insurance holding company Talanx AG is subject to regulatory provisions pursuant to §1 b) Insurance Supervision Act (VAG). For the Talanx Group, supervision is carried out on
the Group level by the Federal Financial Supervisory Authority (BaFin). For this purpose the parent company HDI V. a. G. reports supplementary information to the BaFin in accordance with the "adjusted solvency" rules.
Solvency refers to the ability of an insurer to meet the obligations assumed under its contracts on a lasting basis. Above all, this means fulfi lling defi ned minimum capital requirements. The aim of the "adjusted solvency" rules is to prevent the multiple use of equity to cover risks from underwriting business at diff erent levels of the Group hierarchy. To calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the IFRS consolidated fi nancial statements. To determine the eligible capital elements, the IFRS equity is adjusted; in particular, it is increased by portions of the subordinated liabilities as well as valuation reserves not included in equity and reduced by intangible assets. The Talanx Group's eligible capital is roughly twice as high as legally required.
| 2010 | 2009 | ||
|---|---|---|---|
| Eligible capital of the Group | EUR million | 6,361 | 5,639 |
| Adjusted solvency ratio | % | 196.6 | 184.2 |
1) Calculated analogously for Talanx fr om the adjusted solvency of the HDI Group
The increase in the adjusted solvency ratio from 184.2% to 196.6% can be attributed in part to the rise in the IFRS Group shareholders' equity as a consequence of the Group net income allocated to retained earnings. Furthermore, the taking up of subordinated bonds and debentures to an extent that more than off set partial repurchases of such instruments had a favorable infl uence on the Group's eligible capital. The development of items to be deducted or added was virtually unchanged from the previous year.
In the year under review the Talanx Group and its companies again maintained their excellent or very good ratings from the international rating agencies Standard & Poor's (S&P) and A. M. Best. It is important to distinguish between the "Insurer
Financial Strength Rating", which primarily assesses our ability to meet our obligations to our policyholders, and the "Issuer Credit Rating" or "Counterparty Credit Rating", which provides investors with information from an independent source about a company's credit quality in general.
| Standard & Poor's | A. M. Best | ||||
|---|---|---|---|---|---|
| Grade | Outlook | Grade | Outlook | ||
| Talanx Group 1) | A | Stable | |||
| Talanx Primary Group 2) | A+ | Stable | |||
| Hannover Re subgroup 3) | AA– | Stable | A | Positive |
1) The designation used by A. M. Best for the Group is "Talanx AG and its leading non-life direct insurance operation and its leading life insurance operation"
2) This rating applies to the subgroup of primary insurers (the Talanx Group divisions of Industrial Lines, Retail Germany and Retail International) as well as its major core companies
3) This rating applies to Hannover Re and its major core companies. The Hannover Re subgroup corresponds to the Talanx Group division of Reinsurance
The fi nancial stability of the Talanx Group (with respect to both the primary insurance sector and the reinsurance sector) is assessed by the rating agency A. M. Best as "Excellent"; with a rating of A it is placed in the second-best rating category. The outlook for the rating of the primary insurance
sector is stable. The outlook for the rating of Hannover Re is assessed as positive in light of the company's improved capitalization.
In the case of S&P, the Hannover Re subgroup is awarded a rating in the second-best rating category at AA– ("Very Strong"), while the Primary Group was placed within the third-best rating category with an A+ ("Strong"). The outlook for the ratings is assessed as stable in both cases.
The strong competitive position of both subgroups is highlighted by S&P as a particularly impressive strength. A. M. Best affi rmed inter alia the very good capitalization of both subgroups, which even beat the rating agency's expectations.
In 2010 another rating was added for a company belonging to the Talanx Group: HDI-Gerling Welt Service AG received its initial rating of A (Excellent) with a stable outlook from A. M. Best in December 2010. On the other hand, the S&P ratings of AA– awarded to Hannover Reinsurance (Dublin) Ltd. and E+S Reinsurance (Ireland) were withdrawn on account of their liquidation. The reason here was Hannover Re's move to concentrate its business activities in Ireland at a single subsidiary, namely Hannover Reinsurance (Ireland) Ltd.
The fi nancial strength ratings from the primary insurance sector are summarized in the following table:
| Standard & Poor's | A. M. Best | ||||
|---|---|---|---|---|---|
| Companies | Location | Grade | Outlook | Grade | Outlook |
| HDI Direkt Versicherung AG | Germany | A+ | Stable | – | – |
| HDI-Gerling America Insurance Company | USA | A+ | Stable | A | Stable |
| HDI-Gerling Firmen und Privat Versicherung AG | Germany | A+ | Stable | – | – |
| HDI-Gerling Industrie Versicherung AG | Germany | A+ | Stable | A | Stable |
| HDI-Gerling Lebensversicherung AG | Germany | A+ | Stable | A | Stable |
| HDI-Gerling Welt Service AG | Germany | A+ | Stable | A | Stable |
| neue leben Lebensversicherung AG | Germany | A+ | Stable | – | – |
| HDI-Gerling Verzekeringen N. V. (Nederland) | Netherlands | A | Stable | – | – |
| HDI-Gerling Verzekeringen N. V./ | |||||
| HDI-Gerling Assurances S. A. (Belgie/Belgique) | Belgium | A | Stable | – | – |
| HDI Versicherung AG | Austria | A | Stable | – | – |
| PB Lebensversicherung AG | Germany | A | Stable | – | – |
| PBV Lebensversicherung AG | Germany | A | Stable | – | – |
| TARGO Lebensversicherung AG | Germany | A | Stable | – | – |
S&P defi nes the fi rst seven companies listed in the table (shown against a grey background) as "core companies" of the Talanx Primary Group. This is also why they received the same rating. The other companies listed in the table are considered by S&P to be strategically signifi cant participations and have therefore been awarded grades that are one notch lower. In the case of A. M. Best, all four companies analyzed by this agency received the same rating of A with a stable outlook.
Current ratings of Hannover Re subsidiaries are available on the Hannover Re website, www.hannover-re.com.
| Standard & Poor's | A. M. Best | ||||
|---|---|---|---|---|---|
| Grade Outlook |
Outlook | ||||
| Talanx AG | A– | Stable | bbb+ | Stable | |
| Hannover | |||||
| Rückversicherung AG | AA– | Stable | a+ | Positive |
1) In order to distinguish Financial Strength Ratings fr om Issuer Credit Ratings, A. M. Best uses lower-case script for the latter
This table provides an overview of the Issuer Credit Ratings (ICR). On the basis of the rating of A– ("Strong"), Talanx AG's ability to pay is assessed by S&P as "Very Good", hence corresponding to the third-best category on the issuer credit rating scale. A.M. Best rates the ability to pay of Talanx AG as bbb+ ("Good"), corresponding to the fourth-best rating category. The outlook of these ratings is assessed as stable by both rating agencies.
The somewhat inferior assessment of Talanx AG relative to the Financial Strength Ratings can be attributed to the methodology used by the rating agencies, under which a rating markdown is applied to holding companies. In other words, in accordance with the general analytical criteria used by the rating agencies, companies that exercise a purely holding function with no operational activities of their own are downgraded relative to the Financial Strength Rating that would be awarded to a comparable insurance undertaking.
Hannover Re is rated AA– ("Very Strong") by S&P, equivalent to the second-best rating category. The outlook for this rating is stable. A. M. Best has awarded Hannover Re an Issuer Credit Rating of a+ ("Strong"), corresponding to the third-best rating category on the ICR rating scale used by A. M. Best. The outlook for Hannover Re's ICR is – in keeping with its Financial Strength Rating – positive.
Various ratings also exist for the subordinated liabilities issued by Group companies (issue ratings). These ratings are set out in the explanatory notes on the consolidated balance sheet in subsection 17 "Subordinated liabilities" of the Notes, page 216.
The Management of Talanx AG assesses the development of business in 2010 – aft er elimination of non-recurring eff ects – as satisfactory overall. It is true that the targets for the operating profi t (EBIT) and return on equity were not accomplished, and the result therefore came in below expectations. Yet the decline in the result was attributable above all to special eff ects and the increased burden of losses aft er the exceptionally low claims expenditure of the previous year. From a structural perspective, the result is good: gross premiums and new business are growing and we boosted our fi nancial strength relative to the previous year. At the time when the management report was drawn up the Group's economic situation continued to be favorable.
Only thanks to the extraordinary commitment shown by the men and women working for the Talanx Group worldwide were we able to generate another good result in a market climate that remained challenging. The Board of Management would like to express its appreciation to all of the Group's staff for their considerable dedication and good performance in the fi nancial year just-ended. The Board of Management thanks the Group Employee Council and all the other employee council bodies for their cooperation, which was at all times trusting and constructive.
The number of staff employed within the Talanx Group at yearend stood at 18,006 (18,038); this was equivalent to 16,874 (16,921) full-time positions. The workforce thus remained stable. Of the 18,006 employees that constitute the total labor force, 6,865 (6,656) – i.e. 38% – worked abroad and 11,141 (11,382) were employed in Germany. Our Group has employees in 40 countries on 5 continents around the world. In Germany, roughly three-quarters of staff are employed in the federal states of North-Rhine Westphalia and Lower Saxony.
In Germany the proportion of female staff stood at 48%, while the proportion of part-time employees stood at 17%; both these fi gures were thus on a par with the previous year. Of the employees not subject to collective bargaining agreements, 28% were women; the representation of women on senior executive level was 11%.
A fundamental principle at Talanx is that high performers with potential are fostered without regard to their ethnic origin, religion or gender. In the area of development programs for junior managers and newly appointed managers, the participation of women in most programs has averaged around 25% in recent years. This level rises to 40% in the development program currently running for managerial staff in the property/casualty insurance sector. Female participation in the management program for future senior executives is close to the current representation of women among the ranks of senior management at altogether 12%.
Systematic advancement through appropriate working-time models geared to the various phases of life – such as parttime working and telecommuting – as well as the assistance given to families in their search for suitable daycare facilities for children are intended to optimally develop and build the loyalty of women with the potential to take on leadership roles. Based on these measures, it is our expectation that women will increasingly move into all echelons of management.
For the Talanx Group, state-of-the-art human resources management is crucial to the successful execution of strategy. Considerable eff orts were devoted in the year under review to the project activities carried out in the context of the organizational reconfi guration of the Talanx Group. A key concern
here is improving the competitiveness of the Talanx Group in order to ensure that growth and profi tability targets are achieved and secure jobs created for the long term. In this connection, most notably, various central functions are to be concentrated at a newly established service company and at Talanx AG as part of the latter's expansion into the Group's fi nancial and management holding company.
In addition, Group-wide personnel management activities were focused on personnel marketing, personnel development and training.
One consequence of the impending demographic shift is that even in the near future companies will have to face up to greater competition for qualifi ed university graduates and specialists. In order to ensure that Talanx continues to be able to attract highly skilled and motivated recruits, considerable importance attaches to boosting awareness of the Talanx Group and its individual brands. As part of university marketing activities and the placement of Talanx as a successful employer brand, we launched our comprehensive employer image campaign in the year under review; driven by the slogan "Talanx your career", it enjoys strong recognition value.
Along with personnel marketing, personnel development is a focal point of our human resources management. As in past years, our employees' skills were systematically enhanced to handle their demanding tasks by way of training and personnel development measures. The goal is to consolidate and extend the above-average skills set of our workforce in order to optimally prepare the Group for the challenges presented by the market. Launched in the previous year, the Talanx Corporate Academy has been very successful in establishing itself and off ers an especially high-grade training program in German and English for Board members and senior managers. Complementing the already existing off erings of the divisions, the Corporate Academy serves in particular to convey the Talanx strategy and management methods. Another important goal is to enhance communication and links between the holding company and the divisions as well as between the various divisions. Professors from highly reputed business schools are joined by members of the Talanx AG Board of Management as guest speakers and discussants.
The extent to which members of staff across all divisions sought to improve themselves was gratifying. Not only did they make the most of off erings relating to specialist topics, they also worked intensively to refi ne their methodological, managerial and social skills.
The Industrial Lines division focused on fostering young talent. Trainee programs in the individual insurance lines convey a solidly grounded grasp of the theory and practice of property/casualty insurance in self-contained, one-year units. These activities are designed to build up a suffi cient number of suitably qualifi ed employees in order to meet the increased need for specialist staff .
For the most part, the Retail Germany division cooperates in the area of human resources development with the Group's own training center in Cologne in order to off er a broad range of specialist, methodological and social skills enhancement measures. This encompasses technical seminars, personality training and also specially devised programs aimed at specifi c target groups. In addition, a specialist career model developed in the previous year in the bancassurance sector was rolled out for a number of other functions: employees follow an individually tailored three-part development plan worked out with their manager. This includes personality seminars geared closely to the company's competence profi le. The second element of the career plan is specialist further training, such as participation in study programs alongside an employee's job with the encouragement and fi nancial support of the company. Thirdly, project skills are enhanced – with employees able to extend their theoretical and practical grasp of the role of both project worker and project manager. The successful and innovative execution of this concept was recognized with the award of the insurance industry's internal training prize "InnoWard 2010", beating out 37 other candidatures from throughout the entire German insurance industry.
On the reinsurance side, too, considerable importance attaches to solid and state-of-the-art internal training. This system has been continuously expanded and enhanced in recent years. Along with traditional presence seminars, Hannover Re is developing a second pillar of learning methodology known as "blended learning". This refers to a learning arrangement in which online study phases and presence training are intelligently combined and synthesized into a single unit. Learning thus becomes more self-manageable and, not least, more independent of time and place, hence making it possible to integrate colleagues at locations abroad more easily.
For many years Hannover Re has been off ering a practicetested trainee program focused on graduates in economics (business administration and economics) and (commercial) law as well as graduates in cultural studies. The purpose of this cross-divisional program is to systematically train young talent for its core business of underwriting. In 2009 Hannover Re extended this highly tailored, internal form of further training; it put in place another special training program for (business) mathematicians in response to the continuous and appreciable growth in the need for qualifi ed mathematicians in recent years.
The Group also continues to attach considerable importance to initial training: it enables the company to attract capable, skilled and motivated recruits. For the individual, it is a vital prerequisite for getting off to a successful start in working life. The vast majority of those undergoing training are taken on following completion of their instruction. 404 (391) apprentices and student trainees were employed by the Talanx Group in Germany as at 31 December 2010.
The member companies of the Talanx Group demonstrate their sense of responsibility to the environment in a broad variety of ways. Three courses of action are available to our insurers: sustainable enterprise management, the development of products that promote criteria such as environmental conservation, energy effi ciency and social responsibility, and observance of such criteria in their own investment decisions.
At our companies we are committed inter alia to energysaving measures, which take a number of forms in our offi ce buildings. New buildings, in particular, off er an opportunity to pay close attention to environmentally compatible construction techniques and ecologically friendly operation. A current example is the new corporate headquarters in Hannover, which is to be occupied by the end of 2011: the technical concept here is geared to the minimal consumption of energy and resources. The basic energy need for heating and cooling, for example, is served by the earth's natural potential (geothermal energy). A highly insulated building envelope, triple glazing and the greening of roof surfaces similarly contribute to the building's sustainability.
On the product side our range of insurance off erings includes coverage extensions for photovoltaic systems as well as preferential rates in motor insurance for fuel-effi cient vehicles, hybrid vehicles and those with engines powered by electricity, natural gas, hydrogen or fuel cells. HDI-Gerling off ers an actively managed eco-portfolio in all its current fund products. The "Zukunft " ("Future") investment strategy contains sustainable equity, mixed and bond funds. The selection criteria are conservation of the natural environment, economical use of resources, fair treatment of people and an attractive return.
AmpegaGerling's portfolio also contains investment products that accommodate sustainability concerns. It off ers several sustainable investments, including not only the Gerling Responsibility Fund but also the special bond and equity funds terrAssisi Renten I AMI and terrAssisi Aktien I AMI. These funds invest in entities and issuers that incorporate not only economic but also environmental and social criteria into their company strategy and which are considered trailblazers when it comes to assuming responsibility for a sustainable future.
Our Group invests in accordance with regulatory requirements with an eye to the greatest possible profi tability, liquidity and security so as to be able to render the agreed insurance benefi ts at all times. If investment options are available to us that accommodate particular ethical, social and ecological concerns while at the same time meeting all the aforementioned requirements, these are given special consideration.
Talanx has combined its activities in the fi eld of Corporate Social Responsibility under the heading of education and training. A central step was the establishment of a foundation. The Talanx Foundation, which was set up in 2009 with the aim of off ering fi nancial assistance to particularly strong students in insurance-related disciplines and institutes at selected universities, awarded ten study scholarships per semester for the fi rst time in 2010. The scholarships were initially awarded for one year and may be extended for a further year on at most two occasions until completion of the standard period of study. By way of this engagement Talanx AG seeks to live up to its responsibility to society through the emphasis that it has placed on education and training. We believe it is important to off er fi nancial assistance to particularly strong and deserving students. The aim is to support above all those students who themselves lack the resources to complete their degree in the standard period of study and with an outcome that refl ects their talent if they do not receive appropriate assistance.
The multi-brand principle pursued within the Talanx Group is refl ected in its polyphonic external communications inasmuch as the subsidiaries seek to address their specifi c customer segments with their various brands through tailored marketing and advertising. Primary insurers such as HDI and HDI-Gerling engage directly with the broader public, using inter alia TV commercials, publicity campaigns and sponsorship activities. Reinsurance and asset management operations focus on their particular target groups. Talanx AG speaks principally to the broader fi nancial community and business journalists and its communication is therefore limited chiefl y to print advertisements in selected media.
The sales channels employed by the Group's companies are extremely diverse: they range from our own tied agents' organizations and local representation by branch offi ces and sales outlets through the use of brokers and independent agents to highly specialized bancassurance cooperations. For further information please see the subsections on the various Group segments.
Talanx AG takes good Corporate Governance to mean responsible enterprise management and supervision geared to sustainable value creation. In particular, we strive to further foster the trust placed in us by future investors, our customers and employees as well as the public at large. We also attach considerable importance to the effi cient conduct of their work by the Board of Management and Supervisory Board, good cooperation between these bodies and with the company's staff as well as open and transparent corporate communications.
Talanx AG is a joint-stock company under German stock corporation law. It has three executive bodies: the Board of Management, Supervisory Board and General Meeting. The tasks and powers of these bodies are defi ned by law, the company's Articles of Association and the Rules of Procedure for the Board of Management and Supervisory Board.
In accomplishing its goal of generating a sustainable increase in the value of the company, Talanx AG is guided extensively by the principles of the German Corporate Governance Code (DCGK), by means of which it is progressively aligning itself with the standards of German listed enterprises.
The Board of Management leads the company at its own responsibility and defi nes goals as well as strategy. In accordance with § 7 Paragraph 1 of the Articles of Association, the Board of Management is comprised of at least two persons. Beyond that, the Supervisory Board determines the number of members. The current composition of the Board of Management is set out on page 8 of the Annual Report.
The working practice of the Board of Management is governed by Rules of Procedure adopted by the Supervisory Board. These defi ne the areas of responsibility of the individual members of the Board of Management. Each member of the Board of Management leads the area(s) assigned to them at their own responsibility within the scope of the resolutions of the full Board of Management. In addition, the Rules of Procedure set out the matters reserved for the full Board of Management as well as the required voting majorities. The full Board of Management decides in all cases where adoption of a resolution by the full Board of Management is stipulated by law, the Articles of Association or the Rules of Procedure. The Board of Management meets at least once a month.
The Board of Management reports regularly and comprehensively to the Supervisory Board on the strategic orientation, the development of business, the fi nancial position and results of operations, the planning and goal accomplishment as well as the existing opportunities and risks.
Certain decisions of the Board of Management that are of special importance require the approval of the Supervisory Board. Some of these reservations of approval are prescribed by law, others are governed by the Rules of Procedure of the Board of Management.
The Supervisory Board advises and monitors the management of the company. It is also responsible, in particular, for the appointment and employment contracts of members of the Board of Management and for the examination of the annual fi nancial statements.
The Supervisory Board consists of 16 members. Half of them are chosen by the shareholders and the other half are elected by the employees. In order to ensure that the Supervisory Board performs its tasks eff ectively, it has formed the following committees:
The Board of Management informs the Supervisory Board in a regular and timely manner of the development of business, the implementation of strategic decisions, material opportunities and risks as well as the company's planning. The Chairman of the Supervisory Board is in constant contact with the Chairman of the Board of Management in order to discuss with him the company's strategy, business development and risk management. The composition of the Supervisory Board and its committees is set out on pages 9 et seq.
Shareholders exercise their rights at the General Meeting. The sole shareholder is HDI Haft pfl ichtverband der Deutschen Industrie V. a. G.
Each share carries one vote in the voting on resolutions. The General Meeting elects the members of the Supervisory Board representing the shareholders and votes to ratify the acts of management of the Board of Management and the Supervisory Board. It decides upon the appropriation of the disposable profi t, on capital measures and the approval of company agreements, as well as on the remuneration of the Supervisory Board and on amendments to the company's Articles of Association. Each year an ordinary General Meeting is held, at which the Board of Management and the Supervisory Board provide an account of the fi nancial year justended. In special cases, the Stock Corporation Act provides for the convening of an extraordinary General Meeting.
For the Talanx Group, compliance with applicable laws as a fundamental prerequisite for lasting successful business operations is a matter of course. Employees are supported in this respect by the compliance offi cers at Talanx.
The Code of Conduct for our staff has defi ned standards for responsible and ethical behavior on all levels of the Group. It is incumbent upon every employee within the Group to ensure that their actions are in compliance with this code and the laws, guidelines and instructions governing their area of work.
Our commercial success is determined not only by the quality of our products and services, but also by the legally correct and responsible conduct of our employees towards each other, our business partners and the public at large. Only in this way can we create trust, an especially decisive competitive factor in our industry.
In the form of training events and programs we off er staff the opportunity to refresh, broaden and deepen their knowledge and profi ciency with respect to selected compliance-related topics.
A whistleblower system gives staff the opportunity to provide tips on certain serious breaches of the law – anonymously, if they so desire. This enables compliance offi cers to take action, contain the damage and avoid further losses.
The risk management system of Talanx AG applicable throughout the Group is based on the risk strategy, which in turn is derived from the company strategy. A core component is systematic and comprehensive recording of all risks that from the current standpoint could conceivably jeopardize the company's profi tability and continued existence. Further details in this regard may be obtained from the risk report contained in the present Annual Report on pages 84 et seq.
The remuneration report describes and explains the basic features of the remuneration structure for the Board of Management of Talanx AG as well as the amount of remuneration paid to the Board of Management and the key criteria used in its determination. The explanations provided cover both the remuneration structure applicable to the year under review and the revised remuneration structure for the Board of Management that is to be adopted for the 2011 fi nancial year. The remuneration of the Supervisory Board of Talanx AG, which additionally included a performance-based component for the fi rst time in the year under review, is also described. Furthermore, the main features of the remuneration paid to managing directors and managers outside the Group Board of Management are also discussed.
The remuneration of the Board of Management is determined by the Supervisory Board. The Supervisory Board reviews and discusses the remuneration structure and the appropriateness of the remuneration at regular intervals. The most recent review was conducted by the Supervisory Board at its meeting on 13 November 2010. At this meeting the Supervisory Board also decided upon a fundamental reorientation of the system of remuneration for the Board of Management with eff ect from the 2011 fi nancial year. This is described in greater detail below.
The purpose of the remuneration system for the Board of Management is to appropriately recompense the members of the Board of Management. Based on the scope of activity and responsibility of the individual member of the Board of Management, the total remuneration is geared to his or her personal performance and the commercial success of the company. It consists of the following components:
Fixed remuneration: The fi xed remuneration is paid in twelve equal monthly installments. It is guided, in particular, by the range of duties and professional experience of the individual Board member. The amount of fi xed remuneration is reviewed by the Supervisory Board at intervals of two years.
Variable remuneration: The individual performance of a particular Board member and the commercial success of the company are recognized through an appropriate portion of variable remuneration in the total remuneration.
The variable remuneration is paid in the form of a bonus for the fi nancial year just-ended. It is determined by the Supervisor Board in light of the performance and economic position of the company and the Group as a whole, the performance of the specifi c Board member's area of responsibility as well as his or her individual performance.
Fringe benefi ts: The members of the Board of Management also receive certain fringe benefi ts, most notably a company car and insurance protection (liability, accident and luggage insurance).
Insofar as Board members exercise a mandate at Group companies and are recompensed for this function, such remuneration is counted towards the bonus paid by Talanx AG.
With regard to the amount of remuneration received by the Board of Management, please see the information contained in the present Annual Report on pages 253 et seq.
The employment contracts of the members of the Board of Management with Talanx AG include – with one exception, where an annual funding contribution is paid according to the fi xed remuneration – commitments to an annual pension that is calculated as a percentage of the fi xed annual remuneration ("defi ned benefi t"). The agreed maximum pension amounts to – depending on the particular contract – between 35% and 65% of the monthly fi xed salary payable upon retirement as provided for by the contract at the age of 65. In one instance a commitment exists on the basis of a defi ned contribution. In this case the company pays an annual funding contribution amounting to 20% of the pensionable income (fi xed annual remuneration as at the key date of 1 July of any year). Under both contract variants ("defi ned benefi t" and "defi ned contribution") income from other sources during drawing of the pension may under certain circumstances be counted towards it pro rata or in full (e.g. in the event of incapacity for work or termination of the employment contract before reaching age 65, drawing of disability benefi ts or previously earned pension payments).
In the year under review six individual commitments existed to active members of the Board of Management. The provision expensed for this purpose pursuant to International Financial Reporting Standards amounted to EUR 3.9 million in the year under review.
With respect to the remuneration received by former members of the Board of Management and their surviving dependents as well as the provisions for pension liabilities constituted for this group of persons, please see the information provided in the Notes to this Annual Report.
The Supervisory Board reviewed the remuneration system for the Board of Management in the year under review on the basis of revised legal and regulatory requirements for management remuneration and adjusted its structure with a special eye to sustainability considerations. In this context, the criteria for measurement of the profi t- and performancebased variable remuneration and their weighting were also redefi ned. The revised remuneration structure applies with eff ect from the 2011 fi nancial year onwards to all active members of the Board of Management.
The remuneration of the Board of Management is geared to the size and activities of the company, its economic and fi nancial position, its success and future prospects as well as the customariness of the remuneration, making reference to the benchmark environment (horizontal) and the remuneration level applicable to the company's employees. It is also guided by the tasks of the specifi c member of the Board of Management, his or her individual performance and the performance of the full Board of Management.
Overall, the remuneration is structured in such a way that it refl ects both positive and negative developments, is measured competitively and in line with market standards and takes into account the sustainable development of the company.
As before, the remuneration is split into annual fi xed remuneration – which to some extent for the fi rst time does not constitute the basis for calculating the amount of the fi nal salary pension – and variable remuneration; in this respect, the variable remuneration consists of a performance-based annual cash payment, a so-called "bonus bank" with disbursement aft er three years and share-based remuneration (share awards). By exercising due discretion the Supervisory Board determines at regular intervals and in exceptional situations whether adjustments need to be made to the variable remuneration or restrictions placed upon its disbursement.
The proportion of the total remuneration attributable to variable remuneration varies individually and is within a range of 45% to 65%.
The amount of variable remuneration depends on certain defi ned events and on the accomplishment of certain set targets. The set targets vary according to the function of the Board member in question. The variable remuneration is comprised of a so-called "Group bonus" and an "individual bonus" as well as – in the case of Board members with responsibility for a particular division – a so-called "divisional bonus". The weighting of the various components is determined individually for each member of the Board of Management in light of the function that he or she performs.
An individually determined amount is paid as the Group bonus for each 0.1 percentage point by which the average return on equity (RoE) of the last three fi nancial years exceeds the risk-free interest rate. If the average return on equity of the last three fi nancial years is below the risk-free interest rate or if it is negative, this results in a corresponding penalty amount for each 0.1 percentage point of undershoot. The maximum amount of the Group bonus and the maximum penalty amount are agreed individually. The arrangements governing the Group bonus may be adjusted if the risk-free interest rate changes to such an extent that an (absolute) deviation arises of at least 1 percentage point. The risk-free interest rate is the average market rate over the last fi ve years for 10-year German government bonds, with the average being calculated annually at year-end on the basis of the relevant interest rate.
The divisional bonus is to be geared to the average "Intrinsic Value Created" ("IVC") over the three-year period just-ended for the division for which the Board member in question bears responsibility. A generally applicable concept for measurement of the IVC has still to be fi nalized. The provision governing calculation of the divisional performance on the basis of the divisional IVC is to be applied for the fi rst time to the 2013 fi nancial year. Until such a provision has been
drawn up, the divisional bonus will be established by the Supervisory Board according to its due discretion. In this context, the Supervisory Board shall pay particular attention to
the following criteria: relative change in the IVC in the remuneration year, absolute amount of the IVC in the remuneration year, IVC in the remuneration year relative to the target value, distribution ratio or profi t transfer ratio of the division relative to the target value, general market environment. The individually defi ned amount for 100% criteria fulfi llment is attained if the criteria are achieved in full. Over- or underfulfi llment of the criteria results in additions or deductions. The minimum divisional bonus amounts to EUR 0, while the maximum is double the bonus payable on complete fulfi llment of the criteria.
In addition, individual qualitative and, as appropriate, quantitative personal goals that are to be attained in the subsequent year are defi ned annually for the Board member in question. The criteria applied in this regard may, in particular, be the Board member's individual contribution to the overall result, their leadership skills, power of innovation and entrepreneurial abilities as well as other quantitative or qualitative personal goals, especially making allowance for the special features associated with their area of Board responsibility. The degree of goal attainment is determined by the Supervisory Board at its due discretion in the Supervisory Board meeting at which the consolidated fi nancial statements for the fi nancial year in question are approved. The amount for 100% goal attainment is established on an individual basis. Over- or underfulfi llment results in additions or deductions. The minimum individual bonus amounts to EUR 0, while the maximum is double the bonus payable on complete attainment of the goals.
The total amount of the variable remuneration is arrived at by adding the amounts for the individual remuneration components. If addition of the individual amounts gives rise to a negative amount, the variable remuneration amounts to zero (in other words, there is no negative variable remuneration). A negative amount is, however, taken into consideration when calculating the bonus bank.
Of the total amount of defi ned variable remuneration, a partial amount of 60% is paid out in the month following the Supervisory Board meeting that approves the consolidated fi nancial statements. The remaining amount – i.e. 40% of the total amount of variable remuneration – is initially withheld. Half of the withheld portion is allocated to a bonus bank, while the other half is granted in the form of share awards.
Each year 20% of the mathematically determined variable remuneration is allocated to the bonus bank and withheld interest-free for a period of three years. If the mathematically calculated amount of the variable remuneration is negative, 100% of this negative amount is allocated to the bonus bank. The balance in the bonus bank is reduced accordingly. A positive balance in the bonus bank is carried forward to the next year aft er deduction of any amount paid out, while a negative balance is not carried forward to the following year. The amount allocated to the bonus bank in each case is paid out aft er three years to the extent that it is covered by the balance existing at that time – allowing for credits/debits up to and including those for the most recent fi nancial year just-ended. Any portion of the variable remuneration due for disbursement that is not covered by the balance in the bonus bank is forfeited.
The other partial amount of 20% of the total defi ned variable remuneration is granted as share-based remuneration in the form of share awards. The total number of share awards granted is to be determined – following an initial public off ering of Talanx AG – by the value per share of Talanx AG at the time when the award is made. The value per share of Talanx AG is established according to the unweighted arithmetic mean of the XETRA closing prices of the Talanx share in a period of fi ve trading days before to fi ve trading aft er the meeting of the Supervisory Board that approves the consolidated fi nancial statements. As long as the shares of Talanx have not been listed, the value per share of Talanx AG shall be deemed to be the book value of the shareholders' equity obtained from the consolidated fi nancial statement for the fi nancial year just-ended drawn up in accordance with international fi nancial reporting standards as defi ned by § 315a of the Commercial Code (HGB). The total number of share awards granted is arrived at by dividing the credit amount by the value per share, rounded up to the next full share. For each share award the value of a Talanx share calculated on the disbursement date is paid out aft er expiry of a vesting period of four years.
The remuneration of the Supervisory Board is guided by § 13 of the Articles of Association of Talanx AG. It is set by the General Meeting of Talanx AG and was adjusted and restructured at the 2010 General Meeting.
In addition to reimbursement of their expenses, the members of the Supervisory Board annually receive fi xed remuneration (basic remuneration) and performance-based variable remuneration, which also refl ects the company's long-term success. In order to make allowance for their considerable additional workload, the Chairman receives 2.5 times and his Deputy 1.5 times these remuneration amounts.
For the 2010 fi nancial year the annual basic remuneration set by the General Meeting amounts to EUR 50,000 per member of the Supervisory Board. The basic remuneration of the Chairman amounts to EUR 125,000, while that of the Deputy Chairman amounts to EUR 75,000.
In addition, commencing with the 2010 fi nancial year, each member of the Supervisory Board receives variable remuneration of EUR 55 for each full EUR million by which the average Group net income aft er minority interests of the last three fi nancial years exceeds the minimum return pursuant to § 113 Para. 3 Stock Corporation Act (AktG) (4% of the contributions paid on the lowest issue price of the shares) (benchmark). The factor for the Chairman amounts to EUR 138, and for his Deputy EUR 83. The variable remuneration of the members of the Supervisory Board is capped at a maximum of EUR 50,000, for the Chairman at EUR 125,000 and for his Deputy at EUR 75,000. If the average Group net income aft er minority interests of the last three fi nancial years falls short of the minimum return pursuant to § 113 Para. 3 Stock Corporation Act (AktG), the variable remuneration is forfeited.
Further remuneration of EUR 25,000 per member has been specifi ed for the 2010 fi nancial year for the members of the Finance and Audit Committee and the Personnel Committee of the Supervisory Board. The Chairman of the Committee receives twice this amount.
In addition to reimbursement of their expenses, the members of the Supervisory Board receive an attendance allowance of EUR 1,000 for their participation in each meeting of the Supervisory Board as well as for their participation in each meeting of Committees of the Supervisory Board.
The upper limit of the annual total remuneration that can be received by a Supervisory Board member is three times the applicable basic remuneration.
With regard to the amount of remuneration received by the Supervisory Board, please see the information contained in the present Annual Report on pages 253 et seq.
The remuneration strategy of the Talanx Group is geared to the goal of a sustainable increase in the value of the Group. The remuneration structure described for members of the Group Board of Management therefore applies in principle to managing directors and managers outside the Group Board of Management who are equally able to exert a material infl uence on the overall risk profi le (so-called risk carriers).
Separate remuneration systems exist in the individual divisions within the Talanx Group for the group of persons composed of managing directors and managers below the rank of managing director who are not included among the risk carriers; these systems refl ect the remuneration strategy of the Group. Structuring diff erences are designed to take account of the specifi c framework factors in the divisions as well as to promote their competitiveness.
It is also the case with this group of persons that the remuneration is composed of a fi xed and variable component.
The fi xed part of the remuneration amounts to between 50 and 85% of the total remuneration and is paid out in twelve equal monthly installments. Certain fringe benefi ts, in particular the use of a company car and insurance protection (liability, accident and luggage insurance), as well as employer-funded commitments to occupational retirement benefi ts are also granted. Furthermore, it is possible to build up additional employee-funded retirement provision through deferred compensation. Hannover Rückversicherung AG also off ers a virtual stock option plan that provides for the award of stock appreciation rights.
The measurement of the variable part of the remuneration takes into account the sustainable success of the company, the sustainable success of the organizational unit and the personal success of the member of staff . Individual goals must be in harmony with the strategy of the Talanx Group and must be conducive to enhancing the performance of the Talanx Group. The remuneration schemes and management-by-objectives systems used within the Group will be further standardized in 2011 in those areas where such a move is expedient – without losing sight of the diff erences between the divisions.
The risk strategy derived from the company strategy constitutes the basis for our handling of risks and opportunities. The parameters and decisions of the Board of Management with respect to the Group's risk appetite are fundamental to the acceptance of risks. The risk strategy – as a self-contained set of rules – serves as the foundation for Group-wide risk management. It thus forms an integral component of entrepreneurial actions and is refl ected in the detailed strategies of the various divisions.
As an internationally operating insurance and fi nancial services group we are confronted with a broad diversity of risks that are indivisibly bound up with our entrepreneurial activities and which manifest themselves diff erently in the individual divisions and geographical regions. Both the company strategy and the risk strategy are therefore subject to regular review. Through this regular scrutiny of our assumptions and any resulting adjustments, we ensure that our strategic principles and hence also our actions are guided by the latest insights.
The overriding goal of our risk management is to adhere to our strategically defi ned risk positions. As far as capital resources are concerned, we strive for a capital adequacy ratio in our internal risk capital model that gives us a sizeable safety cushion. As a collateral condition to the regulatory target of overfulfi llment of capital adequacy, Talanx pursues a target rating corresponding to the Standard & Poor's category of "AA".
The interplay of the individual functions and bodies within the overall system is vital to an effi cient risk management system. Talanx has clearly defi ned the roles and responsibilities in order to ensure smooth interaction.
| Controlling elements | Key risk management tasks |
|---|---|
| Supervisory Board | ■ Advising and monitoring the Board of Management in its management of the company, inter alia |
| with respect to risk strategy and risk management | |
| Board of Management | ■ Overall responsibility for risk management |
| ■ Definition of the risk strategy | |
| ■ Responsible for the proper functioning of risk management | |
| Risk Committee | ■ Risk-monitoring and coordinating body, charged especially with the following tasks: |
| ■ Critical observation and analysis of the risk position of the Group as a whole, with particular | |
| attention paid to the risk budget approved by the Board of Management and the risk strategy | |
| ■ Monitoring of steering measures within the Group with an eye to risks that could threaten the | |
| Group's continued existence | |
| Chief Risk Officer | ■ Responsible for holistic risk monitoring across divisions (systematic identification and assessment, |
| control/monitoring and reporting of risks) of all material risks from the Group perspective | |
| Central Risk Management | ■ Group-wide risk monitoring function |
| ■ Methodological competence, inter alia for | |
| ■ Development of processes/methods for risk assessment, management and analysis, | |
| ■ Risk limitation and reporting, | |
| ■ Risk monitoring and determination of the required risk capital across the Group | |
| Local Risk Management | ■ Risk monitoring function in the divisions |
| ■ Observance of centrally defined guidelines, methods and processes as well as systems of limits | |
| and thresholds that serve as a framework for local implementation, monitoring and reporting. | |
| Internal Auditing | ■ Process-independent review of the functional areas of the Group |
| Independent Auditor | ■ Systematic annual review of the risk early-warning system |
The Talanx Group covers an extensive range of products with its Group segments – from insurance to fi nancial and other services. Talanx AG and its subsidiaries therefore use a diverse range of methods and tools to monitor and manage risks. In accordance with an approach geared to ensuring comparatively extensive individual responsibility and decentralization, the subsidiaries each maintain their own risk management systems; for they are best able to assess and quantify their risks and implement timely risk controlling measures. Group Risk Management nevertheless defi nes guidelines for the structuring of local risk management systems, thereby assuring a consistent minimum standard across the Group that can be aggregated.
The risk management process encompasses the identifi cation, measurement, analysis, evaluation, limitation and monitoring of risks as well as risk reporting.
We identify risks with the aid of appropriate indicators and using various risk surveys, in which experts and selected managers comment on the risk position. Group Risk Management holds quarterly meetings with local risk managers in order to remain constantly updated on the risk situation in
the divisions. The risk managers in the divisions report material changes in the risk position to Group Risk Management on an ad hoc basis.
In order to measure, analyze and evaluate risks Group Risk Management derives the risk situation of the Talanx Group from the local risks with the aid of an internal risk capital model. This internal risk capital model enables us to adequately assess the risks. Still based during the reporting period in key respects on a refi ned so-called GDV (German Insurance Association) standard model, it is used for the analysis and measurement of individual risks as well as of the Group's overall risk position. The purpose of risk quantifi cation is to calculate the risk-based capital on the basis of a 99.97% Value at Risk. The time horizon considered under the model is a calendar year. The risk model makes allowance for the eff ects of correlations between Group companies and risk categories. A stochastic, Solvency II-oriented risk-based capital model is currently under development that will facilitate the Talanx-wide use of internal models. The Federal Financial Supervisory Authority (BaFin) began to examine this model in 2008, and we are seeking to obtain regulatory approval for its future adoption.
With respect to risk limitation, key indicators have been specifi ed for steering and monitoring the Group's material risks within our central system of limits and thresholds. Risk steering and monitoring is operationalized through the specifi cation of suitable limits and thresholds for quantitatively measurable material risks. Material risks that cannot be quantifi ed or are diffi cult to quantify (such as operational risks) are primarily steered and monitored using appropriate processes and practices.
In the area of risk monitoring we make a distinction, in particular, between process-integrated independent monitoring and process-independent monitoring. Process-integrated independent monitoring is primarily the responsibility of the Risk Committee, the Chief Risk Offi cer and the organizational units supporting the CRO. Process-independent monitoring falls above all to Internal Auditing and the Supervisory Board.
The purpose of our risk reporting is to provide systematic and timely information about risks and their potential implications as well as to safeguard adequate internal communication within the company about all material risks as a basis for decision-making. Regular reporting on both current business developments and on risk management ensures that the Board of Management of Talanx AG is kept continuously informed of risks and can intervene as necessary to take controlling action; the Supervisory Board is also regularly advised of the risk situation. Material changes in the risk position are reported to the Board of Management of Talanx AG on an ad hoc basis.
The potential implications of risks are not only documented but are also incorporated into the annual planning of the Group companies, thereby making it possible to allow for the risks of future development and consider appropriate countermeasures in a timely manner. The plans drawn up by all Group companies and the Group as a whole are discussed and approved by the Board of Management and Supervisory Board of Talanx AG.
Our decision and monitoring processes not only satisfy the extensive requirements placed on reporting by the Insurance Supervision Act (VAG), they also extend to the preparation and examination of the annual and consolidated fi nancial statements, the internal control system and the use of powerful planning and controlling tools.
In the year under review our risk management activities in the area of primary insurance were assessed as "adequate with positive trend" by Standard & Poor's. The primary insurance sector thus achieved the highest rating that can be attained by insurers without a stochastic internal model. The risk management of Hannover Re was assessed by S&P as "strong", the second-best S&P rating. These ratings testify to the quality of our holistic risk management approach.
Following SAS 70 Type 1 auditing and certifi cation of Ampega-Gerling's control activities in 2009 as evidence of the adequate structuring of its control system, the Type 2 audit examination relating to eff ective implementation of the material controls was successfully passed in 2010.
The hallmark of risk management within the Talanx Group is its decentralized organizational structure. Responsibilities are split between local risk management on the level of the divisions and central risk management on the Group level.
The salient features of the internal control system (ICS) and risk management system implemented at Talanx AG with regard to the Group accounting process can be described as follows:
■ Controls have been implemented in the accountingrelated process steps: bookkeeping data that is received or forwarded is checked for completeness and correctness by the responsible members of staff. The principle of dual control is consistently applied in this regard. In addition, programmed plausibility checks are run using databasesupported software.
With regard to the Group accounting process, integrated controls ensure that the consolidated fi nancial statement is correct and complete. The processes relating to the organization and execution of the consolidation tasks as well as the preparation of the consolidated fi nancial statement of Talanx AG together with the accompanying controls are documented in comprehensive ICS documentation. Major components of the documentation are the Consolidated Financial Statement Guideline and the Organizational Manual; these are regularly reviewed and optimized in light of compliance considerations.
Group-internal recognition and measurement rules are collected in an accounting manual which is available to all Group companies in IT-supported form and provided to all employees indirectly or directly involved in the preparation of individual or consolidated fi nancial statements. The manual is intended to ensure consistent and correct application of International Accounting Standards on a Group-wide basis. It is regularly updated and modifi ed as standards evolve. Supervision of the local accounting units at the subsidiaries by staff in Group Accounting safeguards compliance with the rules contained in the manual.
The consolidated fi nancial statement of Talanx AG is drawn up on the basis of IFRS packages from the included subsidiaries. To this extent, the risk management measures taken on the level of the subsidiaries also have implications for Talanx AG.
Reporting by the companies included in the consolidated fi nancial statement is carried out using an Internet-based IT application. The items of the balance sheet, statement of income, statement of comprehensive income, cash fl ow statement, statement of changes in equity, segment report and notes as well as data with a bearing on consolidation that are stored in a database are uploaded to the consolidation system via interfaces and processed in this system. Internal transactions within the Group are verifi ed through prior reconciliation processes and consolidated where necessary. Written
instructions exist in this regard to ensure that an appropriate procedure is followed. Manual bookings in the consolidation system are to be released by the responsible members of staff in the context of a step-by-step process according to set value limits. Working instructions are also available to support this process as well as for exceptional and infrequent business transactions.
The consolidated fi nancial statements of Talanx AG are examined by the independent auditor of the annual accounts as at the balance sheet date; a review report is drawn up by the independent auditor on the quarterly interim fi nancial statements of the Group as well as the IFRS packages of the companies included therein.
No specifi c risks can as yet be discerned that could jeopardize the continued existence of the Talanx Group or signifi cantly impair its assets, fi nancial position or net income. Particularly with an eye to the further unfolding of the banking crisis, however, there is a considerable abstract degree of uncertainty. The same is true of ongoing developments in the legal framework governing our entrepreneurial activities. Substantial capital, reserves and underwriting provisions have been built up in order to cover for the fi nancial consequences of conceivable risks.
The risk situation of the Talanx Group can be broken down into the risk categories described below. They are based on German Accounting Standard DRS 5-20:
The risks described below refer to the next two fi nancial years.
The Talanx Group, in common with other industry players, was unable to escape the repercus-sions of the banking crisis entirely unscathed. Compared to 2008, in which extensive write-downs were taken on securities owing to the adverse capital market climate, the situation in 2010 – as in the
previous year – was considerably more relaxed. Having initially scaled back equity holdings substantially in 2008 and early 2009, the fi rst moves back into this asset class were made from the summer of 2009 onwards. On the Group level the volume of equities held was almost the same as at the end of 2009, although the portfolio is extensively hedged against price losses through stop loss mechanisms.
Talanx's exposure is limited by the investment guidelines, and dependencies on individual debtors that could jeopardize the Group's survival are thereby ruled out. In the context of the advancing banking crisis on capital markets, the Talanx Group tightened up its previously applicable risk limits in key respects so as to further minimize risks.
Should the current low interest rate level be sustained or indeed should further interest rate cuts ensue, this would give rise to a considerable reinvestment risk for the life insurance companies off ering traditional guarantee products since it would become increasingly diffi cult to generate the guaranteed return. The Group reduces this interest guarantee risk primarily by means of interest rate hedges (see under "Material underwriting risks"). What is more, especially in the context of further declines in interest rates and higher volatilities, decreases may be seen in the Market Consistent Embedded Value (MCEV) of the life insurers. The MCEV for 2010 will be calculated in the fi rst half of 2011.
The contraction in bank lending that has been observed in the market as part of the banking crisis and the associated potential diffi culties raising cash are of only minor signifi cance to the Talanx Group (compared to the banking industry) for reasons connected with the business model; this is because Talanx inherently has suffi cient cash due to the regular premium payments and interest income from invested assets as well as its liquidity-conscious investment policy. Extensive unused lines of credit are also available. Liquidity risks may, however, arise in particular as a consequence of illiquid capital markets and – in the life insurance sector – due to increased cancellations by policyholders, if this necessitates the liquidation of a large volume of additional investments at short notice.
Furthermore, the uncertainties triggered by the banking crisis among private and institutional investors may have implications for the business models of the Talanx Group's individual divisions, e.g. in the form of a possible soft ening of demand for insurance coverage.
In addition to the information provided below, the Notes contain a detailed and quantitative description of the risks associated with insurance contracts and fi nancial instruments.
The underwriting risks in property and casualty insurance are considered separately from those in life insurance because of the considerable diff erences between them.
Underwriting risks in property/casualty business (primary insurance and reinsurance) derive principally from the premium/loss risk and the reserving risk. The premium/loss risk is the risk that previously defi ned insurance premiums are used to pay subsequent indemnifi cation, although the amount of such payments is initially unknown. The actual claims experience may therefore diverge from the expected claims experience. This can be attributable to two reasons: the risk of random fl uctuation and the risk of error.
The risk of random fl uctuation refers to the fact that both the number and amount of claims are subject to random factors and the expected claims level may therefore be exceeded. This risk cannot be excluded even if the claims spread is known. The risk of error describes the risk of the actual claims spread diverging from the assumed claims spread. A distinction is made here between the diagnostic risk and the forecasting risk. The diagnostic risk refers to the possibility that the current situation may be misinterpreted on the basis of the available data. This is particularly likely to occur if only incomplete data is available regarding claims from previous insurance periods. The forecasting risk refers to the risk that the probability distribution of the total claims may change unexpectedly aft er the estimation is made, for example due to higher infl ation.
The Talanx Group manages and reduces all components of the premium/loss risk fi rst and foremost through claims analyses, actuarial modeling, selective underwriting, specialist audits and regular review of the claims experience as well as through the use of appropriate reinsurance protection.
The second underwriting risk in property/casualty business, namely the reserving risk, refers to the possibility that the underwriting reserves may not suffi ce to pay in full claims that have not yet been settled or reported. This may then give rise to a need to establish additional reserves. In order to manage this risk the companies belonging to the Talanx Group measure their reserves prudently. They not only take into account the claims information provided by their customers but also the insights of their own claims investigations and experiences. Furthermore, a so-called IBN(E)R (incurred but not (enough) reported) reserve is constituted for claims that have probably already occurred but have not yet been (adequately) reported. What is more, the level of reserves is regularly reviewed – not only internally but also by external actuaries – and an external expert assessment of the reserves is commissioned in order to minimize the reserving risk. With regard to the run-off results of the loss reserves we would refer the reader to our comments in the Notes under "Loss and loss adjustment expense reserve", pages 219 et seqq.
The following paragraphs describe the risks associated with individual lines of property and casualty insurance and subsequently discuss the risks in life primary insurance and life/ health reinsurance.
Under liability insurance policies we grant the policyholder and any other persons included in the coverage protection against claims for damages asserted by third parties. Indemnifi cation is normally provided for bodily injuries and property damage, although pure fi nancial losses are also insurable. This also includes motor third party liability insurance. The agreed sums insured constitute the policy limits. The frequency and amount of claims can be infl uenced by a number of factors, including for example a change in legislation. As a result, the number of cases in which claims are brought before the courts could rise, with corresponding implications for indemnifi cation payments. Risks may also be associated with infl ation, since some claims are settled over a very long period of time. On account of infl ation, for example, the reserves constituted may not suffi ce to meet subsequent claim payments. Under liability insurance policies the (re)insurer is liable for all insured events that occur during the policy period, even if a claim is not discovered until aft er the policy period has ended. We therefore establish loss reserves not only for claims that have already been
notifi ed, but also for those that have been incurred but not yet reported (IBNR). The actuarial methods that are used to calculate these reserves may involve a risk of error due to the underlying assumptions.
Accident insurance policies provide insurance protection against the economic repercussions of accidents. Depending on the consequences of the accident and the policy concerned, the Group companies normally pay a daily allowance, a lump-sum disability benefi t or disability pension or a death benefi t. The reserves are calculated on the basis of life actuarial models.
The Group (re)insurance companies calculate their premiums for liability and personal accident policies using empirical values and actuarial calculations. They also manage these risks through their underwriting policy. Underwriting guidelines, which set out inter alia underwriting exclusions and limits, defi ne criteria for risk selection. These underwriting guidelines are binding on the underwriters; they are reviewed annually and modifi ed as necessary. The risk of peak exposures is also reduced with the aid of reinsurance coverage. Furthermore, the adequacy of the reserves is regularly reviewed.
Property insurance policies are taken out in order to obtain an insurance benefi t for damaged or destroyed property in the event of a claim. The amount and extent of the losses covered by such policies are determined in particular by the costs of rebuilding and restoration or the compensation payable for contents; in industrial and commercial insurance the losses resulting from business interruption are also covered. The benefi ts are, however, limited by the sum insured. Claims under motor insurance policies may arise out of the replacement or repair of a destroyed or damaged vehicle.
Underwriting risks are of special importance under these policies. As a consequence of incorrect pricing assumptions, inadequate accumulation control or erroneous estimations of the claims experience, key cash fl ows may diverge from the expectations underlying the calculation of the premium. Climate change, in particular, can lead to frequent and severe weather events (e.g. fl oods or windstorm events) and correspondingly heavy losses. Considerable claims may arise under industrial property insurance policies as a consequence of large individual loss events. In order to limit these risks we continually monitor possible divergences between the actual and expected claims experience and, as appropriate, we revisit the pricing calculations. For example, the Group companies have an opportunity to adjust prices to the actual risk situation when policies are renewed. They also manage these risks through their underwriting policy: here too there are underwriting exclusions and limits that serve as a criterion for risk selection. Deductibles also apply in some lines. Substantial individual and accumulation risks are minimized through the use of carefully selected reinsurance coverage which protects against peak losses.
For the Hannover Re Group, scenario calculations are performed in order to identify natural hazards accumulation risks – particularly for net account – at an early stage. In this context, for example, simulation models are used to analyze the worldwide implications of natural disasters due to climate changes. On the basis of these analyses it is possible to determine the maximum exposure that Hannover Re should run for such risks as well as the corresponding retrocession requirement. Retrocession – i.e. the passing on of risks to carefully selected reinsurers of long-standing fi nancial quality – is another vital tool for limiting underwriting risks.
In life primary insurance the insurance policy commits the insurer to either a single or regularly recurring benefi t payment. The premium calculation in this case is based on an actuarial interest rate and biometric bases that depend inter alia on the age of the insured at policy inception, the policy period and the amount of the sum insured. The main insured events are the death of the insured person or maturity of the policy (survival).
Typical risks in life insurance are associated with the fact that policies grant long-term benefi t guarantees: while the premiums for a given benefi t are fi xed at the inception of the policy for the entire policy period, the underlying parameters (interest rate level, biometric assumptions) may change. This is also true – to an increasing extent – of the general legal framework underlying the contractual relationship; risk-entailing changes in this regard are discussed further under "Material operational risks".
Biometric actuarial bases such as mortality, longevity and morbidity are established at the inception of a contract in order to calculate premiums and reserves. Over time, however, these assumptions may prove to be no longer accurate and may therefore necessitate additional expenditures to increase the benefi t reserve. The adequacy of the biometric actuarial bases is therefore regularly reviewed.
Epidemics, a pandemic or a worldwide shift in lifestyle habits may pose special risks to contracts under which death is the insured risk. Under annuity policies the risk derives fi rst and foremost from the continuous improvement in medical care and social conditions, thereby increasing longevity – with the result that insureds draw benefi ts for a longer time than calculated.
Reserves calculated on the basis of assumptions regarding the development of biometric data such as mortality or disability serve to ensure that the commitments under these policies can always be met. Specially trained life actuaries use safety loadings to make sure that the actuarial bases also make suffi cient allowance for risks of change.
In addition, life insurance policies entail lapse risks. In the event of an unusual accumulation of cancellations it is possible, for example, that suffi cient liquid assets may not be available to cover insurance benefi ts. This can give rise to the unplanned realization of losses on the disposal of assets. For this reason, the Group's life insurers invest a suffi ciently large asset portfolio in short-term holdings. They also regularly match and control the duration of their assets and liabilities. What is more, receivables due from insurance agents may be lost in the event of cancellation if the accounts receivable from intermediaries cannot be collected. Insurance intermediaries are therefore carefully selected. Cancellation may also create a cost risk if new business collapses and the fi xed costs – unlike the variable costs – cannot be directly reduced. Cost controlling and a focus on variable sales costs through distribution channels such as brokers limit this risk.
An interest guarantee risk exists under life insurance policies with guaranteed interest payments. This risk arises if, upon inception of a life insurance policy, a guaranteed interest rate is agreed on the savings element of the premium. The interest guarantee risk has been exacerbated by the reform of the Insurance Contract Act inasmuch as policyholders are entitled to participate in the unrealized reserves upon policy termination. The insurance premiums must be invested at appropriate terms on the capital market in order to generate this guaranteed return. Yet the capital market fl uctuates over time; future investments are thus subject to the risk of poorer conditions. What is more, the duration of the investments is generally shorter than the duration of the insurance contracts, hence creating a reinvestment risk. An interest rate risk also exists in connection with guaranteed surrender values. A rapidly rising interest rate level, for example, may give rise to hidden obligations. If contracts were to be terminated prematurely the policyholders would be entitled to the guaranteed surrender values and would not share in any incurred hidden losses. Upon disposal of the corresponding investments the hidden losses would have to be borne by the life insurers, and in theory it is possible that the fair market value of the investments would not suffi ce to cover the guaranteed surrender values. As a further factor, the change in the distribution of acquisition costs brought about by amendment of the Insurance Contract Act will lead to higher surrender values in the initial phase. The Group reduces the interest guarantee risk primarily by constantly monitoring the asset portfolios and capital markets and taking appropriate countermeasures. To some extent interest rate hedging instruments, known as swaptions and book yield notes, are used. For a large part of our life insurance portfolio the interest guarantee risk is reduced through contractual provisions The surplus distributions paid in addition to the guaranteed interest rate can be adjusted according to the state of the capital market. Under unit-linked life insurance policies the investment risks and opportunities are borne by policyholders. The investment risks could, however, be shift ed back onto the life insurers as a consequence of adverse legal developments.
Particularly for the entire German life insurance industry and hence also for the Group's life insurers, the protracted low level of interest rates poses the risk that successive strengthening of the interest provisions may be needed. With this in mind, the Federal Ministry of Finance forwarded a draft ordinance amending the Mathematical Provisions Act (Deckungsrückstellungsverordnung) to the German Insurance Association (GDV) and other associations in December 2010 with a request for comments. The aim is to facilitate the early, gradual establishment of an additional interest provision.
In life and health reinsurance the previously described biometric risks are of special importance. The reserves in life and health reinsurance are based principally upon the information provided by ceding companies. The plausibility of the fi gures is checked using reliable biometric actuarial bases. Through our quality assurance measures we ensure that the reserves established by ceding companies in accordance with local accounting principles satisfy all requirements with respect to the calculation methods used and assumptions made (e.g. use of mortality and morbidity tables, assumptions regarding the lapse rate). The Group writes new business in all regions in compliance with globally applicable underwriting guidelines which set out detailed rules governing the type, quality, level and origin of risks and are revised annually. Special underwriting guidelines give due consideration to the particular features of individual markets. By monitoring compliance with these underwriting guidelines the Group minimizes the potential credit risk stemming from an inability to pay or deterioration in the fi nancial status of cedants. Regular reviews and holistic analyses (e.g. with an eye to lapse risks) are carried out with respect to new business activities and the assumption of international portfolios. The interest rate risk, which in the primary sector is important in life business owing to the guarantees that are given, is of only minimal relevance in life and health reinsurance owing to the structure of the contracts.
A key risk management tool in the areas of life insurance and life/health reinsurance is systematic monitoring of the Market Consistent Embedded Value (MCEV). Sensitivity analyses highlight the areas where the Group is exposed and provide pointers as to which areas to focus on from the risk management perspective.
Bad debts may arise on receivables due under insurance business. This applies, in particular, to receivables due from reinsurers, retrocessionaires, policyholders and insurance agents. Value adjustments or write-downs on receivables would be the result.
The Group counteracts the default risk at reinsurers and retrocessionaires by carefully selecting them with the aid of expertly staff ed Credit Committees, constantly monitoring their credit status and – where necessary – taking appropriate measures to secure receivables. Depending upon the type and expected run-off period of the reinsured business as well as a required minimum capital adequacy, the selection of reinsurers and retrocessionaires is guided by our own credit assessments as well as the minimum ratings of the rating agencies Standard & Poor's and A. M. Best.
The default risk at policyholders is countered fi rst and foremost by means of an eff ective collection procedure and the reduction of outstandings. Agents are subject to credit checks. In addition, adequate general bad debt provisions are established to allow for the default risk.
Risks associated with fi nancial instruments should be considered in particular in the context of the investment policy. Based on a Group investment guideline, the investment policy at the individual companies is regulated within the Talanx Group by the supervisory framework applicable to each particular company and by internal investment guidelines.
Particularly in the interests of policyholders as well as with a view to accommodating the future requirements of the capital market, the investment policy is essentially guided by the following maxims:
An essential component of risk management is the principle of separation of functions – i.e. keeping a distinction between Portfolio Management, Settlement and Risk Controlling. Risk Controlling – which is organizationally and functionally separate from Portfolio Management – bears respon-sibility above all for monitoring all risk limits and evaluating fi nancial products. In this respect the management and control mechanisms are geared particularly closely to the standards adopted by the Federal Financial Supervisory Authority (BaFin) and the respective local regulators.
Within the scope of the Group guidelines, detailed investment guidelines are in force for individual companies, compliance with which is constantly monitored. These investment guidelines serve to defi ne the framework of the investment strategy and are therefore guided by the principles set out in § 54 of the Insurance Supervision Act (VAG), which envisages the greatest possible level of security and profi tability while ensuring liquidity at all times and preserving an appropriate mix and spread of the portfolio. Monitoring of the quotas and limits set out in these guidelines is the responsibility of Group Risk Management and local risk managers as well as the Chief Financial Offi cer of each company. Any signifi cant modifi cation of the investment guidelines and/or investment policy must be approved by the Board of Management of the company concerned and brought to the attention of its Supervisory Board.
Risks associated with fi nancial instruments consist most notably of market price, credit and liquidity risks. With regard to the scope and extent of these risks please see our comments in the Notes under "Nature of risks associated with insurance contracts and fi nancial instruments", pages 166 et seqq.
Market price risks derive from the potential loss due to adverse changes in market prices and may be attributable to changes in interest rates, equity prices and exchange rates. These can lead to impairments or result in realized losses upon disposal of fi nancial assets.
The portfolio of fi xed-income securities is exposed to the interest rate risk. Declining market yields lead to increases and rising market yields to decreases in the fair value of the fi xed-income securities portfolio. The credit spread risk should also be mentioned. The credit spread refers to the interest rate diff erential between a risk-entailing bond and risk-free bond of the same quality. Changes in these risk premiums, which are observable on the market, result – analogously to changes in pure market yields – in changes in the fair values of the corresponding securities. A fall in the level of interest rates can also lead to lower investment income. The Group reduces the resulting interest guarantee risk primarily by means of interest rate hedges (see under "Material underwriting risks").
Share price risks derive from unfavorable changes in the value of equities, equity derivatives or equity index derivatives held in the portfolio. We spread these risks through systematic diversifi cation in various sectors and regions. The equity portfolio is also extensively hedged against price losses through stop loss mechanisms.
Currency risks result from exchange rate fl uctuations – especially if there is a currency imbalance between the technical liabilities and the assets. When it comes to managing the currency risk, we check that matching currency cover is maintained at all times. The risk is limited by investing capital wherever possible in those currencies where obligations are to be fulfi lled under insurance contracts.
Investments in alternative asset classes such as private equity and hedge funds are limited and regularly monitored using a conservative control mechanism. The hedge funds are entirely transparent for the individual companies and are reviewed daily with an eye to liquidity, leverage and exposure.
Real estate risks may result from unfavorable changes in the value of real estate held either directly or through fund units. They may be caused by a deterioration in the particular qualities of a property or by a general downslide in market values (such as a real estate crash). In the case of direct investments in real estate, the yield and other key performance indicators (e.g. vacancies and arrears) are measured on the level of individual properties and the portfolio as a whole. Risk controlling for indirect real estate investments, as with private equity funds, is based on regular monitoring of the development and performance of the funds.
The Talanx Group enters into derivative transactions in particular to hedge against price risks or interest rate risks aff ecting existing assets, to prepare the subsequent purchase of securities or to generate additional earnings on existing securities. The use of derivative products is regulated by internal guidelines in order to ensure the most effi cient and risk-free possible use of forward purchases, derivative fi nancial instruments and structured products and to satisfy regulatory requirements. The use of such instruments is thus subject to very strict limits. The parameters of the investment guidelines and the legal parameters for derivative fi nancial instruments and structured products are updated and constantly monitored in the system of limits. Derivative positions and transactions are specifi ed in detail in the reporting.
We reduce potential market price risks through a variety of risk-controlling mechanisms. One important measure for monitoring and steering market price risks is constant analysis of the Value at Risk (VaR), which is increasingly evolving from as assets-side measurement approach to an asset/liability concept. The VaR is determined on the basis of historical data, e.g. the volatility of the fair values and the correlation between risks. As part of these calculations the decline in the fair value of our portfolio is simulated with a given probability and within a certain period. Stress tests are further vital risk controlling tools. The experts at AmpegaGerling Asset Management GmbH simulate possible market changes that can result in considerable price and interest rate losses for the bulk of the securities. In addition, market price risks are established using enterprise-specifi c stress tests and those required by regulators with the corresponding fi xed stress test parameters.
Credit risks refer to the possible fall in the value of assets due to the failure of a debtor or a change in their ability to pay. As a consequence, fi nancial assets may become non-performing with a corresponding need to take a value adjustment or write-down. Particularly in the area of profi t-participating loans, there is a risk of default on interest payments. The rating classes assigned by rating agencies such as S&P and Moody's are a key pointer for investment decisions taken by Portfolio Management. If a rating cannot be ascertained in this way, an internal rating is determined. This is done by way of mark-ups and mark-downs on existing ratings of the issuer or of instruments with diff erent features from the same issuer. The credit risks to be monitored consist of counterparty risks and issuer's risks. Risks of counterparty default are controlled using specifi ed counterparty lists and by monitoring the limits defi ned for each rating class. Adherence to defi ned issuer limits (Group limits and/or company limits) is monitored by Risk Controlling. In the event of mergers among issuers that increase accumulations, we examine the legal scope for requiring collateral to be furnished as security.
We take liquidity risks to mean the risk of being unable to convert investments and other assets into cash in a timely manner in order to meet our fi nancial obligations when they become due. Thus, for example, it may not be possible to sell holdings (or to do so only with delays) or to close open positions (or to do so only with price markdowns) due to the illiquidity of the markets. In general terms, the Group continuously generates signifi cant liquidity positions because premium income normally accrues well before claim payments and other benefi ts need to be rendered. We counteract liquidity risks through regular liquidity planning as well as continuous reconciliation of the maturities of investments with the fi nancial obligations. A liquid asset structure ensures that the Group is able to make the necessary payments at all times. The expected due dates – among other considerations – are taken as a basis for the payment obligations, making allowance for the run-off pattern of the reserves.
In order to monitor liquidity risks each type of security is assigned a liquidity code that indicates how quickly a security can be sold. These codes are regularly reviewed by Portfolio Management. The plausibility of changes is checked by Risk Controlling and, where appropriate, the codes are modifi ed. The data is subsequently included in the standardized portfolio reporting provided to the Chief Financial Offi cers. Compliance with the defi ned minimum and maximum limits for liquidity is observed. Overstepping of any risk limits is immediately reported to the Chief Financial Offi cers and Portfolio Management.
The Group also optimizes the availability of liquid funds using cash pools within the various Group companies which facilitate management of their cash infl ows and outfl ows.
In our understanding, this category encompasses the risk of losses occurring because of the inadequacy or failure of internal processes or as a result of events triggered by employeerelated, system-induced or external factors. The operational risk also extends to legal risks.
Multifaceted, cause-based risk management and an effi cient internal control system minimize such risks, which may be associated with business activities of all types, members of staff or technical systems. In addition to Internal Auditing, the Compliance function also bears responsibility for overseeing compliance with applicable laws as well as with external and internal guidelines.
Legal risks may arise in connection with contractual agreements and the general legal environment, especially with respect to business-specifi c imponderables of commercial and tax law as they relate to an internationally operating life and property/casualty insurer as well as a life/health and non-life reinsurer. Insurers and reinsurers are also dependent on the political and economic framework conditions prevailing on their respective markets. These external risks are subject to intense monitoring by the Talanx Board of Management on behalf of the entire Group and as part of an ongoing exchange of information with local management.
We view with some concern the extensions of government powers to intervene in banks if there is a danger of them falling below the ratios set by regulators. Particularly with respect to profi t participation certifi cates (Genussscheine) and silent partners' contributions (stille Einlagen), the Bank Restructuring Act has exacerbated the risk of state intervention to the detriment of institutional investors as well as the investing insurance industry and hence also insurance customers. What is more, a fi nancial tax (fi nancial transaction tax and fi nancial activity tax) is envisaged or has already been implemented in various countries in order to at least partially fund the costs of the banking crisis. There is a risk that such a levy could also impact the Group.
In addition, against the backdrop of the banking crisis, the G20 nations discussed the adoption of surcharges on capital for insurers similar to those for systemically-relevant banks. It apparently remains to be seen just what form such a capital surcharge is supposed to take at the insurers under consideration. If, however, the general thrust of the bank plans is carried over to the insurance industry, large insurance undertakings – and hence potentially also the Talanx Group – could fi nd themselves faced with exacting new capital requirements. It should, though, be mentioned in this context that Frankfurt Administrative Court already expressed serious doubts as to the possible systemic relevance of the Talanx Group during the fi nal closure of other legal proceedings.
There are also proceedings pending before the courts, especially with respect to life insurance, that could have implications for the entire German insurance industry and hence also for the Talanx Group once their outcome is legally fi nal. This includes, for example, the question of how to deal with a monthly, quarterly or half-yearly method of payment in insurance contracts.
The Talanx Group – in common with the entire insurance industry – is also facing far-reaching changes against the backdrop of the impending and in some cases already implemented reform of regulatory standards, especially in the context of IFRS, Solvency II and the Minimum requirements for Risk Management in Insurance Undertakings (MaRisk VA). We are tracking the accounting and regulatory changes closely; we have identifi ed the associated more exacting requirements and initiated measures to refi ne our risk management accordingly and hence enable us to satisfy the more complex and extensive standards going forward.
Along with legal risks, the other operational risks include the failure of data processing systems and data security. Ensuring the availability of applications and protecting the confi dentiality and integrity of data are of vital importance to the Talanx Group. Since the global sharing of information increasingly takes place via electronic data transfer, this also creates a vulnerability to computer viruses. Systematic investment in the security and availability of information technology preserves and enhances the existing high level of security.
Operating risks may also arise in the area of human resources, for example due to a lack of the skilled experts and managers necessitated by an increasingly complex business with a strong customer orientation. The Group therefore attaches great importance to further and advanced training activities. With the aid of individual development plans and appropriate skills enhancement opportunities members of staff are thus able to respond to the latest market requirements. What is more, state-of-the-art management tools and appropriate incentive schemes – both monetary and non-monetary – foster strong employee motivation. Talanx counters the risk of personnel committing fraudulent acts to the detriment of the company with internal guidelines governing areas of competence and processing workfl ows as well as with regular specialist checks and audits.
On the marketing side the Talanx Group works together with external agents, brokers and a number of cooperation partners. In this respect there is, of course, an immanent risk that marketing agreements can be impacted by external infl uences – with a corresponding potential for the loss of new business and erosion of the in-force portfolios.
Of material importance to our company in the category of other risks are primarily emerging risks, strategic risks and reputational risks. Other risks also include participation risks of Talanx AG.
The hallmark of emerging risks (such as in the fi eld of nanotechnology or in connection with climate change) is that the content of such risks cannot as yet be reliably assessed – especially with respect to our in-force portfolio. Such risks evolve
gradually from weak signals to unmistakable tendencies. It is therefore vital to detect these risks at an early stage and then determine their relevance. For the purpose of early detection we have developed an effi cient process that spans divisions and ensures the linkage to risk management, thereby making it possible to pinpoint any necessary measures (e.g. ongoing observation and evaluation, the implementation of contractual exclusions or the development of new (re)insurance products).
Strategic risks derive from the risk of an imbalance between the corporate strategy and the constantly changing general business environment. Such an imbalance might be caused, for example, by incorrect strategic policy decisions or a failure to consistently implement the defi ned strategies. We therefore review our corporate strategy and risk strategy annually and adjust our processes and structures as required.
With Project Fokus, for example, Talanx is seeking to implement the restructuring of the Group that has been decided upon to improve its market positioning. The core of the new structure is a reconfi guration of the Group segments in primary insurance business with a view to being able to operate more successfully in the market. It is geared to customer segments – specifi cally, to industrial lines transacted worldwide as well as to German and international retail business, in both cases spanning the various insurance lines. Operational risks, in particular, could arise during the project in connection with the simplifi cation of processes within the central functions. We counter the operational risks most notably with a multi-site concept that serves to reduce the potential for staff turnover.
The reputational risk is the risk associated with possible damage to the company's name as a consequence of an unfavorable public perception (e.g. among customers, business partners, government agencies). Management of this risk is made possible by our set communication channels, a professional approach to corporate communications, tried and tested processes for defi ned crisis scenarios as well as our established Code of Conduct.
Other risks also encompass the participation risks of Talanx AG, especially those associated with the performance of subsidiaries, the stability of results in the portfolio of participating interests and a potentially inadequate balance in the business. Through profi t transfer agreements and dividend
payments Talanx AG participates directly in the business development and risks of the subsidiaries. What is more, negative results trends at the subsidiaries can prompt a need to write down the book values of participating interests at Talanx AG.
The Group uses appropriate tools in the areas of controlling, internal auditing and risk management to counter risks arising out of the development of results at subsidiaries. A standardized reporting system regularly provides decisionmakers with the latest information not only about the Group but also about the business development at all major subsidiaries. They are thus able to intervene at all times in order to control risks. Risks associated with a lack of stability in the results of the portfolio of participating interests or with an inadequate business balance are reduced for the various risk sources primarily by means of segmental and regional diversifi cation, appropriate strategies for risk minimization and risk shift ing as well as by investing systematically in growth markets and in product and portfolio segments that stabilize results.
The risk of asset erosion on acquisitions or their inadequate profi tability is kept as low as possible through intensive due diligence checks conducted in cooperation with independent professional consultants and auditors as well as close monitoring of the business development. Furthermore, Talanx pays close attention to risks deriving from the fi nancing of acquisitions and those associated with the capital needs of subsidiaries as well as their anticipated profi tability. It counters the fi nancing risk by compiling regularly updated cash fl ow statements and forecasts and by defi ning priorities for the application of funds.
This subsection describes signifi cant opportunities open to the Group. The ability to act on opportunities is a major entrepreneurial challenge. The opportunities discussed here refer to the next two fi nancial years.
The emergence of two markets off ering considerable growth potential can currently be observed in connection with demographic change: in the fi rst place, the "market for senior citizens", and, secondly, the "market for young customers", who need to take out additional provision at their own responsibility in response to the diminishing benefi ts aff orded by social welfare systems. In 2010 around 33 million Germans will be over the age of 50. It is already apparent that seniors today cannot be equated with the traditional pensioner of the past. This is clear not only from their growing use of services, for which there is a considerable willingness and ability to pay; the shift is also and more signifi cantly illustrated by the fact that this customer group is increasingly active and hence exposed more than previous generations to risks against which they need protection. For providers, then, it is not simply a matter of supplementing existing products with assistance benefi ts; rather, innovatively designed products must be off ered to cover these newly emerging needs. By way of example, we may cite here products for secondary residences, extensive foreign travel, sporting pursuits conducted well into advancing years or the handing down of assets to children. At the same time, young customers, too, are becoming increasingly aware of the issue of fi nancial security in old age. This potential can be tapped into through a broad range of (state-subsidized) individual provision products and attractive employer off erings for occupational retirement provision. For this customer group we currently expect a stronger demand trend for retirement provision products with fl exible saving and dissaving phases. Based on their comprehensive range of products with innovative solutions and their sales positioning across a broad front, the life insurance companies within the Group are well placed to profi t disproportionately strongly from the "seniors' market" and the "young customers' market".
Trust in banks and bank-related products (including unitlinked life insurance) took a battering from the fi nancial crisis. Although equity markets have rallied of late, a considerable degree of uncertainty and fear regarding stock market volatility still prevails among policyholders in light of the experience of the banking and economic crisis. In Europe, the United States and Asia (life) insurers had increasingly concentrated on the sale of "modern", fl exible products tied to movements on stock markets. Some voices in the industry are now predicting an ever more likely renaissance of products with guarantees. The life insurers within the Group may profi t disproportionately strongly from this turn of events thanks to their innovative products.
We expect general growth stimuli for non-life reinsurance to come from the more exacting requirements placed on companies' risk-based capital resources; for them, the transfer of risk to reinsurers with good ratings off ers an economically attractive alternative. The general framework conditions in international life and health reinsurance can in principle be described as favorable for the next two years. In mature insurance markets such as the United States, Japan, United Kingdom and Germany this assessment is colored by the demographic trend, which is refl ected in heightened awareness of the need for individual provision. This is especially advantageous for annuity and health insurance products. Increasing urbanization in leading emerging markets such as China, India and Brazil is fostering a rapidly growing middle class, which to a greater extent than before is clamoring for insurance solutions designed to protect surviving dependents and aff ord individual retirement provision for policyholders.
The previously described restructuring of the Group is designed to improve its market positioning. The modifi ed confi guration of the Group segments in primary insurance business will enable us to operate more successfully in the market. In addition, the project opens up cost-cutting potential over the medium term.
The capital participation and cooperation entered into with Meiji Yasuda Life in November 2010 will open up further international business opportunities for the foreign expansion of the Talanx Group.
Promising sales channels: bancassurance, brokers, Internet The proportion of life insurance business in Germany deriving from bancassurance is expected to rise to 31% in 2012 (currently 26%). This growth in the life insurance sector is supported by the demographic shift as well as trends on insurance and banking markets. Looked at across all European countries, bancassurance sales of non-life products currently account for only around 10% of the total sales capacity.
Following the changes of ownership aff ecting the existing cooperation partners in the bancassurance sector, the new owners have in each case decided to maintain the cooperation arrangements. Firstly, the former Citibank Privatkunden AG & Co. KGaA was renamed TARGOBANK eff ective 22. February 2010 and with a fresh orientation is now in a position to reaffi rm the confi dence of its customers. The CiV insurers changed their name to Targo so as to continue to underscore the exclusive nature of the partnership. As anticipated, sales again fared well following the roll-out of the "Enhanced Banking System" and the new sales system VERS at TARGOBANK. Secondly, Postbank was taken over by Deutsche Bank: the integration of DWS products into the unit-linked tariff s of PBV Lebensversicherung AG is intended to bring about a situation which satisfi es the interests of all contracting parties.
With a view to jointly developing credit life business in Europe, Talanx and Rheinland Versicherungsgruppe together established an agency company, Credit Life International Services. In addition, two insurance companies based in Hilden were established under the Credit Life brand. Following completion of the currently ongoing licensing procedure of the Federal Financial Supervisory (BaFin), they will trade as Credit Life International Lebensversicherung AG and – for non-life business – Credit Life International Versicherung AG. This will further promote diversifi cation in the markets served by the segment.
Talanx AG has agreed upon a partnership with Swiss Life and acquired a long-term equity stake of almost 10% in order to cement this cooperation. As part of the cooperation it is envisaged that the Talanx companies will become a major product partner of AWD. In addition, Talanx has acquired an interest of just under 10% in MLP. Both MLP and the AWD Group, which has belonged to Swiss Life since last year, are signifi cant sales partners in life insurance business. At this moment in time it is not possible to defi nitively assess what eff ects the Talanx stake in MLP/Swiss Life will have on new business. The extension of the involvement in Swiss Life presents an opportunity not only to maintain the business relationships with the brokers in question on a stable level but also to further expand them.
We see opportunities through the refi nement of Internet tariff s inter alia with respect to HDI Direkt Versicherung, for example through their extension to other lines such as householders' insurance.
Events that could have an infl uence on our fi nancial position, net income or assets are described in the following forecast and in the subsection of the Notes entitled "Events aft er the balance sheet date", pages 254 et seq.
The following remarks about the expected development of the Talanx Group and its business environment are subjective assessments. They are based on well-founded expert assessments as well as plans and forecasts that we consider coherent but the materialization of which is uncertain. Although we arrived at the underlying assumptions with great diligence and to the best of our knowledge, the possibility cannot be ruled out – in view of the fundamental uncertainties applicable to statements regarding the future – that actual developments may diverge from the developments anticipated here. Forecasting reliability has been made even more diffi cult by the global interlinking of economic relations and capital markets. Even though signs of an upturn are currently emerging in large areas of the global economy, the danger of fresh setbacks cannot be underestimated. What is more, it should be borne in mind that there is a time lag before the relevant macroeconomic infl uencing factors make themselves felt on the insurance markets. For this reason, too, some aft er-eff ects of the recent fi nancial and economic crisis will probably continue to reverberate in the insurance industry in the years ahead.
We expect the economic recovery to be sustained in 2011. Developments will, however, continue to be very mixed. The most vigorous growth will be generated in emerging markets, which are benefi ting from a rebound in domestic consumption and comparatively low levels of indebtedness. Many developed nations, on the other hand, will struggle under heavy debt burdens. These structural imbalances will have adverse implications for potential growth in the aff ected countries. This is especially true of countries on the Eurozone periphery, where the indispensable government austerity packages to reduce debt are putting the brakes on public and private consumption expenditure and hence curtailing growth. Germany, on the other hand, will profi t more heavily from the favorable development of emerging markets through its export-oriented growth model and should again outpace Eurozone growth in the coming year. For the United States, too, we anticipate continued recovery and growth in excess of the Eurozone. Given the large proportion of gross domestic product attributable to domestic consumption, the development of the US economy depends in large measure on the state of the labor market. We expect the gradual easing here to be sustained, although minor setbacks from time to time must be anticipated.
The state of the real economy will again prevent any signifi cant pressure on prices in 2011 since underutilized capacities and high unemployment leave little room to pass on price increases. Cautious lending practices show that the monetary holdings of central banks are scarcely fi nding their way into the real economy and that this transmission channel – as it is envisaged by monetary policy – continues to be disrupted. We do not expect to see any signifi cant change in 2011, with infl ation rates likely to pick up slightly – albeit without any real infl ationary pressure. In some emerging markets, on the other hand, there is already appreciable price pressure and this will make itself felt – albeit in milder form – in developed countries too through imported infl ation. The appetite of emerging economies for commodities shows no signs of easing and to some extent could again fi nd its way into the shopping baskets of developed markets in 2011 through rising energy prices. The modestly positive economic trend overall will give central banks little incentive in 2011, as in the previous year, to bring about a swift end to their highly expansionary monetary policy. To this extent, we do not expect any signifi cant departure from the prevailing expansionary monetary policy in the current year.
A tightening of monetary policy is more likely in 2012. Sustained growth, falling unemployment and rising capacity utilization will lead to somewhat greater pricing pressures. The continued dynamic growth of emerging markets will exacerbate this situation through rising commodity prices. A cyclical soft ening in the pace of growth is probable in 2012. There are currently no grounds to fear a fresh downturn, although structural problems such as the high indebtedness of private households and national budgets in developed countries continue to pose substantial risks.
As far as the monetary policy that can be expected from central banks in 2011 is concerned, we anticipate increased vigilance. In our assessment, central banks will be ready for a tightening of monetary policy in order to be able to respond at short notice as needed and set in motion steps to reduce the surplus liquidity. Interest rate increases at the short end of the curve are, however, not expected from the Fed or the
ECB for the time being. The question of how long central banks will keep interest rates on the current low level and continue to pursue their expansionary monetary policy cannot, as things presently stand, be answered. Decision-makers must, however, be made aware that a continuation of this monetary policy – which has undoubtedly played its part in helping to cope with the consequences of the worldwide fi nancial and economic crisis – entails considerable interest rate losses on new investments made by the insurance industry and makes it increasingly diffi cult for insurance enterprises to generate sustainable surpluses. Infl ation expectations in the Eurozone are likely to remain moderate, although they are the subject of heated discussion – including within the ECB. The infl ation risks for the United States and United Kingdom are assessed as slightly higher than for the Eurozone.
In 2011 the focus will continue to be on the sovereign debt crisis aff ecting countries on the Eurozone periphery. Since the funding requirements of these countries are high, further volatility can be expected – depending on the latest news to emerge. Overall, the picture remains very mixed. In the banking sector, too, there is a considerable need for refi nancing. When possible, banks will likely switch to issuing covered bonds. The more exacting capital requirements of Basel III will also keep the banks busy in 2011. The quest for returns, combined with the large issue volume of government bonds anticipated for 2011, will cause ten-year yields on government bonds to rise. In this climate the interest curve should initially become even steeper, before discussions about hiking key interest rates can bring about fl attening as this year progresses. We continue to anticipate a stable development overall on the corporate bond markets, allowing for shortterm news-driven volatility. For 2012, too, we expect interest rates to move higher on the back of the anticipated steps in monetary policy.
Boosted by the ongoing economic upturn, it is our belief that equity markets will again deliver positive returns in 2011. The fundamental valuation is below the long-term average yields, making equities still appear a favorable proposition. Dividend yields are also relatively high and will sup-port the performance of equities accordingly. An intact profi t trend among companies is adding to the positive mood. In our assessment, the M&A cycle is only in its initial phase and will have positive eff ects in 2011. Companies have suffi cient cash at their disposal and can obtain refi nancing on reasonable
terms in the present low interest rate environment. The considerable supply of liquidity that central banks continue to provide points to increased cash infl ows into equity mar-kets. Companies which are heavily exposed in growth regions are likely to fare especially well in 2011. Analysts' earnings estimates for 2011 are, however, already very positive and higher than the pre-crisis level. These high expectations are increasingly opening up a certain potential for disappointment. As a consequence of the slowing pace of economic growth the increase in corporate profi ts forecast for 2012 will not be as vigorous as that anticipated in 2011. Based on diminishing earnings growth, we expect an average return by the standards of this asset class.
Assisted by the broadly positive prospects for the economy as a whole as well as for capital markets, and given the robust state of the insurance industry, the underlying mood driving expectations for the development of business in 2011/2012 is currently one of optimism. This should not, however, obscure the uncertainties that still exist or the risk of setbacks associated with the global imbalances and the failure as yet to restore fi nancial stability to the Eurozone on account of the budget situation of certain member states. These factors pose a latent threat to international fi nancial markets. Any turmoil occurring there could spill over again relatively quickly to the real economy and ultimately also to the insurance sector.
Looking at the German insurance industry, we see a broadly stable business development in the crisis years that has been further energized by the dynamic cyclical recovery of the German economy. Overall, then, we anticipate a modest increase in premium income in 2011 and 2012, the amount of which will ultimately depend on several factors. In addition, we are looking to a steady increase in concentration on the German insurance market, which will be fostered by the approaching implementation of Solvency II and the associated demands placed on capitalization and the installation of complex control and monitoring tools. Smaller insurance companies, in particular, could come up against their limits here. What is more, the trend towards industrialization of insurance production – especially in retail business – and the progressive internationalization of the insurance industry are likely to advance the anticipated consolidation process. There are indications of further diff erentiation in the sales landscape, with an emphasis on the intensity of consulting required by the various products. On the one hand, the Internet is playing an ever greater role here inasmuch as it is increasingly used not only as a source of product and price information but also as a means of closing contracts and accessing extensive service functions. Further potential for expansion can also be discerned in bancassurance.
The current hallmark of German life insurance is vigorous, albeit of late slightly slowing growth in single-premium business and soft ness in new business with a regular premium payment. The interest rate environment will be crucial to further developments within the forecasting horizon to the end of 2012. The dilemma facing German life insurers – one that will only become more acute going forward – is that the high minimum guaranteed interest rates entered into (especially in the existing portfolios from prior years) cannot be earned in the prevailing low interest rate climate; looking to the future, then, it will become increasingly diffi cult to operate successfully with low interest rate levels. In our assessment, given its solid capitalization and reserves as well as its longterm investment horizon, the German life insurance sector should be able to survive a few more years with interest on investments of around 3%, but aft er that things could quickly become very challenging.
The decisive parameters for the development of the life insurance sector over the coming two years will continue to be new business and the lapse rate. Having been severely impacted by spillover eff ects of the fi nancial crisis, we also see fresh demand impetus for unit-linked life insurance products as trust in the fi nancial industry rebounds. In general terms, however, it is our belief that the industry's core task lies in enhancing the fl exibility of the business models in life insurance through innovative products. In our assessment, the future belongs to life insurance products that can be fl exibly attuned to the individual needs of customers in various phases of life. We are convinced that on this basis life insurance off erings can once again become the key product for individual retirement provision. A growing lapse risk can be
assumed in a scenario characterized by a sustained economic downturn and a sudden sharp rise in interest rates. This could prompt a sizeable portion of life insurance customers to cancel their existing long-term retirement provision policies early. In order to pay the surrender values associated with these unexpectedly high lapse rates insurers would have to liquidate investments, leading to a decline in investment income, a lower return and an even greater lapse risk. While we do not rule out the possibility of such a scenario, we consider it highly improbable. In our basic scenario we are looking at stable economic growth without any sudden shock increase in interest rates. Over the next two years the German life insurance market will also be shaped, in our view, by increasing competition for sales capacities as well as by the regulatory requirements for solvency and risk capital anticipated under Solvency II. Against the backdrop of changing capital requirements, we may see a far-reaching reorientation in the market and competitive situation.
For German property and casualty insurance we expect fundamentally positive infl uences from the friendly economic climate that is likely to be sustained in Germany over the next two years. Nevertheless, the already attained level of market saturation puts relatively tight limits on further growth in the quantity structure. We believe that tariff s and premiums have room to move higher in a variety of lines. The scope for premium increases could be extended still further by positive economic eff ects, since rising production numbers normally go hand-in-hand with rising claims expenditure, which in turn lead to higher minimum required premiums. All in all, it is our expectation that the pressure on underwriting profi ts will also continue to grow as the net return on investments keeps falling.
In motor insurance, which in the German insurance industry traditionally serves as a gateway for generating new business, we anticipate sustained fi erce competition over the coming two years – which could, however, shift from a pure price war to other competitive factors. This view is supported by
the fact that the asset base of numerous providers has been heavily eroded by the years of price warfare. The current level of average premiums in motor insurance is not adequate and must rise over the short or long term. One reason for the recurrent annual fl are-up in price competition is the prevailing market-wide renewal date of 1 January. It is our expectation that greater fl exibility in the renewal date will also result in motor insurance premiums that are more commensurate with requirements.
Although there is no mistaking the risks to the global economy, our assessment of the economic growth prospects for 2011 and 2012 in the most likely basic scenario is broadly favorable. In this context, the pace of growth is expected to be particularly dynamic in the emerging markets, which over the longer term will show growth rates roughly double those of the industrialized nations. Established insurance groups with a keen interest in opening up new growth potentials – and which are also equipped with the fi nancial means for further expansion – have increasingly come to focus on emerging markets in recent years as desirable target markets; the market share of these countries is thus steadily increasing on the back of disproportionately strong growth relative to the industrialized nations. The vigorous rise in demand for insurance protection is driven by brisk, dynamic economic growth and growing affl uence in these countries. Along with the up-and-coming economic giants of Asia – such as China, India, South Africa and Malaysia – Latin America also ranks among the preferred growth markets of internationally operating insurance groups. It is our assumption that the appeal of Latin America – including Mexico – will continue to grow, especially in the area of retail business, because the comparatively well-off middle class in this region is rapidly expanding and its insurance needs are hence also on the rise. Considerable demand stimuli can also be expected from the major sporting events recently awarded to Brazil – namely the 2014 Football World Cup and the 2016 Olympic Games.
On this basis the growth prospects in international property/ casualty insurance can be assessed as favorable, especially in emerging markets. The profi tability of property/casualty insurers will, however, initially continue to decline in 2011
and 2012. Even if wide-ranging premium increases were to be implemented in the course of 2011 – fi rst and foremost in motor insurance –, these will not be refl ected in the results posted by insurers until aft er a time lag. This means that technical results cannot be expected to show gradual improvement across a broad front before 2012 at the earliest, although the margins generated prior to the fi nancial crisis will not be attainable for the foreseeable future.
On the international life insurance markets, too, a healthy growth outlook can be anticipated because demand for funded retirement provision products in the context of individual old-age provision as well as provision for surviving dependants remains strong. It is, however, also the case in life insurance that a strong diff erence in the pace of growth is likely to be evident between the industrialized nations and emerging markets – with the latter spurred on by favorable demographic and economic framework conditions. A special challenge facing life insurers is the need to generate suffi cient investment income to off er their customers an attractive return without overextending their own risk position. On the other hand, it must be anticipated that European insurers, in particular, will have to cope with a rising cost of capital under Solvency II since capital requirements in certain subsegments – such as for riskier asset classes or for products with high guarantees – will become more exacting.
Conditions in non-life reinsurance are broadly satisfactory, even though rates declined sometimes substantially on account of the healthy capital resources enjoyed by primary insurers and the absence of market-changing major losses in the developed markets. As a direct consequence of the heavy loss expenditure associated with the sinking of the "Deepwater Horizon" drilling rig we are seeing appreciable price increases on covers for off shore oil exploration. We anticipate further price increases in the April and July treaty renewals, especially for Australia in the aft ermath of the severe fl ooding of December 2010 and January 2011.
In the coming years, as in the past, we expect to see a positive basic direction and further dynamic growth in international life and health reinsurance business. On a global level the growth recorded in life and health reinsurance should continue to outpace the comparable growth on primary markets. In this context we are seeing a shift in demand for new business away from developed markets such as the United States, United Kingdom and Germany towards emerging markets such as China, India, Brazil and Latin America. The preparations for Solvency II, and in particular the stress tests performed by the EU, have led to a greater risk awareness among European insurers and highlighted the important role of reinsurance as a means of risk and capital optimization. This is especially true of small and mid-sized insurers, specialty providers and mutual insurance companies.
In the 2011 and 2012 fi nancial years the orientation of the Group will continue to be shaped by the Group restructuring set in motion in 2009 and by the consolidation of the new Group structure put in place at the beginning of 2011. Through its concentration of central functions the Group will be able to leverage the fi rst synergistic eff ects by the end of 2012. This is to be achieved primarily by way of natural fl uctuation.
Strategic orientation of our Group segments at a glance:
| Group segment | Our mission and strategic tasks |
|---|---|
| Retail Germany | ■ Profitable enlargement of market share |
| ■ Elimination of cost disadvantages | |
| ■ Establishment of clear, simple organizational structures | |
| ■ Putting in place of a closer focus on the customer | |
| Retail International | ■ Growth in strategic target markets |
| ■ Optimization of activities in existing markets | |
| Industrial Lines | ■ Growth in foreign markets |
| ■ Development into a Global Player | |
| Non-Life Reinsurance | ■ Not one of the largest, but rather one of the most profitable non-life reinsurers in the world |
| ■ Special focus on the correct assessment of risks | |
| ■ Technically oriented setting of prices and conditions as well as an adequate level of reserving | |
| Life/Health Reinsurance | ■ In 5 years one of the 3 major, globally operating life/health reinsurers of above-average |
| profitability | |
| ■ Annual double-digit growth in volume and profitability indicators | |
| ■ Special focus on the regional and biometric balance of the portfolio |
A key focus of further measures relating to the Group restructuring in 2011 will be on the Retail Germany division. Intensive preparations are underway here to make this division fi t for the future. The goal is to align the business processes and organization with the needs of customers and sales partners. Combined with the elaboration of product, sales and service strategies that span the various lines of business, the aim is to become one of the most effi cient and customer-oriented insurers serving this segment of clientele.
In our preview of the period until 2012, we expect to see an increase in gross premium to around EUR 25 billion as well as a net return on premium of around 7% for the Talanx Group on a consolidated basis. The return on equity aft er tax and minority interests should be at least 10.8%. This is equivalent to 750 basis points above the risk-free interest rate, which we have defi ned as the 5-year average on 10-year German government bonds. We have set ourselves the goal of a return on equity of 12.5% as a strategic target. We are standing by our objective of going public with a minority interest in Talanx AG, albeit without yet specifying the precise timing of such a move. We shall therefore continue to make systematic preparations in order to be absolutely ready to act at the decisive moment.
In the 2011 fi nancial year our business in Industrial Lines is to be further expanded in Europe as well as Latin America, (South-)East Asia and the Arabian Peninsula. There are also plans to establish a branch offi ce in Canada. Given the economic recovery both domestically and in the export market, the company is looking to boost its premium income – especially from turnover-based policies. The gross premium volume of EUR 2.6 billion expected for 2011 is thus marginally higher than the level recorded as at 31 December 2010. The industrial insurance market remains fi ercely competitive in light of the unchanged predatory competition over prices and conditions. At the time of going to press it was still too early to foresee with any certainty the implications of the Japanese earthquake in March 2011. The Industrial Lines segment must anticipate appreciable claims expenditure. On the other hand, parallel to this, we are looking to a trend reversal on the pricing side – which should make itself felt
partially in 2011 but above all in 2012. Rising claims expenditure must also be anticipated as a consequence of the widespread economic upturn. Despite the cautious assumptions with respect to investment returns, the company expects to achieve again in 2011 the satisfactory investment income generated in 2010.
The comprehensive product range off ered by HDI-Gerling Lebensversicherung is particularly well suited to meeting the challenges posed by demographic change. With this in mind, we expect the company's favorable development to continue.
At the start of 2011 HDI-Gerling Firmen und Privat Versicherung AG geared its range of off erings in retail property/casualty insurance to a modular product architecture, bundling contract administration across all lines for operational purposes. Not only does this generate value-added for policyholders, including for example greater fl exibility and transparency, it also opens up cost-cutting potential for the insurance carrier and on the sales side.
In the sector comprised of commercial customers and freelance professions, HDI-Gerling Firmen und Privat Versicherung AG will continue to focus on professional indemnity and directors' and offi cers' (D&O) business – lines in which the tariff s are to be revised. Not only that, the product range will be enlarged to include a new IT insurance product. In the area of medical malpractice, modernization of the terms and conditions as well as expansion of the portfolio – always with a close eye to keeping the risks in check – are planned. The portfolio of existing business in the "Compact" product line is to be signifi cantly boosted through a high-volume cooperation and an additional component – "Receivables management" – will be added to the product range.
The turn of the year 2010/2011 raised hopes that the motor market is slowly stabilizing. The average premium level was around 3% higher than in the previous year. In the current fi nancial year HDI Direkt Versicherung AG will continue to position itself as a value-for-money provider in this market. Special emphasis will again be placed on expanding sales over the Internet and through cooperation partners; marketing eff orts in employee affi nity business will also be further stepped up. All in all, the company expects to increase its premium income by roughly 3%.
For the companies transacting bancassurance business the bar continues to be set high: Neue Leben Lebensversicherung AG intends to further extend its role as a provision specialist and strategic partner for Sparkasse savings institutions and will seek to cement its position in the market through innovative products and its proven performance standard. For the current 2011 fi nancial year Neue Leben Holding AG anticipates a healthy profi t. At Targo Lebensversicherung AG the focus is on cementing profi table growth for the long term, superb cost effi ciency, the excellent quality of its products and services and the acquisition of new customer groups. In the interests of value-based management PBV Lebensversicherung AG will maintain its orientation towards enhancing effi ciency through further improvements in the cost situation and investment income. On this basis we see opportunities to gain market advantages and further strengthen the competitive position of PBV Lebensversicherung AG as a specialist provider of products for individual retirement provision.
In the 2011 fi nancial year we shall continue to pursue a clear expansionary strategy in international retail business, always emphasizing growth with adequate profi tability. The strategic orientation will concentrate on the establishment and further extension of business in the target regions of Latin America as well as Central and Eastern Europe and Turkey – with both organic and inorganic growth considered desirable – as well as on the optimization of activities in existing markets. Opportunities outside the target regions are acted upon if a clear value-added can be generated above and beyond the set parameters.
Gross premium in the Group segment is expected to grow to around 10% of the Group's total volume by 2012. Our Brazilian company is the principal driver of growth. It is our expectation that the Brazilian economy will continue to fl ourish over the next two years – a development which will be particularly benefi cial to our company, which writes predominantly motor business. HDI Seguros S. A., Brazil, anticipates premium growth of almost 50% in 2011. Growth in the other markets is likely to be in the high single digits or even the double-digit percentage range.
In the Polish market, where we largely transact motor liability business, the rates that can be obtained are still scarcely suffi cient. In 2011 we shall take the opportunity to adjust rates and further optimize workfl ows so as to generate adequate profi tability. In light of our favorable assessment of the development of the Polish life insurance market, we shall realign our company accordingly so as to share fully in its growth.
Growth in life insurance could come in higher overall relative to the 2010 level, were it not for the fact that the cessation of new business in Liechtenstein and Luxembourg as well as the reduced demand for single-premium products off ered by the Italian company will likely cause the premium volume to fl atten out by the end of 2012.
In cooperation with our new strategic partners of the Meiji Yasuda Life Group we shall make the most of opportunities to grow together in foreign markets when the occasion presents itself. Investments in Central and Eastern Europe as well as Turkey and Latin America feature particularly prominently in the target corridor. With the Polish company HDI Asekuracja closing the fi nancial year just-ended in negative territory and owing to the growth recorded by the Italian company HDI Assicurazioni, only the Brazilian company HDI Seguros is expected to pay a dividend in 2011. For 2012 we are looking to generate dividend income from Poland, Brazil and Italy.
In Non-Life Reinsurance we expect broadly good conditions for the current fi nancial year and beyond. The renewals as at 1 January 2011 passed off better for us than the market players had anticipated.
In our target market of Germany we are looking ahead optimistically to the current fi nancial year. With premium volume stable overall, prices for loss-impacted programs rose while rates declined under programs that had been spared losses. In motor business the primary insurance market bottomed out in 2010. This development, combined with improved conditions, will have favorable implications for our result in proportional motor business and also – indirectly – for our non-proportional motor liability portfolio.
Lively competition is once again shaping business conditions in North America in the current fi nancial year. In terms of premium volume, we expect to see a modest increase (+1%) in 2011. Growth will be driven by Canadian business. Given
our very good market position and the excellent relations that we enjoy with our clients, we continue to see good business prospects going forward in our target market of North America.
We are thoroughly satisfi ed with the treaty renewals in specialty lines. Rate movements were particularly favorable in off shore energy business. In view of the heavy losses, prices here rose sharply in both the property and casualty lines, and we therefore expect to enlarge our premium volume for 2011 by 16%. In aviation reinsurance we expect growth of around 12% in our gross premium volume. Business should also develop well in credit and surety reinsurance; given our selective underwriting policy, however, the premium volume here is expected to contract by 8% in 2011. In the area of structured reinsurance products we are seeing sustained demand overall for contracts with a greater risk transfer and we are looking forward to further pleasing development of our business in the current fi nancial year. We shall continue to expand activities in the area of insurance-linked securities in 2011.
We shall grow by around 2% in global treaty reinsurance in 2011, even though the treaty renewals as at 1 January 2011 presented a mixed picture in the individual markets. Owing to the absence of major loss events in zones with peak exposures, such as in the United States, the overall tendency towards declining rates in catastrophe business was sustained. Altogether, the gross premium from our global catastrophe business is likely to contract by around 10% in the current fi nancial year. The price situation in facultative reinsurance, i.e. the underwriting of individual risks, remains tense. At this point in time it is our expectation that rates will for the most part decline. Nevertheless, given the varied nature of demand and the diversifi cation of the markets, our facultative portfolio should again generate profi table growth in 2011. We anticipate that the rate erosion in conventional property and casualty business will be off set by the writing of niche segments.
In Life/Health Reinsurance we have set ourselves an annual growth target of 10% to 12% for gross premium income. Along with our organic growth we anticipate further portfolio acquisitions in mature insurance markets. We are targeting an EBIT margin of at least 6%. For Hannover Life Re, the evolution of its tried and tested "Five Pillar" model continues to shape the development of business; new markets will remain the principal engines of growth over the coming two to three years. We also see good potential in the bancassurance sector, especially in emerging markets. Our expansionary eff orts are concentrated on the United States, Arab countries and the key emerging markets of Asia and Latin America.
AmpegaGerling Asset Management: As a result of updated arm's length comparisons, revenues are expected to contract by EUR 12 million on account of lower fee agreements with affi liated Group companies. If operating expenses are maintained on the level of 2010, the operating profi t will decrease as planned to EUR 21 million (excluding income from profi t transfer agreements).
AmpegaGerling Investment GmbH: Along with portfolio management of public and special funds, the company's activities in 2011 will be concentrated on refi ning its business processes with a view to attaining UCITS IV compliance (management of foreign funds) as well as on further expansion of technical expertise for the administration of investments. All in all, the operating profi t for 2011 is expected to be on the level of the previous year.
AmpegaGerling Immobilien Management GmbH: In view of the transfer of the mortgage lending business (and hence the loss of the associated revenues), it is anticipated that revenues will contract by around EUR 1 million despite the reorganization of commission structures and, among other things, the associated increase in portfolio margins. Driven by special project costs, a negative operating result of –EUR 0.7 mil lion is planned for 2011. From 2012 onwards, following complete implementation of the new production structures and elimination of special project expenses, it is envisaged that an operating profi t will be generated.
As things currently stand, it is to be anticipated that the profi t generated by Protection Re in 2011 will surpass the level of the 2010 fi nancial year.
Talanx Group Financial report 2010
| Assets | Note | 31.12.2010 | 31.12.2009 1) | |
|---|---|---|---|---|
| Figures in EUR million | ||||
| A. Intangible assets | ||||
| a. Goodwill | 1 | 589 | 593 | |
| b. Other intangible assets | 2 | 1,851 | 2,154 | |
| 2,440 | 2,747 | |||
| B. Investments | ||||
| a. Investment property | 3 | 860 | 726 | |
| b. Investments in affi liated companies and | ||||
| participating interests | 4 | 74 | 61 | |
| c. Investments in associated companies | 5 | 144 | 134 | |
| d. Loans and receivables | 6 | 32,343 | 31,548 | |
| e. Other fi nancial instruments | ||||
| i. Held to maturity | 7 | 2,999 | 2,858 | |
| ii. Available for sale | 8/11 | 30,635 | 26,477 | |
| iii. At fair value through profi t or loss | 9/11/12 | 1,221 | 1,099 | |
| f. Other invested assets | 10/11 | 4,185 | 4,133 | |
| Investments under own management | 72,461 | 67,036 | ||
| g. Funds held by ceding companies | 10,961 | 9,349 | ||
| Total investments | 83,422 | 76,385 | ||
| C. Investments for the account and risk of | ||||
| holders of life insurance policies | 6,414 | 4,975 | ||
| D. Reinsurance recoverables on | ||||
| technical provisions | 5,523 | 5,962 | ||
| E. Accounts receivable on insurance business | 13 | 5,011 | 4,342 | |
| F. Deferred acquisition costs | 14 | 3,715 | 3,544 | |
| G. Cash | 1,265 | 1,685 | ||
| H. Deferred tax assets | 27 | 268 | 235 | |
| I. Other assets | 15 | 1,781 | 1,655 | |
| J. Non-current assets and assets of disposal | ||||
| groups classifi ed as held for sale | 1,529 | 35 | ||
| Total assets | 111,368 | 101,565 |
1) Figures for the previous year adjusted on the basis of IAS 8 and IFRS 8; see explanatory remarks in the section "Summary of major accounting policies"
| Liabilities | Note | 31.12.2010 | 31.12.2009 1) | ||
|---|---|---|---|---|---|
| Figures in EUR million | |||||
| A. Shareholders' equity | 16 | ||||
| a. Common shares | 260 | 260 | |||
| b. Reserves | 4,696 | 4,314 | |||
| Total shareholders' equity | |||||
| excluding minorities | 4,956 | 4,574 | |||
| c. Minority interests | 3,035 | 2,579 | |||
| Total shareholders' equity | 7,991 | 7,153 | |||
| B. Subordinated liabilities | 17 | 2,791 | 2,003 | ||
| C. Technical provisions | |||||
| a. Unearned premium reserve | 18 | 5,411 | 5,026 | ||
| b. Benefi t reserve | 19 | 42,466 | 39,754 | ||
| c. Loss and loss adjustment expense reserve | 20 | 28,538 | 27,256 | ||
| d. Provision for premium refunds | 21 | 1,113 | 1,274 | ||
| e. Other technical provisions | 250 | 221 | |||
| 77,778 | 73,531 | ||||
| D. Technical provisions in the area of life insurance insofar as the investment risk is borne by policyholders |
6,414 | 4,975 | |||
| E. Other provisions | |||||
| a. Provision for pensions | 22 | 1,316 | 1,298 | ||
| b. Provision for taxes | 23 | 743 | 771 | ||
| c. Sundry provisions | 24 | 692 | 575 | ||
| 2,751 | 2,644 | ||||
| F. Liabilities | |||||
| a. Notes payable and loans | 25 | 747 | 675 | ||
| b. Funds held under reinsurance treaties | 5,224 | 4,514 | |||
| c. Other liabilities | 11/12/26 | 4,858 | 4,561 | ||
| 10,829 | 9,750 | ||||
| G. Deferred tax liabilities | 27 | 1,433 | 1,509 | ||
| Total liabilities/provisions | 101,996 | 94,412 | |||
| H. Liabilities of disposal groups classifi ed as held for sale |
1,381 | — | |||
| Total liabilities | 111,368 | 101,565 |
1) Figures for the previous year adjusted on the basis of IAS 8 and IFRS 8; see explanatory remarks in the section "Summary of major accounting policies"
| Note | 2010 | 2009 1) | ||
|---|---|---|---|---|
| Figures in EUR million | ||||
| 1. Gross written premium including premium from unit-linked life and annuity insurance |
22,869 | 20,923 | ||
| 2. Savings elements of premium from unit-linked | ||||
| life and annuity insurance | 1,139 | 979 | ||
| 3. Ceded written premium | 2,767 | 2,530 | ||
| 4. Change in gross unearned premium | –185 | –67 | ||
| 5. Change in ceded unearned premium | 25 | 24 | ||
| Net premium earned | 28 | 18,753 | 17,323 | |
| 6. Claims and claims expenses (gross) | 30 | 17,810 | 15,101 | |
| Reinsurers' share | 1,712 | 1,043 | ||
| Claims and claims expenses (net) | 16,098 | 14,058 | ||
| 7. Acquisition costs and administrative expenses | ||||
| (gross) | 31 | 4,887 | 4,754 | |
| Reinsurers' share | 515 | 710 | ||
| Acquisition costs and administrative expenses (net) | 4,372 | 4,044 | ||
| 8. Other technical income | 71 | 43 | ||
| Other technical expenses | 390 | 295 | ||
| Other technical result | –319 | –252 | ||
| Net technical result | –2,036 | –1,031 | ||
| 9. a. Income from investments | 29 | 3,383 | 3,321 | |
| b. Expenses for investments | 29 | 486 | 903 | |
| Net income from investments under own management |
2,897 | 2,418 | ||
| Income/expense on funds withheld and contract deposits |
29 | 280 | 240 | |
| Net investment income | 3,177 | 2,658 | ||
| thereof profi t/loss from investments in associated companies |
2 | –6 | ||
| 10. a. Other non-technical income b. Other non-technical expenses |
32 32 |
947 1,039 |
967 1,005 |
|
| Other income/expenses | –92 | –38 | ||
| Profi t before goodwill impairments | 1,049 | 1,589 | ||
| 11. Goodwill impairments | 33 | 17 | 92 | |
| Operating profi t/loss (EBIT) | 1,032 | 1,497 | ||
| 12. Financing costs | 34 | 134 | 133 | |
| 13. Taxes on income | 35 | 228 | 471 | |
| Net income | 670 | 893 | ||
| thereof minority interest in profi t or loss | 450 | 408 | ||
| thereof Group net income | 220 | 485 |
1) Figures for the previous year adjusted on the basis of IAS 8 and IFRS 8; see explanatory remarks in the section "Summary of major accounting policies"
| 2010 | 2009 1) | |
|---|---|---|
| Figures in EUR million | ||
| Net income | 670 | 893 |
| 1. Unrealized gains and losses on investments | ||
| Gains (losses) recognized directly in equity during the period | 108 | 908 |
| Reclassifi cation of net realized gain (loss) | –224 | 102 |
| Tax income (expense) | –3 | –116 |
| –119 | 894 | |
| 2. Currency translation | ||
| Gains (losses) recognized directly in equity during the period | 250 | 87 |
| Reclassifi cation of net realized gain (loss) | 2 | –4 |
| Tax income (expense) | –12 | 1 |
| 240 | 84 | |
| 3. Changes from cash fl ow hedges | ||
| Gains (losses) recognized directly in equity during the period | –103 | –7 |
| Reclassifi cation of net realized gain (loss) | — | — |
| Tax income (expense) | 3 | 2 |
| –100 | –5 | |
| 4. Changes in policyholder participation/shadow accounting | ||
| Gains (losses) recognized directly in equity during the period | 324 | –462 |
| Tax income (expense) | –7 | 20 |
| 317 | –442 | |
| 5. Changes from the measurement of associated companies | ||
| Gains (losses) recognized directly in equity during the period | –2 | — |
| Reclassifi cation of net realized gain (loss) | — | — |
| Tax income (expense) | — | — |
| –2 | — | |
| 6. Other changes | ||
| Gains (losses) recognized directly in equity during the period | 4 | 8 |
| Reclassifi cation of net realized gain (loss) | — | — |
| Tax income (expense) | –1 | –3 |
| 3 | 5 | |
| Taxes on income and expense recognized in equity via | ||
| other income/expenses | –20 | –96 |
| Income and expense recognized during the period in equity | ||
| via other income/expenses after taxes | 339 | 536 |
| Total recognized income and expense during the period | 1,009 | 1,429 |
| thereof attributable to minority interests | 615 | 491 |
| thereof attributable to the Group | 394 | 938 |
1) Adjusted on the basis of IAS 8
| Cumulative other comprehensive income (other reserves) | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Common shares |
Additional paid-in capital |
Retained earnings |
Unrealized gains/ losses on investments |
Gains/ losses from currency translation |
Other changes in share- holders' equity |
Measure ment gains and losses from cash fl ow hedges |
Minority interests |
Share holders' equity |
|
| Figures in EUR million | |||||||||
| Balance at 31.12.2008 | 260 | 630 | 2,977 | –123 | –211 | 111 | –18 | 2,092 | 5,718 |
| Adjustments pursuant to IAS 8 |
— | — | 12 | –8 | — | 7 | — | 1 | 12 |
| Adjusted balance at 01.01.2009 |
260 | 630 | 2,989 | –131 | –211 | 118 | –18 | 2,093 | 5,730 |
| Total recognized income and expense |
— | — | 485 | 799 | 71 | –412 | –5 | 491 | 1,429 |
| therein adjustments pursuant to IAS 8 |
— | — | –41 | — | — | — | — | 1 | –40 |
| thereof currency translation |
— | — | — | — | 71 | — | — | 13 | 84 |
| thereof unrealized gains and losses on investments |
— | — | — | 799 | — | — | — | 95 | 894 |
| thereof change from equity measurement |
— | — | — | — | — | — | — | — | — |
| thereof change from cash fl ow hedges |
— | — | — | — | — | — | –5 | — | –5 |
| thereof sundry changes1) | — | — | — | — | — | –412 | — | –25 | –437 |
| Dividends paid to shareholders |
— | — | — | — | — | — | — | –18 | –18 |
| Capital increase | — | — | — | — | — | — | — | 12 | 12 |
| Other changes | — | — | — | — | — | — | — | 1 | 1 |
| Balance at 31.12.2009 2) | 260 | 630 | 3,474 | 667 | –140 | –294 | –23 | 2,579 | 7,153 |
| Adjustments pursuant to IAS 8 |
— | — | –15 | 29 | — | –26 | — | — | –12 |
| Adjusted balance at 01.01.2010 |
260 | 630 | 3,459 | 696 | –140 | –320 | –23 | 2,579 | 7,141 |
| Changes in ownership interest 3) |
— | — | — | — | — | — | — | 7 | 7 |
| Total recognized income and expense |
— | — | 219 | –174 | 144 | 305 | –100 | 615 | 1,009 |
| thereof currency translation |
— | — | — | — | 144 | — | — | 96 | 240 |
| thereof unrealized gains and losses on investments |
— | — | — | –174 | — | — | — | 55 | –119 |
| thereof change from equity measurement |
— | — | — | — | — | –1 | — | –1 | –2 |
| thereof change from cash fl ow hedges |
— | — | — | — | — | — | –100 | — | –100 |
| thereof sundry changes1) | — | — | — | — | — | 306 | — | 13 | 319 |
| Dividends paid to shareholders |
— | — | — | — | — | — | — | –162 | –162 |
| Capital reduction | — | — | — | — | — | — | — | –4 | –4 |
| Balance at 31.12.2010 | 260 | 630 | 3,678 | 522 | 4 | –15 | –123 | 3,035 | 7,991 |
1) The sundry changes consist of the policyholder participation/shadow accounting as well as other changes
2) Adjusted on the basis of IAS 8
3) Changes in ownership interest with no change of control status
| 2010 | 2009 1) | |
|---|---|---|
| Figures in EUR million | ||
| I. 1. Net income | 670 | 893 |
| I. 2. Changes in technical provisions | 3,879 | 3,339 |
| I. 3. Changes in deferred acquisition costs | –38 | 5 |
| I. 4. Changes in funds held and in accounts receivable and payable | 441 | –930 |
| I. 5. Net changes in contract deposits | –1,230 | 71 |
| I. 6. Changes in other receivables and liabilities | 71 | 117 |
| I. 7. Changes in fi nancial assets held for trading | 36 | 226 |
| I. 8. Net gains and losses on investments | –385 | –237 |
| I. 9. Changes in other balance sheet items | –86 | –70 |
| I. 10. Other non-cash expenses and income as well as adjustments to net income |
1,226 | 2,058 |
| I. Cash fl ows from operating activities | 4,584 | 5,472 |
| II. 1. Cash infl ow/outfl ow from the sale of consolidated companies | 47 | — |
| II. 2. Cash infl ow/outfl ow from the purchase of consolidated companies | — | 79 |
| II. 3. Cash infl ow from the sale of real estate | 38 | 43 |
| II. 4. Cash outfl ow from the purchase of real estate | –205 | –225 |
| II. 5. Cash infl ow from the sale and maturity of fi nancial instruments | 16,552 | 18,622 |
| II. 6. Cash outfl ow from the purchase of fi nancial instruments | –20,754 | –21,329 |
| II. 7. Changes in investments for the account and risk of holders of life insurance policies |
–1,394 | –1,603 |
| II. 8. Changes in other invested assets | 130 | –659 |
| II. Cash fl ows from investing activities | –5,586 | –5,072 |
| III. 1. Cash infl ow from capital increases | — | 12 |
| III. 2. Cash outfl ow from capital reductions | –4 | — |
| III. 3. Dividends paid | –162 | –18 |
| III. 4. Net changes from other fi nancing activities | 719 | –123 |
| III. Cash fl ows from fi nancing activities | 553 | –129 |
| Change in cash and cash equivalents (I.+II.+III.) | –449 | 271 |
| Cash and cash equivalents at the beginning of the fi nancial year | 1,685 | 1,408 |
| Cash and cash equivalents – exchange rate diff erences on cash | 54 | 6 |
| Cash and cash equivalents at the end of the fi nancial year | 1,290 | 1,685 |
| Cash and cash equivalents of disposal groups | 25 | — |
| Cash and cash equivalents at the end of the fi nancial year | ||
| excluding disposal groups | 1,265 | 1,685 |
| Additional information | ||
| Taxes paid | 294 | –3 |
| Interest paid | 255 | 260 |
1) Adjusted on the basis of IAS 8
The cash fl ow statement shows how the cash and cash equivalents of the Group changed in the course of the year under review due to infl ows and outfl ows. In this context a distinction is made between cash fl ow movements from operating activities and those from investing and fi nancing activities.
The cash fl ows are presented in accordance with IAS 7 "Statement of Cash Flows" and the principles set out in German Accounting Standard (DRS) No. 2 regarding the preparation of cash fl ow statements, which were supplemented and specifi ed more closely by DRS 2-20 for insurance enterprises.
The cash fl ow statement was drawn up using the indirect method. The liquid funds are limited to cash and cash equivalents and correspond to the balance sheet item "Cash".
The cash fl ow movements of the Group are infl uenced principally by the business model of an insurance and reinsurance enterprise. Normally, we fi rst receive premiums for risk assumption and subsequently make payments for claims. The eff ects of exchange rate diff erences and the infl uences of changes in the consolidated group are eliminated in the cash fl ow statement. The acquisition of new companies is shown in the line "Cash infl ow/outfl ow from the purchase of consolidated companies"; the sum total of purchase prices paid less acquired cash and cash equivalents is recognized here.
The informational value of the cash fl ow statement for the Group is to be considered minimal. For us, it is not a substitute for liquidity and fi nancial planning, nor is it used as a management tool.
The purchase price for HDI Strakhovanie totaled EUR 1 million; cash assets accrued in the same amount (see subsection of the Notes entitled "Business combinations in the reporting period", page 163).
Based in Hannover/Germany, Talanx AG heads Germany's third-largest insurance group – with premium income of EUR 22.9 (20.9) billion in 2010 – as a fi nancial and management holding company. It does not, however, itself transact insurance business. The Group, which is active in more than 150 countries worldwide through cooperation arrangements, off ers high-quality insurance services in non-life and life insurance as well as reinsurance and also conducts business in the asset management sector.
The Group operates as a multi-brand provider in the divisions of Industrial Lines, Retail Germany, Retail International, Non-Life Reinsurance and Life/Health Reinsurance as well as Corporate Operations. Its brands include HDI and HDI-Gerling, off ering insurance solutions for retail and commercial customers as well as industrial clients, Hannover Re – one of the world's leading reinsurers –, the bancassurance specialists Neue Leben, PB and Targo Versicherungen as well as the investment fund provider and asset manager AmpegaGerling. At the end of 2010 the companies belonging to the Talanx Group employed a total global workforce* of 16,874 (16,921).
Talanx AG is a wholly-owned subsidiary of HDI Haft pfl ichtverband der Deutschen Industrie Ver si cherungsverein auf Gegenseitigkeit (ultimate parent company), Hannover (HDI V. a. G.), and the parent company for all Group companies belonging to HDI V. a. G. It is entered in the commercial register of Hannover County Court under the number HR Hannover B 52546 with the address "Riethorst 2, 30659 Hannover". In accordance with §§ 341 et seq. of the German Commercial Code (HGB) HDI V. a. G. is obliged to prepare consolidated annual accounts that include the annual fi nancial statements of Talanx AG and its subsidiaries. The consolidated annual accounts of the parent company are published in the electronic federal gazette.
As the parent company of the Talanx Group, Talanx AG has drawn up a consolidated fi nancial statement pursuant to § 290 of the German Commercial Code (HGB). The consolidated fi nancial statement was prepared voluntarily on the basis of § 315 a Para. 3 of the German Commercial Code (HGB) pursuant to Article 4 of Regulation (EC) No. 1606/2002 in accordance with International Financial Reporting Standards (IFRS) in the form adopted for use in the European Union. The standards and rules specifi ed in § 315 a Para. 1 of the German Commercial Code (HGB) were observed in full.
Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as IFRS (International Financial Reporting Standards); the standards approved in earlier years still bear the name IAS (International Accounting Standards). Standards are cited in our Notes accordingly; in cases where the Notes do not make explicit reference to a particular standard, the term IFRS is used. Insurance-specifi c transactions for which IFRS do not contain any separate standards are recognized in compliance with IFRS 4 "Insurance Contracts" according to the pertinent provisions of United States Generally Accepted Accounting Principles (US GAAP).
The consolidated fi nancial statement refl ects all IFRS in force as at 31 December 2010 as well as all interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) and the previous Standing Interpretations Committee (SIC), application of which was mandatory for the 2010 fi nancial year and which were adopted by the EU. In addition, the German Accounting Standards (DRS) adopted by the German Accounting Standards Committee (DRSC) have been observed insofar as they do not confl ict with currently applicable IFRS standards.
The consolidated fi nancial statement was drawn up in euros (EUR). The amounts shown have been rounded to EUR millions (EUR million), unless fi gures are required in EUR thousands (EUR thousand) for reasons of transparency. This may give rise to rounding diff erences in the tables presented in this report. Figures indicated in brackets refer to the previous year.
IFRS 3 (revised 2008) "Business Combinations" and resulting changes to IAS 27 "Consolidated and Separate Financial Statements", IAS 28 "Investments in Associates" and IAS 31 "Interests in Joint Ventures" are applicable to acquisitions in fi nancial years beginning on or aft er 1 July 2009.
The revised standard (IFRS 3), which was ratifi ed on 3 June 2009 by the EU, continues to require recognition of business combinations, albeit with some signifi cant changes. For example, all considerations paid for corporate acquisitions are to be measured at fair value at the time of acquisition. In this context, contingent considerations are carried as a liability and changes are recognized in profi t or loss upon remeasurement. An option is available on a transaction-by-transaction basis to recognize the non-controlling interest either at fair value or with the pro rata remeasured equity. All acquisition-related costs are expensed.
The standard was applied within the Group inter alia to the acquisition of the controlling interest in HDI Strakhovanie on 7 July 2010. Further details of the acquisition in the fi nancial year are provided in the subsection of the Notes entitled "Business combinations in the reporting period".
The revised IAS 27 requires the recognition of all eff ects of transactions with non-controlling interests in equity, insofar as there is no change in control and this transaction does not result in goodwill or in gains and losses. In case of a loss of control the standard provides detailed guidance on balance sheet recognition. The remaining interest is to be measured at fair value and any gain or loss arising upon remeasurement is to be carried as such. The revised standard had an eff ect on the reporting period, since inter alia transactions took place with non-controlling interests which are discussed in the section of the Notes entitled "Consolidation", subsection "Scope of consolidation" (pages 155 et seqq.).
The "Improvements to IFRSs (2009)" contains various amendments aff ecting twelve existing IFRS (ten standards and two interpretations) and is the second such collective standard published in the context of the IASB annual improvement process, which has been ongoing since 2006. The amendments are for the most part applicable to fi nancial years beginning on or aft er 1 January 2010 and had no signifi cant implications for the Group.
In addition to the accounting standards described above, the following amendments to standards and interpretations were observed as at 1 January 2010:
IFRIC 12 "Service Concession Arrangements": IFRIC 12 clarifi es how underlying infrastructure assets are to be recognized by the operator of a service concession arrangement. This new provision had no infl uence on the consolidated fi nancial statement.
IFRIC 15 "Agreements for the Construction of Real Estate": IFRIC 15 provides guidance as to the cases in which revenue from the construction of real estate is to be recognized in the fi nancial statement and whether a contract for the construction of real estate falls within the scope of IAS 11 "Construction Contracts" or IAS 18 "Revenue". This new interpretation had no relevance to the consolidated fi nancial statement in the reporting period.
Insofar as they were of any practical relevance to the consolidated fi nancial statement, the adoption of these amendments and interpretations had no material infl uence on the Group's assets, fi nancial position or net income in the reporting period.
The Group's assessment of the eff ects of these new standards, interpretations and amendments to existing standards is set out below.
In November 2009 the IASB published the revised IAS 24 "Related Party Disclosures", which replaces IAS 24 (2003). The new standard must be applied to fi nancial years beginning on or aft er 1 January 2011. Among the major new features of IAS 24 (rev.) is the requirement for disclosures of, inter alia, guarantees, undertakings and other commitments which are dependent upon whether (or not) a particular event occurs in the future. The defi nition of a related entity or a related person is also clarifi ed. The standard, the implications of which for the Group are currently under review, was ratifi ed by the EU in July 2010.
In December 2009 the EU adopted the amendments to IAS 32 "Financial Instruments: Presentation – Classifi cation of Rights Issues" in European law. IAS 32 was amended such that subscription rights as well as options and warrants for a fi xed number of treasury shares against a fi xed amount of any currency are to be classifi ed as equity instruments as long as these are issued pro rata to all an entity's existing shareholders of the same class. The amendments to IAS 32 must be applied to fi nancial years beginning on or aft er 1 February 2010. It is not expected to have any implications for the consolidated fi nancial statement.
IAS 19 "Prepayments of a Minimum Funding Requirement" (Amendments to IFRIC 14): This amendment was ratifi ed by the EU in July 2010 and must be applied to fi nancial years beginning on or aft er 1 January 2011. The amendments are of relevance if a pension plan provides for minimum funding requirements and the entity makes an early payment of contributions to cover those requirements. No implications for the Group are currently anticipated.
In November 2009 the IFRIC published IFRIC 19 "Extinguishing Financial Liabilities with Equity Instruments". The interpretation addresses accounting by the debtor if renegotiated contractual conditions of a fi nancial liability enable it to extinguish all or part of a fi nancial liability through the issue of its own equity instruments (debt for equity swaps). The equity instruments are to be measured at fair value upon issuance. Diff erences between the fair value of the equity instrument and the carrying amount of the extinguished liability are recognized in profi t or loss. The interpretation was adopted by the EU in July 2010 and must be applied to fi nancial years beginning on or aft er 1 July 2010. We do not expect application of the new standard to have any eff ect on the Group.
Also in November 2009 the IASB published a new standard on the classifi cation and measurement of fi nancial instruments, which was expanded in October 2010 to include rules governing the accounting of fi nancial liabilities and derecognition of fi nancial instruments. IFRS 9 is the fi rst step in a three-phase project intended to replace IAS 39 "Financial Instruments: Recognition and Measurement". The new standard introduces a revised classifi cation of fi nancial assets. In future, the standard envisages only two categories of fi nancial assets: those measured at "fair value" and at "amortized costs". Reclassifi cation will only be possible if the business model changes signifi cantly. Equity investments that fall within the scope of application of IFRS 9 are to be measured at fair value in the balance sheet, with value changes recognized in profi t or loss. An exception in this regard is an equity investment which an entity elects to measure at fair value through other comprehensive income (FVTOCI). The Group has still to analyze the full implications of IFRS 9. It is, however, already becoming clear that the revised rules will have an infl uence, inter alia, on the accounting of fi nancial assets within the Group. The standard does not apply until fi nancial years beginning on or aft er 1 January 2013; it has still to be adopted in European law.
On 7 October 2010 the IASB published amendments to IFRS 7 "Financial Instruments: Disclosures" which are applicable to fi nancial years beginning on or aft er 1 July 2011. The amendments concern disclosure requirements in connection with the transfer of fi nancial assets. A transfer of fi nancial assets exists, for example, where receivables are sold or in the case of asset-backed securities (ABS) transactions. The amendments have still to be ratifi ed by the EU. We are currently reviewing the implications for the consolidated fi nancial statement.
In May 2010 the IASB published the third annual collection of minor amendments to IFRS – "Improve ments to IFRSs (2010)". Most amendments must be applied to fi nancial years beginning on or aft er 1 January 2011; the EU ratifi ed the standard in February 2011. We are currently examining the implications of these amendments for the consolidated fi nancial statement.
In December 2010 the IASB published amendments to IAS 12 "Income Taxes", which has still to be adopted by the EU. These new rules include clarifi cation of the treatment of temporary tax diff erences in connection with measurement using the fair value model of IAS 40 "Investment Property". The amendment enters into force for reporting years beginning on or aft er 1 January 2012. We do not expect the application of these amendments to have any eff ect on the consolidated fi nancial statement.
The annual fi nancial statements of the subsidiaries, special funds and special purpose entities included in the Group are governed by uniform accounting policies, the application of which is based on the principle of consistency. The accounting policies as well as changes in the accounting principles and changes in the presentation of the consolidated fi nancial statement are explained below. Newly applicable accounting standards in the 2010 fi nancial year are described in the section "General accounting principles and application of IFRS", while the consolidation principles are discussed in the section "Consolidation" (pages 154 et. seqq.).
At the commencement of the 2010 fi nancial year the Group reorganized its insurance activities in primary insurance and adjusted the Group structure accordingly. Refl ecting this development, the management of the Group changed in line with the revised responsibilities on the Board of Management as did the internal reporting. The Reinsurance division is not aff ected by the restructuring; the two reporting segments of Non-Life Reinsurance and Life/Health Reinsurance therefore remain unchanged.
In keeping with the requirements of IFRS 8 "Operating Segments" (management approach), this organizational reconfi guration led to a change in the segment report for all comparable periods. The number of reportable segments consequently increased. Based on the information reported to the Group's chief operating decision-makers for the allocation of resources and performance of business, the reportable segments under IFRS 8 were identifi ed according to the structure of insurance activities geared to customer groups. The two existing primary insurance segments – Property/ Casualty Primary Insurance and Life Primary Insurance – have therefore been converted into three reportable segments that span the various lines of business: "Industrial Lines", "Retail Germany" and "Retail International". The Corporate Operations segment was modifi ed, but continues to consist of companies that predominantly perform functional tasks within the Group. Since goodwill is allocated principally to groups of cash-generating units mostly on the segment level, the management was compelled to allocate portions of goodwill to the newly identifi ed operational segments (see explanatory remarks in the "Goodwill" subsection of the section "Notes on the consolidated balance sheet – assets", pages 187 et seqq.).
Consolidation bookings are shown in a pure consolidation column in which cross-segment transactions within the Group are off set. Refl ecting the internal management and the reporting, income from dividend payments and profi t/loss transfer agreements accruing to the Group holding company are eliminated in the Corporate Operations segment. The revised segmentation aff ects consolidation both within and between the segments. In individual cases this resulted in changes in disclosures in the segmental income statement and segmental balance sheet. For further information on the segment report see the remarks in the section of the Notes entitled "Segment reporting".
Analogously to the internal reporting and the modifi cation of segment reporting, we adjusted disclosures in the consolidated balance sheet and consolidated statement of income as shown below. These changes in presentation are made retrospectively and had no implications for the amounts recognized in previous years. The comparable amounts for reclassifi cation from the previous year are shown in brackets:
In the 2010 fi nancial year we adjusted the previous year's fi gures with respect to the following circumstances retrospectively as at 31 December 2009 in accordance with the requirements of IAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors":
The adjustments made in the 2010 fi nancial year pursuant to IAS 8 had the following eff ects on the consolidated balance sheet as at 31 December 2009. Refl ecting the explanatory remarks provided above, the specifi c circumstances are labeled with the letters a) to d):
| 31.12.2009 | Changes from adjustments pursuant | |||||
|---|---|---|---|---|---|---|
| Consolidated balance sheet | as reported | to IAS 8 having an eff ect on 2009 | 31.12.2009 | |||
| Figures in EUR million | Re a) | Re b) | Re c) | Re d) | ||
| Assets | ||||||
| A. b. Other intangible assets | 2,152 | — | — | 2 | — | 2,154 |
| B. g. Funds held by ceding companies | 10,778 | — | — | — | –1,429 | 9,349 |
| D. Reinsurance recoverables on technical provisions |
5,974 | — | –12 | — | — | 5,962 |
| Liabilities | ||||||
| A. b. Reserves | 4,354 | –33 | –8 | 1 | — | 4,314 |
| A. c. Minority interests | 2,578 | — | — | 1 | — | 2,579 |
| C. d. Provision for premium refunds | 1,242 | 32 | — | — | — | 1,274 |
| F. b. Funds held under reinsurance treaties | 5,943 | — | — | — | –1,429 | 4,514 |
| G. Deferred tax liabilities |
1,512 | 1 | –4 | — | — | 1,509 |
The eff ects on the consolidated statement of income for the 2009 fi nancial year are as follows:
| 31.12.2009 | Changes from adjustments pursuant to IAS 8 having an |
||||
|---|---|---|---|---|---|
| Consolidated statement of income | as reported | eff ect on 2009 | 31.12.2009 | ||
| Figures in EUR million | Re a) | Re b) | Re c) | ||
| 6. Claims and claims expenses (gross) |
15,069 | 32 | — | — | 15,101 |
| 6. Claims and claims expenses (gross) Reinsurers' share |
1,055 | — | –12 | — | 1,043 |
| 10. b. Other non-technical expenses1) | 1,007 | — | — | –2 | 1,005 |
| 13. Taxes on income |
474 | 1 | –4 | — | 471 |
| Net income – thereof minority interest in profi t or loss |
407 | — | — | 1 | 408 |
| Net income – thereof Group net income |
525 | –33 | –8 | 1 | 485 |
1) Aft er adjusted presentation of the consolidated statement of income
We corrected the following circumstances in the 2010 fi nancial year through adjustment of the opening balance sheet as at 1 January 2010; retrospective application to prior years was omitted, since in this regard determination of the period-related adjustments was not feasible or did not seem advisable aft er weighing up cost/benefi t considerations:
The adjustments had the following implications for the 2010 opening balance sheet:
| Consolidated balance sheet | Adjustments 2010 | |||
|---|---|---|---|---|
| Figures in EUR million | Re a) | Re b) | ||
| Assets | ||||
| D. Reinsurance recoverables on technical provisions |
–18 | — | ||
| Liabilities | ||||
| A. b. Reserves – retained earnings | –12 | –3 | ||
| A. b. Reserves – other reserves | — | 3 | ||
| G. Deferred tax liabilities |
–6 | — |
The Group has refi ned the calculation logic for the fair values of derivatives in connection with Modifi ed Coinsurance/Coinsurance Funds Withheld reinsurance treaties. This represents a change in an accounting estimate, which was performed in the year under review without adjustment of the comparative fi gures for previous years. Within the scope of the accounting of ModCo reinsurance treaties, under which securities deposits are held by the ceding companies and payments rendered on the basis of the income from certain securities of the ceding company, the interest-rate risk elements are clearly and closely related to the underlying reinsurance arrangements. Embedded derivatives consequently result solely from the credit risk of the underlying securities portfolio. We calculate the fair values of the embedded derivatives in ModCo treaties using the market information available on the valuation date on the basis of a "credit spread" method. Through refi nement of the calculation logic for these derivatives, the risks from the aforementioned contracts are established on a more market-oriented basis. The derivative (balance sheet item: "Financial instruments at fair value through profi t or loss", subitem: "Financial instruments held for trading") had a fair value of EUR 45 million as at the balance sheet date (31 December 2009: EUR 32 million). Retention of the parameters used until the fi rst quarter of 2010 to calculate the fair values would have produced a value of EUR 27 million. The eff ect of this refi nement of the calculation logic on the value of the derivative in future reporting periods could only have been determined with a disproportionately high eff ort.
The preparation of the consolidated fi nancial statement to some extent necessitates discretionary decisions and estimates – in relation to the future – which aff ect the disclosure, recognition and measurement of some items in the balance sheet and statement of income as well as the information on contingent claims and liabilities as at the balance sheet date. The estimates and assumptions, which entail a signifi cant risk in the form of a material adjustment of the book values of assets and contingent claims and liabilities within the next fi nancial year, are discussed below or set out in the accounting policies or directly in the notes on individual items.
Impairment test of goodwill: In accordance with the subsection entitled "Goodwill", the Group tests for impairment of goodwill. Insofar as the recoverable amount is based on calculations of the value in use, appropriate assumptions are used as a basis (see item 1 of the Notes "Goodwill", pages 187 et seqq.).
Fair value of derivative and other fi nancial instruments: Fair values and impairments for fi nancial instruments not traded on an active market (e.g. derivatives in connection with Modifi ed Coinsurance/Coinsurance Funds Withheld treaties) are determined using appropriate measurement methods. In this regard please see our remarks on the determination of fair values as well as the applicability criteria for determination of the need to take impairments on certain fi nancial instruments in the subsection entitled "Investments including income and expenses".
Technical provisions: The loss and loss adjustment expense reserves, the amount and maturity of which are uncertain, are recognized according to "best estimate" principles in the amount that will probably be utilized. The actual amounts payable may prove to be higher or lower; any resulting run-off profi ts or losses are recognized in income. In the area of life insurance and life/health reinsurance the determination of provisions and assets is crucially dependent on actuarial projections of the business. In this context key input parameters are either predetermined by the tariff (e.g. costs included in the calculation, amount of premium, actuarial interest rate) or estimated (e.g. mortality, morbidity or lapse rates). These assumptions are heavily dependent, inter alia, on country-specifi c parameters, sales channel, quality of underwriting and type of reinsurance. For the purposes of US GAAP accounting these assumptions are reviewed as at each balance sheet date and subsequently adjusted in line with the actual projection. The resulting eff ects are refl ected inter alia as true-up adjustments in the balance sheet items "Other intangible assets", "Deferred acquisition costs", "Provision for premium refunds" (provision for deferred premium refunds) and, as appropriate, the "Benefi t reserve" (funding of maturity bonuses).
Deferred acquisition costs: The actuarial bases for amortization of the deferred acquisition costs are continuously reviewed and, as necessary, adjusted. Impairment tests are carried out through regular checks on, inter alia, profi t developments, lapse assumptions and default probabilities.
Present value of future profi ts (PVFP) on acquired insurance portfolios: The PVFP is the present value of the expected future net cash fl ows from existing life insurance contracts at the time of acquisition and is determined using actuarial methods. Uncertainties may arise, inter alia, with regard to the expected amount of these net cash fl ows.
Realizability of deferred tax assets: Estimates are made in particular with respect to the utilization of tax loss carry-forwards, fi rst and foremost in connection with deferred tax liabilities recognized in the balance sheet and expected future earnings.
Provisions for pensions and similar obligations: The present value of pension obligations is infl uenced by numerous factors based on actuarial assumptions. The assumptions used to calculate the net expenses (and income) for pensions include the discount rate. Further key assumptions used to establish the pension liabilities are provided in item 22 "Provisions for pensions and other postemployment benefi t obligations" of these Notes.
The actual amounts may diverge from the estimated amounts.
In March 2004 the IASB published IFRS 4 "Insurance Contracts". The fi rst standard governing the accounting of insurance contracts, it divides the "Insurance Contracts" project into two phases. IFRS 4 represents the outcome of Phase 1 and serves as a transitional arrangement until the IASB redefi nes the measurement of insurance contracts aft er completion of Phase 2. The exposure draft (ED/2010/8) "Insurance Contracts" has now been published; the fi nal standard is expected in the second quarter of 2011.
IFRS 4 (Phase 1) – which also applies to reinsurance contracts – requires that all contracts written by insurance companies be classifi ed either as insurance contracts or investment contracts. An insurance contract exists if one party (the insurer) assumes a signifi cant insurance risk from another party (the policyholder) by agreeing to pay the policyholder compensation if a defi ned uncertain future event detrimentally impacts the policyholder. For the purposes of recognizing insurance contracts within the meaning of IFRS 4, insurance companies are permitted to retain their previously used accounting practice for insurance contracts for the duration of the currently applicable project stage (Phase 1). Underwriting items in the consolidated fi nancial statement are therefore recognized in accordance with US GAAP. All contracts without a signifi cant underwriting risk are treated as investment contracts pursuant to IFRS 4. Investment contracts that carry a discretionary surplus participation are also recognized in accordance with US GAAP. Investment contracts that do not have a discretionary surplus participation are treated as fi nancial instruments pursuant to IAS 39.
Intangible assets – with the exception of goodwill and insurance-related intangible assets – are recognized at amortized costs less scheduled straight-line depreciation and, as appropriate, impairment losses. The following useful lives were taken as a basis for all intangible assets with the exception of goodwill.
| Software (self-developed or purchased) | 3–10 years |
|---|---|
| Insurance-related intangible assets (subject to the underlying insurance contracts) | Until approx. 2056 |
The goodwill arising out of corporate acquisitions is the positive diff erence between the cost of acquisition and the pro-rata fair value of identifi ed assets, liabilities and contingent liabilities (fair value of the revalued net assets). Negative diff erences from initial consolidation are to be recognized immediately in income aft er fresh testing pursuant to IFRS 3 "Business Combinations". Goodwill is an asset with an indefi nite useful life and hence scheduled depreciation is not taken; instead, in accordance with IFRS 3 "Business Combinations" in conjunction with IAS 36 "Impairment of Assets", goodwill is tested for impairment at least annually according to the "impairment-only approach" and written down as necessary depending on the outcome of the test. An impairment loss established in this way is recognized in income.
For the purposes of the impairment test pursuant to IAS 36.80 et seqq. "Impairment of Assets", goodwill is allocated to "cash generating units" (CGUs) (see item 1 of these Notes "Goodwill" pages 187 et seqq.). In order to determine a possible impairment the recoverable amount – defi ned as the higher of the value in use or the fair value less costs to sell – of a CGU is established and compared with the carrying values of this CGU in the Group including goodwill. If the carrying values including goodwill exceed the recoverable amount, a goodwill impairment is recognized. The impairment loss on goodwill is recognized as a separate item in the statement of income.
The present value of future profi ts (PVFP) on acquired insurance portfolios refers to the present value of the expected future net cash fl ows from life insurance contracts existing at the time of acquisition. It consists of a shareholders' and tax portion, on which deferred taxes are established, and a policyholders' portion. Amortization is taken on the insurance portfolios according to the realization of the surpluses on which the calculation is based. Impairment and the measurement parameters used are tested at least once a year; as necessary, the amortization patterns are adjusted or an impairment loss is taken. Only the amortization of the shareholders' portion is taken as a charge against future earnings. The portion of the PVFP in favor of policyholders is recognized as a liability by life insurance companies which are required to enable their policyholders to participate in all profi ts through the establishment of a provision for deferred premium refunds.
The other intangible assets also consist of acquired and self-developed soft ware. Intangible assets acquired for a consideration are recognized at amortized costs; self-developed soft ware is carried at production cost less straight-line depreciation. The other intangible assets are tested for impairment as at the balance sheet date and written down if necessary. These depreciation and impairment expenses are allocated to the functional units; insofar as allocation to functional units is not possible, they are recognized under other expenses. Write-ups on these assets are recognized in other income.
With respect to real estate, a distinction is made between investment property and own-use real estate based on the following criteria: investment and own-use real estate for mixed-use properties is classifi ed separately if the portions used by third parties and for own use could be sold separately. If this is not the case, properties are only classifi ed as investment property if less than 10% is used by Group companies.
Investment property is measured at acquisition or manufactoring costs less scheduled depreciation and impairment. Scheduled depreciation is taken on a straight-line basis over the expected useful life, at most 50 years. An impairment expense is taken if the market value (recoverable amount) determined using recognized valuation methods is less than the carrying amount. In the case of the directly held portfolio, a qualifi ed external opinion is drawn up for each object every fi ve years on the basis of the discounted cash fl ow method (calculation of the discounted cash fl ows from rents etc. that can be generated from an object). Expert opinions are obtained at shorter intervals if special facts or circumstances exist that may aff ect the value. In addition, internal assessments are drawn up per object on each balance sheet date, also based on the discounted cash fl ow method, in order to review the value. An external fair value opinion is obtained for real estate special funds every 12 months – the key date is the date of fi rst appraisal. For properties that are not rented out, the fair value is established using the discounted cash fl ow method in light of the forecast vacancy rate.
Maintenance costs and repairs are expensed in investment income; value-enhancing expenditures are capitalized using the equity method and can extend the useful life in individual cases.
Investments in associated companies encompass solely the associated companies valued using the equity method on the basis of the proportionate shareholders' equity attributable to the Group. The portion of an associated company's year-end result relating to the Group is included in the net investment income. The shareholders' equity and year-end result are taken from the associated company's latest available annual fi nancial statement. In this context, allowance is made for specifi c extraordinary circumstances in the appropriate reporting period, if they are material to the associated company's assets, fi nancial position or net income.
Financial assets/liabilities including derivative fi nancial instruments in the directly held portfolio are recognized/derecognized upon acquisition or sale as at the settlement date in accordance with IAS 39 "Financial Instruments: Recognition and Measurement". Upon addition to the portfolio, fi nancial assets are allocated to the four categories "loans and receivables", "fi nancial instruments held to maturity", "fi nancial instruments available for sale" and "fi nancial instruments at fair value through profi t or loss". Financial liabilities are classifi ed either as "fi nancial instruments at fair value through profi t or loss" or "at amortized cost". Depending on their categorization, the transaction costs directly connected with the acquisition may be recognized. Subsequent measurement of fi nancial instruments depends on the above categorization and is carried out either at amortized cost or at fair value. The amortized costs are determined from the historical costs aft er allowance for amounts repayable, premiums or discounts amortized within the statement of income using the eff ective interest rate method and any unscheduled impairment. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction or for which a liability could be settled.
Financial instruments due on demand are recognized at face value. Such instruments include inter alia cash in hand and funds held by ceding companies.
The item Investments in affi liated companies and participating interests consists inter alia of investments in companies that are not consolidated because of their subordinate importance for the presentation of the assets, fi nancial position and net income of the Group. Associated companies not measured at equity on account of their subordinate importance are also carried in this item of the balance sheet. Recognition of investments in listed companies is at fair value on the balance sheet date; other investments are recognized at cost, less impairments where applicable.
Loans and receivables are non-derivative fi nancial instruments with fi xed or determinable payments that are not listed on an active market and are not intended to be sold at short notice. They consist primarily of fi xed-income securities in the form of borrower's note loans, registered debentures and mortgage loans. They are carried at amortized cost using the eff ective interest rate method. The individual receivables are tested for impairment as at the balance sheet date. Unscheduled depreciation is taken if full repayment of the loan or receivable is no longer expected. Reversals are recognized in earnings via the statement of income. The upper limit of the write-up is the amortized cost that would have arisen at the measurement date without impairment.
Financial assets held to maturity are comprised of fi nancial assets that entail fi xed or determinable payments and have a defi ned due date, but which are not loans or receivables. The Group has the intention and ability to hold the securities recognized here until maturity. The procedure for measuring and testing impairment is the same as for the "loans and receivables".
Financial assets classifi ed as available for sale include fi xed-income or variable-yield fi nancial assets that the Group does not immediately intend to sell and that cannot be allocated to any other category. These securities are carried at fair value. Premiums and discounts are spread over the maturity period so as to achieve a constant eff ective interest rate. Unrealized gains and losses arising out of changes in fair value are recognized via the other income/expenses in equity (other reserves) aft er allowance for accrued interest, deferred taxes and premiums at life insurers due to policyholders upon realization (provision for deferred premium refunds).
Financial assets at fair value through profi t or loss consist of the trading portfolio and those fi nancial assets categorized upon acquisition as measured at fair value through profi t or loss. The trading portfolios (fi nancial instruments held for trading) contain all fi xed-income and variable-yield securities that the Group acquired for trading purposes and with the aim of generating short-term gains. In addition, all derivative fi nancial instruments with positive fair values including embedded derivatives in hybrid fi nancial instruments that must be separated as well as derivatives connected with insurance contracts that do not satisfy the requirements for recognition as a hedging relationship (hedge accounting as per IAS 39) are carried here. Derivatives with negative fair values are shown under other liabilities. We use derivative fi nancial instruments to a carefully judged extent in order to hedge parts of our portfolio against interest rate and market price risks, optimize returns or realize intentions to buy/sell. Financial assets held for trading are carried at their fair value on the balance sheet date. Financial assets at fair value through profi t or loss consist principally of unsecured debt instruments issued by corporate issuers. Structured products are also recognized in this category subject to application of the fair value option provided in IAS 39. Structured fi nancial instruments requiring separation from the host contract – the fair value of which can be reliably established – that would have had to have been broken down into their constituent components (host contract and one or more embedded derivatives) had they been allocated to the loans and receivables, held to maturity or available for sale categories are also recognized here. The Group utilizes the fair value option solely for selected parts of the investment portfolio.
All securities measured at fair value through profi t or loss are carried at fair value on the balance sheet date. If market prices are not available as fair values, the carrying values are established using recognized measurement methods. All unrealized gains or losses from this valuation are – in common with the realized gains and losses – recognized in net investment income.
Derivative fi nancial instruments designated as hedging instruments pursuant to IAS 39 (Hedge Accounting) are to be carried at fair value upon initial measurement. The method used to recognize gains and losses upon subsequent valuation is dependent upon the type of hedged risk. The Group designates some derivatives as hedges on the fair value of particular assets (fair value hedges) and others as hedges against specifi c risks of fl uctuating cash fl ows associated with a liability recognized in the balance sheet or a transaction that is expected and highly likely to materialize in the future (cash fl ow hedges); further information is provided in item 12 of the Notes "Derivative fi nancial instruments and hedge accounting", pages 207 et seqq. These hedging instruments are carried under other assets or other liabilities.
Establishment of fair values: The fair value of a fi nancial instrument corresponds to the amount that the Group would receive or pay if it were to sell or settle the said fi nancial instrument on the balance sheet date. The fair value of securities is thus determined on the basis of current, publically available, unadjusted market prices. Insofar as market prices are listed on markets for fi nancial instruments, their bid price is used; fi nancial liabilities are measured at the asked price. In the case of securities for which no current market price is available, a valuation price is normally determined using models of fi nancial mathematics on the basis of current and observable market data. Such models are used principally for the measurement of unlisted securities.
The Group uses various valuation models for this purpose, the details of which are provided in the following table:
| Financial instrument | Pricing method | Parameter | Pricing model |
|---|---|---|---|
| Fixed-income securities | |||
| Unlisted plain vanilla bonds | Theoretical price |
Interest rate curve | Present-value method |
| Unlisted structured bonds | Theoretical price |
Interest rate curve, volatility surfaces, correlations |
Hull-White, Black Karasinski, LIBOR market model etc. |
| Unlisted bond funds | Theoretical price |
Audited Net Asset Values (NAV) | Net Asset Value method |
| ABS/MBS for which no market prices are available |
Theoretical price |
Prepayment speed, incurred losses, default probabilities, recovery rates |
Future cash fl ow method, liquidation method |
| CDOs/CLOs, profi t participation certifi cates |
Theoretical price |
Risk premiums, default rates, recovery rates, redemptions |
Present-value method |
| Equities | |||
| Unlisted equities | Theoretical price |
Acquisition cost, cash fl ows, EBIT multiples, as applicable book value |
Net Asset Value method |
| Other invested assets | |||
| Private equity | Theoretical price |
Acquisition cost, cash fl ows, EBIT multiples, market prices |
Net Asset Value method |
| Derivative fi nancial instruments |
|||
| Plain vanilla interest rate swaps |
Theoretical price |
Interest rate curve | Present-value method |
| Currency forwards | Theoretical price |
Interest-rate curves, spot and forward rates |
Interest parity model |
| OTC stock options, OTC stock index options |
Theoretical price |
Listing of the underlying share, implicit volatilities, money-market interest rate, dividend yield |
Black-Scholes |
| Interest rate futures | Theoretical price |
Interest rate curve | Present-value method |
| Infl ation swaps | Theoretical price |
Infl ation swap rates (Consumer Price Index), historical index fi xings, inter est rate curve |
Present-value method with seasonality adjustment |
| Insurance derivatives | Theoretical price |
Market values of the cat. bonds, interest rate curve |
Present-value method |
We have allocated all fi nancial instruments measured at fair value to a level of the fair value hierarchy in accordance with IFRS 7. For further explanation please see our remarks in item 11 of the Notes "Fair value hierarchy".
The value determined on the basis of valuation models at time of acquisition can, however, diverge from the actual cost of acquisition. The resulting measurement diff erence constitutes a theoretical "day-one profi t/loss". As at the balance sheet date this produced only an insignifi cant loss.
Impairment: At each balance sheet date we review our fi nancial assets – with the exception of fi nancial assets at fair value through profi t or loss (since impairments are implicitly included in the fair value) – with an eye to objective, substantial indications of impairment. Permanent impairments on all these fi nancial assets are charged to the statement of income. IAS 39.59 contains a list of objective indications for impairment of a fi nancial asset. IAS 39.61 sets out additional requirements with regard to indications of objective evidence for the impairment of equity instruments, according to which impairment exists if there is a signifi cant or prolonged decrease in the fair value below acquisition cost. For the Group, this means that a decrease in the fair value of equity instruments is deemed to be signifi cant if it falls by more than 20% below acquisition cost; a prolonged decrease exists if the fair value falls consistently below cost for a period of at least nine months. In the case of securities denominated in foreign currencies, assessment is made in the functional currency of the entity holding the equity instrument. In principle, we take as a basis for fi xed-income securities the same indicators as for equity instruments. Qualitative case-by-case analysis is also carried out. Reference is made, fi rst and foremost, to the rating of the instrument, the rating of the issuer/borrower as well as the individual market assessment in order to establish whether impairment exists. What is more, when instruments measured at amortized cost are tested for impairment, we examine whether material items – looked at on their own – are impaired.
Impairments are taken on the fair value as at the balance sheet date in the event of a prolonged decrease in value – if available, on the publically listed market price. In this context, impairments on investments are recognized directly on the assets side – without using an adjustment account – separately from the relevant items. Reversals on debt instruments are recognized in income up to the level of the amortized costs. In the case of fi nancial assets available for sale, any further amount is recognized directly in equity with no eff ect on income. Reversals on equity instruments are recognized in equity via the other income/expenses outside the statement of income.
Securities loaned in the context of securities lending continue to be carried in the balance sheet since the material opportunities and risks resulting from such securities remain within the Group.
Other invested assets are recognized for the most part at fair value. Insofar as these fi nancial assets are not listed on public markets (e.g. participating interests in private equity fi rms), they are carried at the latest available "net asset value" as an approximation of fair value. Loans included in this item are recognized at amortized cost.
Funds held by ceding companies are receivables due under reinsurance provided to our clients in the amount of the cash deposits contractually withheld by such clients; funds held under reinsurance treaties (shown under liabilities) represent the cash deposits furnished to us by our retrocessionaires. Neither of these types of deposit triggers any cash fl ows and the funds cannot be used without the consent of the other party. Funds held by ceding companies/funds held under reinsurance treaties are recognized at acquisition cost (nominal amount). Appropriate allowance is made for credit risks.
Insurance contracts that satisfy the test of a signifi cant risk transfer to the reinsurer as required by IFRS 4 but fail to meet the risk transfer required by US GAAP are recognized using the "deposit accounting" method and eliminated from the technical account. The compensation elements for risk assumption booked to income under these contracts are shown under other income/expenses. The balances are shown as contract deposits on the assets and liabilities sides of the balance sheet, the fair values of which correspond approximately to their book values.
This item consists of policyholders' investments under unit-linked life insurance policies. The insurance benefi ts under these insurance contracts are linked to the unit prices of investment funds or a portfolio of separate fi nancial assets. The assets are kept and invested separately from other invested assets. They are recognized at fair value. The unrealized gains or losses are opposed by changes in the technical provisions. Policyholders are entitled to the profi ts generated; they are likewise liable for the incurred losses.
The reinsurers' portions of the technical provisions are calculated according to the contractual conditions of the underlying reinsurance treaties using a simplifi ed method; the reader is referred to the explanatory notes on the corresponding liabilities-side items. Appropriate allowance is made for credit risks.
Acquisition costs which are closely connected with the closing of insurance contracts and variable in relation to the acquired new business are capitalized in accordance with US GAAP as deferred acquisition costs (FASB ASC 944). Deferred acquisition costs are regularly tested for impairment using an adequacy test. The actuarial bases are also subject to ongoing review and adjustment as necessary.
In the case of property/casualty insurance companies and non-life reinsurance, acquisition costs are normally deferred pro rata for the unearned portion of the premiums. They are amortized at a constant rate over the average contract period. In the case of life insurers and in life/health reinsurance, the deferred acquisition costs are determined in light of the period of the contracts, the expected surrenders, the lapse expectancies and the anticipated interest income. The amount of amortization depends on the gross margins of the contracts calculated for the corresponding year of the contract period. Depending on the type of contract, amortization is taken either in proportion to the premium income or in proportion to the expected profi t margins.
In the case of life reinsurance treaties classifi ed as "universal life-type contracts", the deferred acquisition costs are amortized on the basis of the expected profi t margins from the reinsurance treaties, making allowance for the period of the insurance contracts. A discount rate based on the interest rate for medium-term government bonds was applied to such contracts. In the case of annuity policies with a single premium payment, these values refer to the expected policy period or period of annuity payment.
IAS 12 "Income Taxes" requires that assets-side deferred taxes be established if asset items are to be recognized in a lower amount or debit items in a higher amount in the consolidated balance sheet than in the tax balance sheet of the relevant Group company and if these diff erences will lead to reduced tax burdens in the future. In principle, such valuation diff erences may arise between the tax balance sheets drawn up in accordance with national standards and the IFRS balance sheets of the companies included in the consolidated fi nancial statement drawn up in accordance with uniform group standards. Deferred tax assets are also recognized for tax credits and on tax loss carry-forwards. The assessment as to whether deferred tax claims from tax loss carry-forwards can be used, i.e. are not impaired, is guided by the results planning of the company and concretely realizable tax strategies. Value adjustments are taken on impaired deferred tax assets.
Insofar as deferred taxes refer to items carried directly in shareholders' equity via the other income/expenses, the resulting deferred taxes are also recognized outside the statement of income.
Deferred taxes are based on the current country-specifi c tax rates. In the event of a change in the tax rates on which the calculation of the deferred taxes is based, appropriate allowance is made in the year in which the change in the tax rate is adopted in law. Deferred taxes at the Group level are booked using the Group tax rate of 31.6%, unless they can be allocated to specifi c companies.
Other assets are carried at amortized cost. Derivatives recognized as hedging instruments in the context of hedge accounting which show a positive fair value are carried at fair value. Property, plant and equipment are recognized at acquisition or manufacturing costs less straight-line depreciation. The useful life for own-use real estate is at most 50 years; the useful life for fi xtures and fi ttings is normally between 2 and 10 years. Impairment expenses are spread across the technical functional areas or recognized under other income/expenses.
Long-lived assets held for sale (or groups of assets and liabilities held for sale) are classifi ed as held for sale pursuant to IFRS 5 if their carrying amount is realized largely through sale rather than through continued operational use. Sale must be highly probable. The assets or disposal group held for sale are measured at the lower of carrying amount and fair value less costs to sell and recognized separately in the balance sheet as assets or liabilities. Scheduled depreciation is recognized until the date of classifi cation as held for sale. Impairment losses on fair value less costs to sell are recognized in profi t or loss; any subsequent increase in fair value less costs to sell leads to the realization of gains up to the amount of the cumulative impairment loss. If the impairment loss to be taken on a disposal group exceeds the carrying amount of the corresponding non-current assets, the need to establish a provision within the meaning of IAS 37 "Provisions, Contingent Liabilities and Contingent Assets" is examined. More detailed information on the non-current assets held for sale and disposal groups is contained in the subsection of the same name.
The common shares, reserves (additional paid-in capital, retained earnings) and cumulative other comprehensive income are recognized in equity. The common shares and additional paid-in capital are comprised of the amounts paid in by the shareholder of Talanx AG on its shares. The retained earnings consist of profi ts generated and reinvested by Group companies and special investment funds since they have belonged to the Group as well as income and expenses from changes in the consolidated group. In addition, in the event of a retrospective change of accounting policies, the adjustment for previous periods not included in the fi nancial statement is recognized in the opening balance sheet value of the retained earnings and comparable items of the earliest reported period. Unrealized gains and losses from changes in the fair value of fi nancial assets held as available for sale are carried in cumulative other comprehensive income; translation diff erences resulting from the currency translation of foreign subsidiaries as well as unrealized gains/losses from the valuation of associated companies at equity are also recognized under the other reserves. In addition, write-ups on available-for-sale variable-yield securities are recognized under this item of shareholders' equity. In the year under review various derivatives were used as hedging instruments in the context of cash fl ow hedges. The fl uctuations in value are recognized in a separate reserve item in equity.
Minority interests are shown in the consolidated statement of income following the net income. Minority interests in shareholders' equity are consequently recognized as a component of shareholders' equity. They refer to the shares held by companies outside the Group in the shareholders' equity of subsidiaries.
The technical provisions are shown for gross account in the balance sheet, i.e. before deduction of the portion attributable to reinsurers; the reader is referred here to the explanatory notes on the corresponding asset items. The reinsurers' portions of the technical provisions are calculated and recognized on the basis of the individual reinsurance treaties.
Unearned premiums correspond to already collected premiums that are apportionable to future risk periods. These premiums are normally deferred by specifi c dates for insurance contracts (predominantly in primary insurance); in reinsurance business global methods are sometimes used if the accounting data required from prior insurers for a calculation pro rata temporis is unavailable.
Benefi t reserves are calculated and recognized in life insurance business using actuarial methods for commitments arising out of guaranteed claims of policyholders in life insurance and of ceding companies in life/health reinsurance. They are calculated as the diff erence between the present value of future expected payments to policyholders/cedants and the present value of future expected net premium still to be collected from policyholders/cedants. The calculation includes assumptions relating to mortality, morbidity, lapse rates and the future interest rate development. The actuarial bases used in this context allow an adequate safety margin for the risks of change, error and random fl uctuation.
In the case of life insurance contracts without a surplus participation, the method draws on assumptions as to the best estimate of investment income, life expectancy and morbidity risk, allow ing for a risk margin. These assumptions are based on customer and industry data. In the case of life insurance contracts with a surplus participation, reference is made to assumptions that are contractually guaranteed or used to establish the surplus participation.
Life insurance products must be divided into the following categories pursuant to FASB Accounting Standards Codifi cation (ASC) 944–40 for the measurement of the benefi t reserve:
In the case of life insurance contracts with a "natural" surplus distribution (previously included in FAS 120 in conjunction with SOP 95-1 (Statement of Principles)), the benefi t reserve is composed of the net level premium reserve and a reserve for maturity bonuses. The net level premium reserve is arrived at from the present value of future insurance benefi ts (including earned bonuses, but excluding loss adjustment expenses) less the present value of the future premium reserve. The net level premium reserve is calculated as the net premium less the portion of premium earmarked to cover loss adjustment expenses. The reserve for maturity bonuses is generally constituted from a fi xed portion of the gross profi t generated in the fi nancial year from the insurance portfolio.
For contracts in life insurance with no surplus distribution (previously included in FAS 60), the benefi t reserve is calculated as the diff erence between the present value of future benefi ts and the present value of the future net level premium reserve. The net level premium reserve corresponds to the portion of the gross premium used to fund future insurance benefi ts.
In the case of primary life insurance contracts classifi ed according to the "universal life" model, unit-linked life insurances or similar life/health reinsurance treaties (previously included in FAS 97), a separate account is kept to which the premium payments less costs and plus interest are credited. We recognize the benefi t reserve in the area of life insurance insofar as the investment risk is borne by policyholders separately in liabilities item D.
The loss and loss adjustment expense reserves are constituted for payment obligations from insurance claims that have occurred but have not yet been settled. They relate to payment obligations under insurance and reinsurance contracts in respect of which the amount of the insurance benefi t or the due date of payment is still uncertain. Insofar they are based on estimates that may vary from the actual payment. The loss and loss adjustment expense reserves are subdivided into reserves for claims reported by the balance sheet date and reserves for claims that have already been incurred but not yet reported (IBNR) by the balance sheet date.
Reserves for claims reported by the balance sheet date are based on recognized actuarial methods used to estimate future claims expenditure including expenses associated with loss adjustment. They are recognized according to best estimate principles in the amount that will probably be utilized. In order to measure the "ultimate liability" the expected ultimate loss ratios are calculated for all lines of non-life reinsurance with the aid of actuarial methods such as the chain ladder method. The development of a claim until completion of the run-off is projected on the basis of statistical triangles. In this context it is assumed that the future rate of infl ation of the loss run-off will be analogous to the average rate of the past infl ation contained in the data. The more recent underwriting years in actuarial projections are subject to greater uncertainty, although this is reduced with the aid of a variety of additional information. Particularly in reinsurance business, a considerable period of time may elapse between the occurrence of an insured loss, notifi cation by the insurer and pro-rata payment of the loss by the reinsurer. The realistically estimated future settlement amount ("best estimate"), calculated in principle on the basis of the information provided by ceding companies, is therefore brought to account. This estimate draws on past experience and assumptions as to the future development, taking account of market information. The amount of the reserves and their allocation to occurrence years are determined using established forecasting methods of non-life actuarial science.
Reserves for claims that have occurred but not yet been notifi ed by the balance sheet date are constituted in the same way as reserves for claims that have already occurred. The Group draws here on empirical values adjusted according to current trends and other relevant factors. These reserves are constituted using actuarial and statistical models of the expected costs for fi nal settlement and handling of claims. The analyses are based upon currently known facts and circumstances, projections of future events, estimates of the future infl ationary trend as well as other social and economic factors. The latest trends observed in claim notifi cations, the extent of losses and increases in risk are also considered.
Suffi cient statistical data is not available for major losses. In these instances appropriate reserves are established aft er analysis of the portfolio exposed to such risks and, as appropriate, aft er individual scrutiny. These reserves represent the best estimates of the Group.
With the exception of a few reserves, the loss and loss adjustment expense reserves are not discounted.
The provision for premium refunds is constituted in life insurance for obligations regarding the surplus participation of policyholders that have not yet been defi nitively allocated to individual insurance contracts on the balance sheet date. It consists of amounts allocated to policyholders in accordance with national regulations or contractual provisions and amounts resulting from temporary diff erences between the IFRS consolidated fi nancial statement and the local annual fi nancial statements (provision for deferred premium refunds, shadow provision for premium refunds) that will have a bearing on future calculations of the surplus distribution.
We regularly subject all technical provisions to an adequacy test in accordance with IFRS 4. If current experience indicates that future income will not cover the expected expenses, the technical provisions are adjusted in income or an additional provision for anticipated losses is established aft er writing off the deferred acquisition costs. We review the adequacy of the benefi t reserve on the basis of current assumptions as to the actuarial bases.
IFRS 4.30 allows unrealized, but recognized profi ts and losses (these derive predominantly from changes in the fair value of assets classifi ed as "available for sale") reported in equity (Other Comprehensive Income, OCI) to be included in the measurement of technical items. This may aff ect the following items: deferred acquisition costs, present values of future profi ts (PVFPs), provisions for maturity bonuses of policyholders, provisions for deferred costs and the provision for premium refunds. The aforementioned assets and liabilities items and their corresponding amortization schemes are determined on the basis of the estimated gross margins (EGMs). The latter are modifi ed accordingly following subsequent recognition of unrealized gains and losses. The resulting adjustments are carried as so-called "shadow adjustments" to the aff ected items. The contra item in equity (OCI) is reported analogously to the underlying changes in value.
In the case of life insurance products under which policyholders carry the investment risk themselves (e.g. in unit-linked life insurance), the benefi t reserves and other technical provisions refl ect the fair value of the corresponding investments; these provisions are recognized separately. We would refer the reader to the explanatory notes on the assets-side item "Investments for the account and risk of holders of life insurance policies", page 135.
This item includes inter alia the provisions for pensions and other post-employment benefi t obligations. The Group companies normally grant their employees pension commitments based on defi ned contributions or defi ned benefi ts. The type and amount of the commitments depends on the pension plans in force at the time when the commitment was given. They are based principally on an employee's length of service and salary level.
In addition, since the mid-1990s various German companies have off ered the opportunity to obtain pension commitments through deferred compensation. The employee-funded commitments included in the provisions for accrued pension rights are protected by insurance contracts with HDI-Gerling Lebensversicherung AG, Cologne, and Neue Leben Lebensversicherung AG, Hamburg. Furthermore, Group employees have the opportunity to accumulate additional old-age provision by way of deferred compensation through contributions to special insurance companies known as "Pensionskassen". The benefi ts are guaranteed for their members and surviving dependants and comprise traditional pension plans with bonus increases as well as unit-linked hybrid annuities. In addition to these pension plans, executive staff and Board members, in particular, enjoy individual commitments as well as commitments given under the benefi ts plan of the Bochumer Verband. Additional similar obligations based upon length of service exist at some Group companies.
In the case of pensions commitments based on defi ned contributions the companies pay a fi xed amount to an insurer or pension fund. The commitment given by the company is fi nally discharged upon payment of the contribution. Under pension commitments based on defi ned benefi ts the employee receives a specifi c pension commitment from the company or a pension fund. The contributions payable by the company to fund the commitment are not fi xed in advance.
If the pension commitments are balanced against assets of a legally independent entity (e.g. a fund) that may be used solely to cover the pension assurances given and cannot be seized by any creditors, the pension commitments are to be recognized less the assets.
Pension commitments under defi ned benefi t plans are measured in accordance with IAS 19 "Employee Benefi ts" using the projected unit credit method. Not only are the benefi t entitlements and current annuities existing as at the balance sheet date measured, but allowance is also made for their future development. The interest rate used for discounting the pension commitments is based upon the rates applicable to fi rst-rate fi xed-income corporate bonds in accordance with the currency and duration of the pension commitments.
The amounts payable under defi ned contribution plans are expensed when they become due.
Actuarial gains or losses from pension commitments and plan assets derive from divergences between the estimated risk experience and the actual risk experience (irregularities in the risk experience, eff ects of changes in the calculation parameters and unexpected gains or losses on plan assets). The Group uses the "corridor method" defi ned in IAS 19 to recognize its actuarial gains and losses. Under the corridor method, a portion of the actuarial gains and losses is recognized in profi t or loss to the extent that the hitherto unrecognized actuarial gains or losses at the beginning of the fi nancial year exceed the higher of the following amounts: 10% of the present value of the earned pension entitlements or 10% of the fair value of any plan assets. The amount outside the corridor – divided by the expected average remaining working lives of the benefi ciaries – is included as income or expense in the statement of income.
Sundry provisions are established on the basis of best estimates in the amount that is likely to be used. The provisions are discounted if the interest rate eff ect is of material signifi cance. The carrying amount of the provisions is reviewed as at each balance sheet date. Provisions in foreign currencies are translated at the exchange rate on the balance sheet date.
Financial liabilities including subordinated liabilities, insofar as they do not involve funds held under reinsurance treaties or liabilities from derivatives, are reported at amortized costs. Subordinated liabilities are fi nancial obligations that can only be satisfi ed aft er the claims of other creditors in the event of liquidation or bankruptcy. Funds held under reinsurance treaties are measured at nominal value and liabilities from derivatives are recognized at fair value (on the valuation models used within the Group to establish fair values see the subsection "Investments including income and expenses"). In addition, derivatives used as hedging instruments in the context of hedge accounting are shown under the "Other liabilities"; further explanatory information in this regard is provided in item 12 of the Notes "Derivative fi nancial instruments and hedge accounting" (pages 207 et seqq.).
Deferred tax liabilities must be recognized in accordance with IAS 12 "Income Taxes" if assets are to be recognized in a higher amount or liabilities in a lower amount in the consolidated balance sheet than in the tax balance sheet of the group company in question and if this – as a temporary diff erence – will lead to additional tax loads in the future; cf. the explanatory notes on deferred tax assets.
Items in the fi nancial statements of Group companies are measured on the basis of the currency corresponding to the currency of the primary economic environment in which the company operates (functional currency). The consolidated fi nancial statement is prepared in the euro, which constitutes the functional currency and the reporting currency of Talanx AG.
Transactions in foreign currencies are converted into the functional currency using the exchange rates on the transaction date. In accordance with IAS 21 "The Eff ects of Changes in Foreign Exchange Rates" the recognition of exchange gains and losses on translation is guided by the nature of the underlying balance sheet item.
Gains and losses from the translation of monetary assets and liabilities existing in foreign currencies are recognized in the statement of income under other income/expenses.
Currency translation diff erences relating to non-monetary assets, changes in the fair values of which are carried in income, are recognized with the latter in income as profi t or loss from fair value measurement changes. Exchange gains or losses from non-monetary items – such as equity securities – classifi ed as available for sale are initially recognized outside income in a separate item of shareholders' equity and only booked to income when such non-monetary items are settled.
The Group companies' statements of income prepared in the national currencies are converted into euro at the average rates of exchange and transferred to the consolidated fi nancial statement. The conversion of foreign currency items in the balance sheets of the individual companies and the transfer of these items to the consolidated fi nancial statement are eff ected at the mean rates of exchange on the balance sheet date. All resulting currency translation diff erences – including those arising out of the capital consolidation – are recognized as a separate item within the other reserves in shareholders' equity. Goodwill is treated as an asset of the foreign entity and translated accordingly.
Balance sheet (balance sheet date) Statement of income (average) Currency/country 31.12.2010 31.12.2009 2010 2009 1 EUR corresponds to: AUD Australia 1.3068 1.6048 1.4510 1.7839 BHD Bahrain 0.4997 0.5404 0.5009 0.5267 BRL Brazil 2.2085 2.4963 2.3384 2.8024 CAD Canada 1.3259 1.5048 1.3758 1.5916 CLP Chile 619.9699 727.1109 677.6252 781.1374 CNY China 8.7511 9.7847 8.9895 9.5419 GBP United Kingdom 0.8585 0.9042 0.8592 0.8966 HKD Hong Kong 10.3146 11.1172 10.3232 10.8274 HUF Hungary 280.1572 272.2169 276.2410 280.0399 KRW South Korea 1501.6346 1669.5842 1541.5994 1771.3279 MXN Mexico 16.4031 18.6562 16.8429 18.9262 MYR Malaysia 4.0869 4.9113 4.2915 4.9076 PLN Poland 3.9678 4.1269 4.0114 4.3358 SEK Sweden 9.0119 10.2986 9.5582 10.6210 UAH Ukraine 10.5603 11.4827 10.5571 11.1792 USD United States 1.3254 1.4336 1.3287 1.3969 ZAR South Africa 8.7907 10.6121 9.7204 11.6273
The exchange rates for the Group's key foreign currencies are as follows:
The Group adjusted its segment reporting in the year under review in light of the corporate reorganization according to customer groups that was undertaken in primary insurance business (see our remarks on "Change in segment reporting" in the section "Accounting policies" page 121).
The reportable segments were determined according to the internal reporting and management structure of the Group, on the basis of which the Group Board of Management regularly assesses the performance of the segments and decides on the allocation of resources to the segments. As a fi rst step, the Group split its business activities into the areas of insurance and corporate operations. The insurance business was then subdivided – to some extent along new lines – into fi ve reportable segments; in view of the diff erent product types, risks and capital allocations, a diff erentiation is initially made between primary insurance and reinsurance.
Refl ecting its diff erent products and business groups, reinsurance business continues to be split into the two segments of Non-Life Reinsurance and Life/Health Reinsurance. On account of their management according to customer groups and geographical regions (domestic versus international) – which therefore spans the various lines of business –, insurance activities in the primary sector have been restructured/presented in accordance with the following three reportable segments: "Industrial Lines", "Retail Germany" and "Retail International"; this replaces the previous two-way split by line of business into Property/Casualty Primary Insurance and Life Primary Insurance. The revised segmentation in primary insurance thus corresponds to the responsibilities of the members of the Board of Management.
The area of "Corporate Operations" constitutes another reportable segment. Altogether, then, the Group has identifi ed six reportable segments in conformity with IFRS 8 "Operating Segments". The fi gures for the previous year have been adjusted accordingly.
The major products and services with which these reportable segments generate income are set out below. In addition, the main restructuring measures in the three primary insurance segments are discussed.
Industrial Lines: In the Industrial Lines segment we are for the fi rst time reporting worldwide industrial business as an independent segment; it was previously part of the Property/Casualty Primary Insurance segment. The scope of business operations encompasses a wide selection of insurance products such as liability, motor, accident, fi re, marine, special lines and engineering insurance for large and mid-sized enterprises in Germany and abroad. In addition, reinsurance in various classes of insurance is granted.
Retail Germany: Insurance activities serving German retail and commercial customers that span the various lines of business, including the bancassurance business transacted Germany-wide – i.e. insurance products sold over the counter at banks –, are managed in this reportable segment (previously included in the segments of Property/Casualty Primary Insurance and Life Primary Insurance). In addition to traditional composite insurance products, numerous life insurance products are off ered in the form of individual, group and collective policies for a single or regular premium: endowment, annuity and term life insurance, accident insurance, unit-linked life insurance, occupational disability and strict "any occupation" disability insurance, foreign travel insurance and occupational retirement provision.
Retail International: The scope of operations in this new segment encompasses insurance business transacted across the various lines of insurance with retail and commercial customers, including bancassurance activities in foreign markets. The broad selection of insurance products largely refl ects those off ered in the Retail Germany segment.
Non-Life Reinsurance: The most important activities concentrate on property and casualty business with retail, commercial and industrial customers – fi rst and foremost in the US and German markets –, marine and aviation business, credit/surety business, facultative business and catastrophe business.
Life/Health Reinsurance: The segment consists of the international activities of the Hannover Re Group in the life, health, annuity and accident lines.
Corporate Operations: The Corporate Operations segment encompasses – in contrast to the fi ve operating segments – management and other functional activities in support of the business conducted by the Group, primarily relating to asset management, administration, run-off and placement of portions of reinsurance cessions, Group fi nancing and other service tasks. Certain service companies previously allocated to the primary insurance segments are included in this segment from 2010 onwards.
All transactions between reportable segments are measured on the basis of standard market transfer prices that would also be applicable to transactions at arm's length. Such intra-group transactions between segments are eliminated within the scope of consolidation – in the consolidation column, insofar as they are cross-segment transactions. For reasons of consistency and comparability, we have adjusted the consolidated statement of income in line with the segment statement of income; the same applies to the consolidated balance sheet and the segment balance sheet. Non-current assets are considered largely to consist of intangible assets and own-use real estate/ investment property.
Depending upon the nature and timeframe of the commercial activities, various management ratios and performance indicators are used to assess the fi nancial success of the reportable segments within the Group; the operating profi t (EBIT) – determined from IFRS profi t contributions – is, however, used as a consistent measurement basis. The net profi t or loss for the period before income taxes is highlighted as a means of capturing true operating profi tability and for the sake of better comparability. In addition, the result is adjusted for interest charges incurred for borrowing (fi nancing costs).
Balance sheet as at 31 December 2010 1)
| Industrial Lines | Retail Germany | Retail International | |||||
|---|---|---|---|---|---|---|---|
| Assets | 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||||||
| A. Intangible assets | |||||||
| a. Goodwill | 60 | 60 | 397 | 397 | 124 | 128 | |
| b. Other intangible assets | 8 | 8 | 1,629 | 1,943 | 29 | 25 | |
| 68 | 68 | 2,026 | 2,340 | 153 | 153 | ||
| B. Investments | |||||||
| a. Investment property | 39 | 41 | 449 | 451 | 69 | 64 | |
| b. Investments in affi liated companies and participating interests |
9 | 8 | 24 | 15 | — | — | |
| c. Investments in associated companies | — | — | 9 | 9 | 24 | 25 | |
| d. Loans and receivables | 3,084 | 3,000 | 26,993 | 26,155 | 3 | 3 | |
| e. Other fi nancial instruments | |||||||
| i. Held to maturity | 121 | 121 | 295 | 297 | 71 | 51 | |
| ii. Available for sale | 2,764 | 2,355 | 8,599 | 7,700 | 2,444 | 2,220 | |
| iii. At fair value through profi t or loss | 16 | 20 | 445 | 508 | 487 | 269 | |
| f. Other invested assets | 559 | 870 | 849 | 991 | 224 | 219 | |
| Investments under own management | 6,592 | 6,415 | 37,663 | 36,126 | 3,322 | 2,851 | |
| g. Funds held by ceding companies | 43 | 42 | 3 | 66 | — | — | |
| Total investments | 6,635 | 6,457 | 37,666 | 36,192 | 3,322 | 2,851 | |
| C. Investments for the account and risk of holders of life insurance policies |
— | — | 5,419 | 4,203 | 995 | 772 | |
| D. Reinsurance recoverables on technical provisions | 3,866 | 3,947 | 2,797 | 2,659 | 713 | 699 | |
| E. Accounts receivable on insurance business | 1,675 | 1,002 | 368 | 407 | 354 | 287 | |
| F. Deferred acquisition costs | 26 | 8 | 1,498 | 1,377 | 202 | 198 | |
| G. Cash | 242 | 297 | 337 | 676 | 204 | 209 | |
| H. Deferred tax assets | 25 | 36 | 22 | 30 | 59 | 51 | |
| I. Other assets | 448 | 419 | 1,412 | 1,024 | 211 | 172 | |
| J. Non-current assets and assets of disposal groups classifi ed as held for sale |
— | — | — | 35 | — | — | |
| Total assets | 12,985 | 12,234 | 51,545 | 48,943 | 6,213 | 5,392 |
1) Previous year's fi gures adjusted due to modifi ed segment reporting pursuant to IFRS 8
2) Adjusted on the basis of IAS 8
| Non-Life Reinsurance | Life/Health Reinsurance | Corporate Operations | Consolidation | Total | |||||
|---|---|---|---|---|---|---|---|---|---|
| 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 2) |
| 8 | 8 | — | — | — | — | — | — | 589 | 593 |
| 29 | 45 | 108 | 112 | 48 | 21 | — | — | 1,851 | 2,154 |
| 37 | 53 | 108 | 112 | 48 | 21 | — | — | 2,440 | 2,747 |
| 301 | 161 | 2 | 2 | — | 7 | — | — | 860 | 726 |
| 11 | 4 | — | 1 | 30 | 33 | — | — | 74 | 61 |
| 85 | 84 | 12 | 14 | 14 | 2 | — | — | 144 | 134 |
| 2,270 | 2,657 | 45 | 45 | 1 | 1 | –53 | –313 | 32,343 | 31,548 |
| 3,024 | 2,949 | 4 | 4 | 46 | — | –562 | –564 | 2,999 | 2,858 |
| 12,096 | 10,227 | 4,409 | 3,653 | 323 | 322 | — | — | 30,635 | 26,477 |
| 181 | 208 | 92 | 94 | — | — | — | — | 1,221 | 1,099 |
| 2,352 | 1,779 | 273 | 267 | 413 | 417 | –485 | –410 | 4,185 | 4,133 |
| 20,320 | 18,069 | 4,837 | 4,080 | 827 | 782 | –1,100 | –1,287 | 72,461 | 67,036 |
| 696 | 626 | 11,940 | 10,163 | — | — | –1,721 | –1,548 | 10,961 | 9,349 |
| 21,016 | 18,695 | 16,777 | 14,243 | 827 | 782 | –2,821 | –2,835 | 83,422 | 76,385 |
| — | — | — | — | — | — | — | — | 6,414 | 4,975 |
| 941 | 1,633 | 515 | 265 | — | — | –3,309 | –3,241 | 5,523 | 5,962 |
| 1,806 | 1,897 | 1,036 | 975 | — | — | –228 | –226 | 5,011 | 4,342 |
| 362 | 331 | 1,472 | 1,507 | — | — | 155 | 123 | 3,715 | 3,544 |
| 328 | 257 | 118 | 200 | 36 | 46 | — | — | 1,265 | 1,685 |
| 10 | 15 | 2 | 7 | 181 | 96 | –31 | — | 268 | 235 |
| 970 | 1,085 | 47 | 54 | 474 | 673 | –1,781 | –1,772 | 1,781 | 1,655 |
| 1,529 | — | — | — | — | — | — | — | 1,529 | 35 |
| 26,999 | 23,966 | 20,075 | 17,363 | 1,566 | 1,618 | –8,015 | –7,951 | 111,368 | 101,565 |
Balance sheet as at 31 December 2010 1)
| Industrial Lines | Retail Germany | Retail International | |||||
|---|---|---|---|---|---|---|---|
| Liabilities | 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||||||
| B. Subordinated liabilities | 265 | 269 | 165 | 155 | — | — | |
| C. Technical provisions | |||||||
| a. Unearned premium reserve | 713 | 726 | 1,835 | 1,882 | 1,008 | 960 | |
| b. Benefi t reserve | — | — | 32,333 | 30,919 | 1,752 | 1,527 | |
| c. Loss and loss adjustment expense reserve | 7,777 | 7,428 | 2,696 | 2,773 | 1,129 | 936 | |
| d. Provision for premium refunds | 13 | 12 | 1,061 | 1,202 | 39 | 61 | |
| e. Other technical provisions | 31 | 42 | 8 | 8 | 15 | 9 | |
| 8,534 | 8,208 | 37,933 | 36,784 | 3,943 | 3,493 | ||
| D. Technical provisions in the area of life insurance insofar | |||||||
| as the investment risk is borne by policyholders | — | — | 5,419 | 4,203 | 995 | 772 | |
| E. Other provisions | |||||||
| a. Provision for pensions | 438 | 434 | 133 | 130 | 8 | 8 | |
| b. Provision for taxes | 117 | 143 | 142 | 178 | 40 | 27 | |
| c. Sundry provisions | 92 647 |
137 714 |
283 558 |
239 547 |
33 81 |
23 58 |
|
| F. Liabilities | |||||||
| a. Notes payable and loans | — | — | — | — | 17 | 17 | |
| b. Funds held under reinsurance treaties | 4 | 15 | 2,224 | 2,050 | 345 | 267 | |
| c. Other liabilities | 1,835 | 1,343 | 2,321 | 2,654 | 298 | 222 | |
| 1,839 | 1,358 | 4,545 | 4,704 | 660 | 506 | ||
| G. Deferred tax liabilities | 88 | 142 | 290 | 311 | 9 | 5 | |
| Total liabilities/provisions | 11,373 | 10,691 | 48,910 | 46,704 | 5,688 | 4,834 | |
| H. Liabilities of disposal groups classifi ed as held for sale | — | — | — | — | — | — |
| Non-Life Reinsurance | Life/Health Reinsurance | Corporate Operations | Consolidation | Total | |||||
|---|---|---|---|---|---|---|---|---|---|
| 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 2) | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 2) |
| 1,869 | 1,365 | 92 | 35 | 542 | 264 | –142 | –85 | 2,791 | 2,003 |
| 1,813 | 1,438 | 98 | 75 | — | — | –56 | –55 | 5,411 | 5,026 |
| — | — | 8,941 | 7,954 | — | — | –560 | –646 | 42,466 | 39,754 |
| 15,634 | 15,395 | 2,431 | 2,032 | — | 6 | –1,129 | –1,314 | 28,538 | 27,256 |
| — | — | — | — | — | — | — | — | 1,113 | 1,274 |
| 131 | 106 | 51 | 40 | — | — | 14 | 16 | 250 | 221 |
| 17,578 | 16,939 | 11,521 | 10,101 | — | 6 | –1,731 | –2,000 | 77,778 | 73,531 |
| — | — | — | — | — | — | — | — | 6,414 | 4,975 |
| 64 | 60 | 18 | 17 | 655 | 649 | — | — | 1,316 | 1,298 |
| 263 | 264 | 24 | 7 | 157 | 152 | — | — | 743 | 771 |
| 135 | 57 | 23 | 14 | 128 | 106 | –2 | –1 | 692 | 575 |
| 462 | 381 | 65 | 38 | 940 | 907 | –2 | –1 | 2,751 | 2,644 |
| 188 | 116 | 168 | 50 | 1,304 | 1,383 | –930 | –891 | 747 | 675 |
| 320 | 331 | 5,572 | 4,564 | — | — | –3,241 | –2,713 | 5,224 | 4,514 |
| 620 | 829 | 1,139 | 1,297 | 757 | 580 | –2,112 | –2,364 | 4,858 | 4,561 |
| 1,128 | 1,276 | 6,879 | 5,911 | 2,061 | 1,963 | –6,283 | –5,968 | 10,829 | 9,750 |
| 716 | 715 | 310 | 297 | 4 | 7 | 16 | 32 | 1,433 | 1,509 |
| 21,753 | 20,676 | 18,867 | 16,382 | 3,547 | 3,147 | –8,142 | –8,022 | 101,996 | 94,412 |
| 1,381 | — | — | — | — | — | — | — | 1,381 | — |
| Shareholders' equity 3) | 7,991 | 7,153 |
|---|---|---|
| Total liabilities | 111,368 | 101,565 |
1) Previous year's fi gures adjusted due to modifi ed segment
reporting pursuant to IFRS 8
2) Adjusted on the basis of IAS 8
3) Group shareholder's equity incl. minority interests
| Industrial Lines | Retail Germany | Retail International | |||||
|---|---|---|---|---|---|---|---|
| 2010 | 2009 2) | 2010 | 2009 2) | 2010 | 2009 | ||
| Figures in EUR million | |||||||
| 1. Gross written premium including premium from unit-linked life and annuity insurance |
3,076 | 3,077 | 6,823 | 6,614 | 2,233 | 1,827 | |
| thereof: with other segments | 28 | 15 | 21 | 18 | — | — | |
| with third parties | 3,048 | 3,062 | 6,802 | 6,596 | 2,233 | 1,827 | |
| 2. Savings elements of premium from unit-linked | |||||||
| life and annuity insurance | — | — | 932 | 835 | 207 | 144 | |
| 3. Ceded written premium | 1,658 | 1,732 | 437 | 625 | 203 | 242 | |
| 4. Change in gross unearned premium | 37 | 19 | 45 | 167 | 19 | –32 | |
| 5. Change in ceded unearned premium | 42 | –41 | –8 | 163 | 100 | 6 | |
| Net premium earned | 1,413 | 1,405 | 5,507 | 5,158 | 1,742 | 1,403 | |
| 6. Claims and claims expenses (gross) | 2,047 | 1,777 | 6,018 | 5,233 | 1,527 | 1,245 | |
| Reinsurers' share | 878 | 909 | 192 | 302 | 113 | 117 | |
| Claims and claims expenses (net) | 1,169 | 868 | 5,826 | 4,931 | 1,414 | 1,128 | |
| 7. Acquisition costs and administrative expenses (gross) | 568 | 622 | 1,282 | 1,594 | 657 | 477 | |
| Reinsurers' share | 256 | 315 | 172 | 508 | 210 | 129 | |
| Acquisition costs and administrative expenses (net) | 312 | 307 | 1,110 | 1,086 | 447 | 348 | |
| 8. Other technical income | 10 | 9 | 28 | 11 | 17 | 8 | |
| Other technical expenses | –1 | 105 | 230 | 97 | 34 | 34 | |
| thereof: amortization PVFP | — | — | 147 | 75 | 1 | 1 | |
| Other technical result | 11 | –96 | –202 | –86 | –17 | –26 | |
| Net technical result | –57 | 134 | –1,631 | –945 | –136 | –99 | |
| 9. a. Income from investments | 268 | 311 | 1,793 | 1,756 | 174 | 146 | |
| b. Expenses for investments | 37 | 70 | 181 | 513 | 22 | 25 | |
| Net income from investments under own management | 231 | 241 | 1,612 | 1,243 | 152 | 121 | |
| Income/expense on funds withheld and contract deposits | — | –1 | –35 | –36 | –1 | — | |
| Net investment income | 231 | 240 | 1,577 | 1,207 | 151 | 121 | |
| thereof: interest and similar income | 223 | 224 | 1,485 | 1,380 | 119 | 117 | |
| impairments/depreciation on investments | 7 | 12 | 68 | 193 | 8 | 14 | |
| write-ups on investments | — | 1 | 10 | — | — | — | |
| profi t/loss from investments in associated | |||||||
| companies | — | — | 1 | — | –1 | — | |
| 10. a. Other non-technical income | 197 | 220 | 397 | 376 | 142 | 43 | |
| b. Other non-technical expenses | 186 | 259 | 387 | 357 | 113 | 92 | |
| Other income/expenses | 11 | –39 | 10 | 19 | 29 | –49 | |
| thereof: interest and similar income | 4 | 8 | 8 | 7 | 23 | 13 | |
| write-ups on accounts receivable and other assets |
26 | 6 | 11 | 1 | — | 1 | |
| interest and similar expanses | 31 | 30 | 23 | 24 | 16 | 5 | |
| write-downs on accounts receivable | |||||||
| and other assets | 7 | 45 | 24 | 32 | 14 | 16 | |
| amortization on acquired insurance portfolios | — | 67 | — | 31 | — | — | |
| Profi t before goodwill impairments | 185 | 335 | –44 | 281 | 44 | –27 | |
| 11. Goodwill impairments | — | 1 | — | 72 | 17 | 15 | |
| Operating profi t/loss (EBIT) | 185 | 334 | –44 | 209 | 27 | –42 | |
| 12. Financing costs | 14 | 18 | 11 | 22 | — | 1 | |
| 13. Taxes on income | 32 | 79 | –12 | 129 | 44 | –2 | |
| Net income | 139 | 237 | –43 | 58 | –17 | –41 |
1) Previous year's fi gures adjusted due to modifi ed segment reporting pursuant to IFRS 8
2) Adjusted on the basis of IAS 8
| Non-Life Reinsurance | Life/Health Reinsurance | Corporate Operations | Consolidation | Total | |||||
|---|---|---|---|---|---|---|---|---|---|
| 2010 | 2009 | 2010 | 2009 2) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 2) |
| 6,340 | 5,753 | 5,090 | 4,529 | — | — | –693 | –877 | 22,869 | 20,923 |
| 367 | 472 | 277 | 372 | — | — | –693 | –877 | — | — |
| 5,973 | 5,281 | 4,813 | 4,157 | — | — | — | — | 22,869 | 20,923 |
| — | — | — | — | — | — | — | — | 1,139 | 979 |
| 705 | 339 | 423 | 421 | — | — | –659 | –829 | 2,767 | 2,530 |
| –274 | –199 | –13 | –27 | — | — | 1 | 5 | –185 | –67 |
| –34 | –22 | — | 3 | — | — | –75 | –85 | 25 | 24 |
| 5,395 | 5,237 | 4,654 | 4,078 | — | — | 42 | 42 | 18,753 | 17,323 |
| 4,330 | 3,786 | 4,106 | 3,538 | — | — | –218 | –478 | 17,810 | 15,101 |
| 456 | –22 | 317 | 231 | — | — | –244 | –494 | 1,712 | 1,043 |
| 3,874 | 3,808 | 3,789 | 3,307 | — | — | 26 | 16 | 16,098 | 14,058 |
| 1,525 | 1,323 | 1,216 | 1,112 | — | — | –361 | –374 | 4,887 | 4,754 |
| 92 | 37 | 98 | 116 | — | — | –313 | –395 | 515 | 710 |
| 1,433 | 1,286 | 1,118 | 996 | — | — | –48 | 21 | 4,372 | 4,044 |
| — | 4 | 17 | 11 | — | — | –1 | — | 71 | 43 |
| 10 | 11 | 54 | 44 | — | — | 63 | 4 | 390 | 295 |
| — | — | 4 | 3 | — | — | — | — | 152 | 79 |
| –10 | –7 | –37 | –33 | — | — | –64 | –4 | –319 | –252 |
| 78 | 136 | –290 | –258 | — | — | — | 1 | –2,036 | –1,031 |
| 946 | 839 | 246 | 309 | 13 | 30 | –57 | –70 | 3,383 | 3,321 |
| 179 | 266 | 42 | 24 | 110 | 86 | –85 | –81 | 486 | 903 |
| 767 | 573 | 204 | 285 | –97 | –56 | 28 | 11 | 2,897 | 2,418 |
| 12 | 37 | 304 | 240 | — | — | — | 1 | 280 | 240 |
| 779 | 610 | 508 | 525 | –97 | –56 | 28 | 12 | 3,177 | 2,658 |
| 672 | 682 | 606 | 571 | 3 | 7 | –67 | –76 | 3,041 | 2,905 |
| 23 | 136 | 1 | 1 | 9 | 5 | —1 | –8 | 115 | 353 |
| 27 | 20 | — | — | — | — | — | — | 37 | 21 |
| 2 | –5 | 1 | — | — | –1 | — | — | 2 | –6 |
| 332 | 211 | 95 | 180 | 606 | 664 | –822 | –727 | 947 | 967 |
| 280 | 197 | 37 | 76 | 824 | 630 | –788 | –606 | 1,039 | 1,005 |
| 52 6 |
14 1 |
58 1 |
104 1 |
–218 14 |
34 20 |
–34 –12 |
–121 –14 |
–92 44 |
–38 36 |
| 61 | 99 | — | — | — | — | — | — | 98 | 107 |
| 32 | 47 | 10 | 5 | 65 | 60 | –19 | –18 | 158 | 153 |
| 48 | 50 | 11 | 7 | 6 | 3 | — | — | 110 | 153 |
| — | — | — | — | — | — | — | — | — | 98 |
| 909 | 760 | 276 | 371 | –315 | –22 | –6 | –108 | 1,049 | 1,589 |
| — | — | — | — | — | 4 | — | — | 17 | 92 |
| 909 | 760 | 276 | 371 | –315 | –26 | –6 | –108 | 1,032 | 1,497 |
| 90 | 79 | 4 | 2 | 65 | 72 | –50 | –61 | 134 | 133 |
| 196 | 217 | 61 | 71 | –108 | –31 | 15 | 8 | 228 | 471 |
| 623 | 464 | 211 | 298 | –272 | –67 | 29 | –55 | 670 | 893 |
| thereof minority interest in profi t or loss | 450 | 408 | |||||||
| thereof Group net income | 220 | 485 | |||||||
The geographical breakdown shown below is based on the regional origin of the investments and the gross written premium with respect to external clients. No transactions with external clients amounting to at least 10% of total gross premium occurred during the reporting period.
| Investments excluding funds held by ceding companies 1) |
Primary Insurance | Reinsurance | Corporate Operations |
31.12.2010 Total |
|---|---|---|---|---|
| Figures in EUR million | ||||
| Germany | 30,795 | 6,064 | 465 | 37,324 |
| United Kingdom | 1,371 | 1,705 | 46 | 3,122 |
| Rest of Europe | 12,842 | 6,993 | 316 | 20,151 |
| United States | 839 | 6,052 | — | 6,891 |
| Rest of North America | 103 | 987 | — | 1,090 |
| Asia and Australia | 240 | 2,121 | — | 2,361 |
| Rest of the world | 756 | 766 | — | 1,522 |
| Total | 46,946 | 24,688 | 827 | 72,461 |
| Investments excluding funds held by ceding companies 1) |
Primary Insurance | Reinsurance | Corporate Operations |
31.12.2009 Total |
|---|---|---|---|---|
| Figures in EUR million | ||||
| Germany | 32,178 | 5,996 | 222 | 38,396 |
| United Kingdom | 682 | 1,338 | 211 | 2,231 |
| Rest of Europe | 10,218 | 5,790 | 313 | 16,321 |
| United States | 837 | 5,852 | 3 | 6,692 |
| Rest of North America | 82 | 803 | — | 885 |
| Asia and Australia | 178 | 1,349 | — | 1,527 |
| Rest of the world | 537 | 447 | — | 984 |
| Total | 44,712 | 21,575 | 749 | 67,036 |
1) Aft er elimination of internal transactions within the Group across segments
| Gross written premium 1) | Primary Insurance | Reinsurance | 2010 Total |
|---|---|---|---|
| Figures in EUR million | |||
| Germany | 8,281 | 691 | 8,972 |
| United Kingdom | 182 | 2,434 | 2,616 |
| Rest of Europe | 2,642 | 1,675 | 4,317 |
| United States | 145 | 2,957 | 3,102 |
| Rest of North America | — | 416 | 416 |
| Asia and Australia | 47 | 1,452 | 1,499 |
| Rest of the world | 786 | 1,161 | 1,947 |
| Total | 12,083 | 10,786 | 22,869 |
| 2009 | |||
|---|---|---|---|
| Gross written premium 1) | Primary Insurance | Reinsurance | Total |
| Figures in EUR million | |||
| Germany | 8,095 | 696 | 8,791 |
| United Kingdom | 190 | 1,808 | 1,998 |
| Rest of Europe | 2,538 | 1,561 | 4,099 |
| United States | 112 | 2,841 | 2,953 |
| Rest of North America | 1 | 386 | 387 |
| Asia and Australia | 32 | 1,218 | 1,250 |
| Rest of the world | 517 | 928 | 1,445 |
| Total | 11,485 | 9,438 | 20,923 |
1) Aft er elimination of internal transactions within the Group across segments
The consolidated fi nancial statement was drawn up in accordance with uniform Group accounting policies. The annual fi nancial statements included in the consolidated fi nancial statement were for the most part prepared as at 31 December. Compilation of interim fi nancial statements for the Group companies with diverging fi nancial years is not required pursuant to IAS 27 "Consolidated and Separate Financial Statements" because their closing dates are no more than three months prior to the Group closing date.
The capital consolidation is compiled in accordance with the requirements of IAS 27. Subsidiaries are all companies (including special purpose entities) with respect to which the Group exercises control over fi nancial and business policy. Subsidiaries are included in the consolidated fi nancial statement (full consolidation) from the point in time when control passed to the Group. They are deconsolidated at the point in time when control ends.
Investments in subsidiaries not included in the consolidated fi nancial statement because of their subordinate importance – in relation to assets, fi nancial position and net income of the Group – are recognized at fair value or, if this cannot be reliably established, at amortized cost in the balance sheet item "Investments in affi liated companies and participating interests".
Acquired subsidiaries are accounted using the purchase method. The acquisition costs associated with purchase correspond to the fair value of the assets off ered and liabilities arising/assumed at the time of the transaction. Acquisition-related costs are recognized in income when they are incurred. Assets, liabilities and contingent liabilities that can be identifi ed in the context of a corporate acquisition are measured upon initial consolidation at their fair values at the time of acquisition. A diff erence arising out the netting of the acquisition costs with the fair value of the assets and liabilities is recognized as goodwill under intangible assets. In accordance with IFRS 3 "Business Combinations" scheduled amortization is not taken on goodwill; instead, it is written down as necessary on the basis of annual impairment tests. Immaterial and negative goodwill are recognized in the statement of income in the year of their occurrence.
Minority interests in shareholders' equity or in the net income of majority-owned subsidiaries are shown separately in equity in the item "Minority interests" and in the statement of income in the item "Minority interest in profi t or loss".
All intra-group receivables and liabilities as well as income, expenses, and profi ts and losses resulting from intra-group transactions were eliminated within the scope of the debt and earnings consolidation.
Companies over which the Group is able to exercise a signifi cant infl uence are normally consolidated "at equity" as associated companies and initially carried at cost of acquisition. A signifi cant infl uence is presumed to exist if a company belonging to the Group directly or indirectly holds at least 20% – but no more than 50% – of the voting rights. The Group's investment in associated companies includes the goodwill arising upon acquisition. The accounting policies used by associated companies were in principle modifi ed – if necessary – in order to ensure consistent Group-wide accounting. The Group's share in the profi ts and losses of associated companies is recognized separately in the consolidated statement of income in accordance with IAS 1 "Presentation of Financial Statements".
Joint ventures, i.e. if two or more partner companies conduct a commercial activity under joint management, are included in the consolidated fi nancial statement according to proportionate consolidation. The procedure for proportionate consolidation largely corresponds to the inclusion of subsidiaries pursuant to IAS 27. However, the assets and liabilities as well as the expenses and income of the joint venture are not carried over to the consolidated balance sheet and consolidated statement of income in the full amount, but rather only on a proportionate basis.
Talanx AG is the ultimate parent company of the Group. In accordance with IAS 27 the consolidated fi nancial statement includes Talanx AG (as the parent company) and all major domestic and foreign Group companies in which Talanx AG indirectly or directly holds a majority voting interest or over which it exercises a de facto power of control.
Only subsidiaries which are of minor importance – both individually and in their entirety – for the net assets, fi nancial position and results of operations of the Group and which do not transact insurance business are exempted from consolidation. The Group assesses whether a subsidiary is of minor importance on the basis of the company's total assets and net income relative to the corresponding average values for the Group as a whole over the last three years. For this reason 37 (35) subsidiaries, the business object of which is primarily the rendering of services for insurance companies within the Group, were not consolidated in the year under review. Altogether, the balance sheet total of these subsidiaries amounts to less than 0.1% of the average balance sheet total of the Group over the last three years; the result of these companies amounts to altogether less than 1% of the average result of the Group over the last three years. In subsequent periods the subsidiaries not included in the consolidated group on grounds of materiality are examined on each closing date in order to verify whether consolidation is required in light of a reassessment of materiality.
The scope of consolidation as at the balance sheet date encompasses the companies listed in the table below.
| Scope of consolidation | 2010 | 2009 |
|---|---|---|
| Number of consolidated companies | ||
| Germany | 70 | 74 |
| Abroad 1) | 86 | 89 |
| Total | 156 | 163 |
| Number of consolidated special purpose entities | ||
| Abroad | 2 | 2 |
| Total | 2 | 2 |
| Number of consolidated special funds | ||
| Germany | 14 | 16 |
| Abroad | 8 | 2 |
| Total | 22 | 18 |
| Sum total of consolidated companies | 180 | 183 |
| Number of associated companies included at equity | ||
| Germany | 3 | 3 |
| Abroad 2) | 9 | 9 |
| Total | 12 | 12 |
| Joint ventures consolidated proportionately | ||
| Germany | 1 | — |
1) Consists of: 47 (52) individual companies and 39 (37) companies which are consolidated in 3 (3) subgroups.
2) Consists of: 3 (4) associated companies and 6 (5) companies which are included at equity in 1 (1) subgroup.
With regard to the major acquisitions and disposals in the year under review please see our explanatory remarks in the following subsections of this section. All affi liated companies, joint ventures, special funds and special purpose entities as well as associated companies are specifi ed individually in the list of shareholdings (see separate section of these Notes, pages 256 et seqq.).
In the year under review fi ve subsidiaries, four associated companies (thereof one company in a subgroup of Hannover Re) and one joint venture were added to the Group. The 13 disposals relating to subsidiaries resulted from eight internal Group mergers, one sale and four liquidations/deletions. In addition, four additions and two disposals occurred at two subgroups of Hannover Re. Furthermore, two associated companies are no longer recognized at equity. Specifi cally, the scope of consolidation of the Group changed as follows as at 31 December 2009:
On 25 February 2010 the companies Erste Credit Life International AG (in future: Credit Life International Lebensversicherung AG) and Zweite Credit Life International AG (in future: Credit Life International Versicherung AG), both based in Hilden, were established. The two companies are to transact credit life business with eff ect from 1 July 2010. The companies are wholly owned by HDI-Gerling Leben Service Holding AG, Cologne (renamed Talanx Deutschland AG and registered offi ce relocated to Hannover on 7 December 2010 – abbreviated to TD); the share capital of each company amounts to EUR 50 thousand and is fully paid up.
Eff ective 16 March 2010 Funis GmbH & Co. KG participated with a capital contribution of EUR 8 thousand (corresponding to 75.2% of the shares) in the newly established Foco 146 AB, which is based in Stockholm, Sweden. The company began trading under the name Svedea AB with eff ect from the balance sheet date. The company's business object consists principally of writing liability insurance for motor vehicles and yachts. On account of its subordinate importance the company was not included in the consolidated fi nancial statement.
With eff ect from the second quarter Inter Hannover (No. 1) Limited, London, was included in the consolidated fi nancial statement for the fi rst time. All shares in the company are held by International Insurance Company of Hannover Ltd., Bracknell. The object of the company, which is a corporate member of Lloyd's of London with limited liability, is to participate in the business of one or more Lloyd's syndicates. Further details are provided in the section "Business combinations in the reporting period" on page 163.
At the beginning of July 2010 HDI-Gerling International Holding AG (trading with eff ect from 30 December 2010 as Talanx International AG – abbreviated to TINT), Hannover, and Talanx AG, Hannover, acquired 99% and 1% respectively of OOO Strakhovaya Kompaniya "HDI Strakhovanie", Moscow. The common shares amount to RUB 30 million (EUR 1 million). The company is active in the Retail International segment (see also the section "Business combinations in the reporting period" on page 163).
The Polish company HDI-Gerling Polska Towarzystwo Ubezpieczen S.A., Warsaw, was merged into HDI Asekuracja Towarzystwo Ubezpieczen S.A., Warsaw, with retroactive eff ect from 30 June 2010.
In the third quarter of 2010 Hannover Beteiligungsgesellschaft mbH, Hannover, was merged into GERLING Beteiligungs-GmbH, Cologne, Proactiv Holding AG, Hilden, was merged into Talanx Deutschland AG, Hannover, and HDI-Gerling UK Service Company Ltd., London, was merged into the London branch of HDI-Gerling Industrie Versicherung AG with retroactive eff ect from 1 January 2010.
By way of a contract dated 30 August 2010 Clarus GmbH, Wiesbaden, was merged into DTPVO Deutsche Privatvorsorge AG (DTPVO), Darmstadt, with retroactive eff ect from 1 January 2010. DTPVO was renamed Clarus AG and has its registered offi ce in Wiesbaden. The entries were made on 15 October 2010.
In December 2010 ASPECTA Euro Group GmbH, Cologne, was merged into Talanx International AG, Hannover, ASPECTA Lebensversicherung AG was merged into HDI-Gerling Lebensversicherung AG, both Cologne, and HBG Hannover Beteiligungsgesellschaft mbH & Co. KG, Hannover, was merged into GERLING Beteiligungs-GmbH, Cologne, with retroactive eff ect from 1 October 2010.
Talanx AG sold its participating interest in Euro International Reinsurance S.A., Luxembourg, to a non-Group company at the end of May 2010. The disposal produced income of EUR 9 million in the Non-Life Reinsurance segment.
The Italian company HDI Servizi S.r.l., Rome, was liquidated at the end of the second quarter of 2010.
On 22 September 2010 PENATES A. Ltd., British Virgin Islands, was deleted from the public register.
The Irish companies E+S Reinsurance (Ireland) and Hannover Reinsurance (Dublin), both based in Dublin, were deleted from the public register on 25 November 2010.
Eff ective 8 March 2010 Hannover Rück Beteiligung Verwaltungs-GmbH (HRBV), which is wholly owned by Hannover Re, reached agreement with a third party outside the Group on the sale of 0.5% of its stake in E+S Rück – by way of a share reduction without a change of control status. Upon closing of the transaction HRBV held an interest of 63.69% in E+S Rück.
Eff ective 26 April 2010 the share capital of E+S Rück, Hannover, was increased out of retained earnings without the issue of new shares by an amount of EUR 2.8 million from EUR 42.6 million to EUR 45.5 million. The par value per share now stands at EUR 600. This did not give rise to a change of control status.
TINT increased its stake in HDI Seguros S.A., São Paulo/Brazil, to 99.998% in the context of a capital increase at the end of June 2010, in which the minority shareholders did not participate. Through the acquisition of further shares from minority shareholders TINT also increased its stake in HDI Seguros S. A. de C. V., León/Mexico, from 99.45% to 99.98% in the year under review.
Furthermore, TINT increased its stake in HDI STRAKHUVANNYA (Ukraine), Kiev, to 99.224% in the context of a capital increase in August and September 2010 in which the minority shareholders did not participate. Through the acquisition of further shares from minority shareholders TINT also increased its stake in HDI Seguros S. A./Chile from 99.922% to 99.927% in the year under review.
With regard to the consolidation of special purpose entities, the Group makes a distinction below between the areas of investments (excluding special and public funds), securitization of reinsurance risks and Insurance-Linked Securities (ILS). Such special purpose entities are to be examined in accordance with SIC-12 "Consolidation – Special Purpose Entities" with an eye to their consolidation requirement. In cases where IFRS do not currently contain any specifi c standards, our analysis also falls back – in application of IAS 8 – on the relevant standards of US GAAP.
Within the scope of its asset management activities our subsidiary Hannover Re, Hannover, has participated since 1988 in numerous special purpose entities – predominantly funds –, which for their part transact certain types of equity and debt capital investments. On the basis of our analysis of the relations with these entities we concluded that the Group does not exercise a controlling infl uence in any of these transactions and a consolidation requirement therefore does not exist.
Hannover Re participates – primarily through the companies Secquaero ILS Fund Ltd., Grand Cayman/Cayman Islands, and Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover, – in a number of special purpose entities for the securitization of catastrophe risks by investing in disaster bonds (or "cat bonds"). Since Hannover Re does not exercise a controlling infl uence in any of these transactions either there is no consolidation requirement
The securitization of reinsurance risks is largely structured through the use of special purpose entities.
In July 2009 Hannover Re issued a catastrophe ("cat") bond with the aim of transferring to the capital market peak natural catastrophe exposures deriving from European windstorm events. The term of the cat bond, which has a volume of nominally EUR 150 million, runs until 31 March 2012; it was placed with institutional investors from Europe and North America by Eurus II Ltd., a special purpose entity domiciled in the Cayman Islands. Hannover Re does not exercise a controlling infl uence over the special purpose entity. Under IFRS this transaction is to be recognized as a fi nancial instrument.
Eff ective 1 January 2009 Hannover Re raised further underwriting capacity for catastrophe risks on the capital market by way of the "K6" transaction. This securitization, which was placed with institutional investors in North America, Europe and Asia, involves a quota share cession on worldwide natural catastrophe business as well as aviation and marine risks. The volume of "K6", which was increased in the year under review, was equivalent to EUR 249 (123) million as at the balance sheet date. The planned term of the transaction runs until 31 December 2011 or in the case of the new shares placed in the year under review until 31 December 2012. Kaith Re Ltd., a special purpose entity domiciled in Bermuda, is being used for the securitization.
Hannover Re also uses the special purpose entity Kaith Re Ltd. for various retrocessions of its traditional covers to institutional investors. In accordance with SIC-12 Kaith Re Ltd. is included in the consolidated fi nancial statement.
Eff ective 26 April 2010 Hannover Re made use of its right of early cancellation and terminated the credit default swap underlying the "Merlin" transaction. Since 2007 Hannover Re had used this transaction to transfer risks from reinsurance recoverables to the capital market. The securities serving as collateral were issued through the special purpose entity Merlin CDO I B.V., over which Hannover Re did not exercise a controlling infl uence.
In the course of 2010, as part of its extended Insurance-Linked Securities (ILS) activities, Hannover Re wrote a number of so-called collateralized fronting arrangements under which risks assumed from ceding companies were passed on to institutional investors outside the Group using special purpose entities. The purpose of such transactions is to directly transfer clients' business. Due to the lack of a controlling infl uence over the special purpose entities involved, there is no consolidation requirement for Hannover Re with respect to these structures.
The largest single transaction in this connection is "FacPool Re", under which Hannover Re has transferred a portfolio of facultative reinsurance risks to the capital market since September 2009. The contracts, which cover worldwide individual risks, are mediated by an external reinsurance intermediary, written by Hannover Re and placed on the capital market in conjunction with a service provider. The "FacPool Re" transaction consists of a quota share reinsurance arrangement and two non-proportional cessions. The total amount of capital provided is equivalent to EUR 45 (42) million, with Hannover Re keeping a share of approximately EUR 4 (4) million and additionally assuming losses that exceed the capacity of "FacPool Re". The term of the transaction is roughly two and a half years. A number of special purpose entities participate in the reinsurance cessions within "FacPool Re"; Hannover Re does not hold any shares in these special purpose entities and does not bear the majority of the economic benefi ts or risks arising out of their activities through any of its business relations.
Associated companies are those over which the Group exercises a signifi cant but not controlling infl uence. In the year under review 12 (12) were valued using the equity method in accordance with IAS 28 "Investments in Associates". A further six (four) associated companies are not recognized at equity owing to their subordinate importance for the presentation of the net assets, fi nancial position and results of operations (please see here our remarks in the section "Accounting policies", subsection "Summary of major accounting policies" from page 127 onwards).
In the case of the company DFA Capital Management, Inc., Wilmington/USA, which had previously been consolidated as an associated company, the requirements for a signifi cant infl uence pursuant to IAS 28.7 are no longer satisfi ed; most notably, there is no interchange of personnel on the management/supervisory bodies. With eff ect from the second quarter of 2010, therefore, the company was no longer measured at equity, but was instead recognized as an investment under the balance sheet item "Investments in affi liated companies and participating interests".
On 18 January 2010 Funis GmbH & Co. KG, a wholly owned subsidiary of Hannover Re, acquired an interest of 28.5% in Energi Holdings, Inc., based in Peabody/United States, for a purchase price equivalent to EUR 2.4 million. The business object of Energi Holdings, Inc. and its three other wholly owned subsidiaries is the mediation of risk management and insurance brokerage services for companies in the energy industry. On 9 December 2010 Funis GmbH & Co. KG acquired a participation of around 25% of the shares in XS Direct Holdings, based in Dublin/Ireland, by subscribing to newly issued shares. The interest amounts to EUR 2.5 million. The company held three further participations – in each case with all shares – as at the balance sheet date. The business object of the company consists principally of the development and sale of fi nancial services in Ireland and the United Kingdom. Both Energi Holdings, Inc. and XS Direct Holdings were not included in the consolidated fi nancial statement at equity owing to their subordinate importance.
The company WPG IV CDA Liquidation Trust, Grand Cayman/Cayman Islands, was liquidated at the end of February 2010 and was therefore no longer measured at equity in the consolidated fi nancial statement from the fi rst quarter of 2010 onwards.
In December 2010 AmpegaGerling Asset Management GmbH acquired a 25.1% stake in C-QUADRAT Investment AG, Vienna. The company will be measured at equity from the fourth quarter of 2010 onwards and recognized for the fi rst time as an associated company in the consolidated fi nancial statement.
Since 30 September 2010 one company has been included in the consolidated fi nancial statement on a proportionate basis as a joint venture in accordance with IAS 31 "Interests in Joint Ventures".
In July 2010 Proactiv Holding AG, Hilden, acquired 50% of the shares of Credit Life International Services GmbH, Neuss, from Rheinland Versicherungs AG for a purchase price of EUR 13 thousand. The acquisition took place with retroactive eff ect from 1 January 2010. Owing to the merger of Proactiv Holding AG into Talanx Deutschland AG (TD), these shares are currently held by TD. Prior to acquisition the acquired company did not conduct any form of business activity whatsoever. The business object of Credit Life International Services GmbH is the mediation of insurance products with and without underwriting, collection and loss adjustment powers as well as the provision of consulting services for companies. Since TD and Rheinland Versicherungs AG, Neuss, each hold a 50% interest in the share capital of EUR 25 thousand, Credit Life International Services GmbH is included in the consolidated fi nancial statement for the fi rst time from the third quarter of 2010 onwards as a joint venture on a proportionate basis.
There are no contingent liabilities or capital commitments whatsoever on the part of TD with respect to Credit Life International Services GmbH. Of the company consolidated on a proportionate basis, current and non-current assets and liabilities as well as income and expenses in amounts of EUR 2 million each are attributable to the Group share. Goodwill did not arise in the context of this transaction. At the time of its acquisition the joint venture was of subordinate importance from the standpoint of the Talanx Group.
On 7 July 2010 (date of acquisition) the Group acquired through its subsidiary HDI-Gerling International Holding AG 99% and through Talanx AG 1% of the shares of HDI Strakhovanie (previously Fortis Insurance Company LLC), Russia, for EUR 1 million from Fortis Insurance International N.V. and Sycamore Insurance 2 B.V. HDI Strakhovanie is an insurance company that has previously transacted property/casualty primary insurance in Russia on a limited scale. The company, which in future will complement the product portfolio of our existing Russian subsidiary with property/casualty products, commenced its business operations in December 2010. No appreciable costs were incurred in connection with the business combination.
HDI Strakhovanie was consolidated for the fi rst time in the third quarter of 2010, and will be included in the consolidated fi nancial statement as a fully consolidated subsidiary from that point in time onwards. The acquired assets in an amount of EUR 1 million relate exclusively to cash at banks. The goodwill calculated upon acquisition totaled EUR 0.1 million. We have omitted an "as if" presentation and information on the profi t contributions generated since acquisition of the company, since there are no material implications for the net assets, fi nancial position and results of operations of the Talanx Group. A loss of EUR 37 thousand was recorded in the 2010 fi nancial year.
With eff ect from 15 January 2010 all shares of Inter Hannover (No. 1) Limited, London, were acquired through the Group subsidiary International Insurance Company of Hannover Ltd., Bracknell. Since the company is not of material signifi cance from the standpoint of the Talanx Group and given that this company was formerly a so-called "shelf company", we have omitted the disclosures of information pursuant to IFRS 3 "Business Combinations".
The fi ve items of real estate classifi ed in the previous year as properties for sale (balance sheet item: investment property) with a book value of EUR 35 million in the Retail Germany segment were all sold as planned with economic eff ect in 2010.
On 21 December 2010 our subsidiary in the Non-Life Reinsurance segment Hannover Re reached agreement on the sale of its US subgroup Clarendon Insurance Group, Inc., Wilmington (CIGI), to Enstar Group Ltd., Hamilton, a Bermuda-based company specializing in the run-off of insurance business. Hannover Re holds all shares of CIGI indirectly through the intermediate holding company Hannover Finance, Inc., Wilmington (HFI), which is also included in full in the consolidated fi nancial statement. The buyer is to acquire all shares of CIGI at a purchase price equivalent to EUR 163 million before fi nal price determination, which will take place upon adoption of the local annual fi nancial statement as at 31 December 2010. As at the balance sheet date the transaction was still subject to the customary regulatory approvals. Closing of the transaction and the associated deconsolidation from Hannover Re are anticipated in the second quarter of 2011.
Pursuant to IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" CIGI was classifi ed as at the balance sheet date as a disposal group, which is to be measured at the lower of the carrying amount and fair value less costs to sell. This measurement gave rise to the recognition of impairment losses in an amount of EUR 10 million, which were carried in other income/expenses. In addition, a miscellaneous liability of EUR 4 million was recognized for selling expenditures and a sundry provision of EUR 55 million was constituted for expenses in connection with measurement of the disposal group. The corresponding expenses were recognized in other income/expenses.
The cumulative other comprehensive income of –EUR 29 million arising out of the currency translation of the assets and liabilities belonging to the disposal group will only be realized in the context of deconsolidation. Profi ts and losses from the measurement of available-for-sale fi nancial assets in an amount of EUR 3 million as at the balance sheet date will also not be realized until deconsolidation.
In compliance with IFRS 5 "Non-current Assets Held for Sale and Discontinued Operations" we recognize the assets and liabilities of the disposal group in corresponding balance sheet items that are distinct from continuing operations. Transactions between the disposal group and the Group's continuing operations continue to be entirely eliminated in conformity with IAS 27 "Consolidated and Separate Financial Statements".
The assets and liabilities of the disposal group are presented in the following table and broken down into their major components:
| Figures in EUR million | 31.12.2010 |
|---|---|
| Assets | |
| Total investments | 643 |
| Cash | 27 |
| Reinsurance recoverables on unpaid claims | 831 |
| Accounts receivable | 17 |
| Other assets | 11 |
| Assets held for sale | 1,529 |
| Liabilities | |
| Technical provisions | 1,310 |
| Funds withheld | 27 |
| Reinsurance payable | 17 |
| Other liabilities | 27 |
| Liabilities related to assets held for sale | 1,381 |
In addition, we are currently reviewing the possibility of disposing of three real estate objects in Munich, Hamburg and Cologne with book values of altogether EUR 57 million (balance sheet item: investment property) which are allocated to the Retail Germany segment. The planned disposal in 2011 is prompted above all by unfavorable rental forecasts. The sales negotiations are to commence in the fi rst quarter of 2011. Since the requirements pursuant to IFRS 5 were not fully satisfi ed at the closing date, separate disclosure as "non-current assets held for sale" as at 31 December 2010 was omitted.
The disclosures provided below complement the risk reporting in the management report and refl ect the requirements of German Accounting Standard DRS 5-20, IFRS 4 and IFRS 7. For fundamental qualitative statements, e.g. regarding the organization of our risk management or the assessment of the risk situation, please see the risk report contained in the management report.
IFRS 7 "Financial Instruments: Disclosures" sets out all the disclosures required for fi nancial instruments. Some disclosure duties are to be met by establishing classes of fi nancial instruments. The grouping made in this context must facilitate a minimum distinction between fi nancial instruments measured at fair value and those measured at amortized cost. The establishment of classes need not necessarily be identical to the categorization of fi nancial instruments pursuant to IAS 39.6 or IAS 39.45–46 for purposes of subsequent measurement. The classes established for our fi nancial instruments were guided by the needs of our portfolio and our balance sheet structure; the degree of detail of the stated classes may vary as permitted according to the required disclosure.
Essentially, the following classes of fi nancial instruments were established:
The focus of the Talanx Group's business activities is on the sale and administration of insurance products in all standard lines of property/casualty and life insurance in both primary and reinsurance business.
Risks from insurance contracts consist principally of insurance risks, default risks, liquidity risks and market risks. Insurance risks in property/casualty insurance are considered separately from those in life insurance because of the signifi cant diff erences between them.
Insurance risks in non-life business (primary insurance and reinsurance) derive primarily from the premium/loss risk and the reserving risk.
Insurance business is based upon the assumption of individual risks from policyholders (in primary insurance) or cedants (in reinsurance) and the equalization of these risks in the community of (re)insureds and over time. For the insurer, the fundamental risk lies in providing insurance benefi ts, the amount and due date of which are unknown, from premiums calculated in advance that cannot be changed. The reserving risk arises out of the potentially insuffi cient establishment of reserves in the balance sheet and the resulting strain on the technical result.
We counter the assumed premium/loss risk inter alia through appropriate reinsurance protection. The volume of reinsurance protection relative to the gross written premium can be measured according to the level of retained premium; shown below broken down by segments, this indicates the proportion of written risks retained for our risk.
| Retention by segments | 2010 | 2009 |
|---|---|---|
| % | ||
| Industrial Lines | 46.1 | 43.7 |
| Retail Germany | 91.6 | 85.6 |
| Retail International | 92.4 | 86.9 |
| Non-Life Reinsurance | 88.9 | 94.1 |
| Total Non-Life Insurance | 78.9 | 78.7 |
The level of retained premium on the Group level in non-life insurance remained roughly on a par with the previous year at 78.9%, compared to 78.7%. Changes occurred on the level of individual segments, however, which in some cases were signifi cant. Most notably, the cancellation of a quota share reinsurance treaty in the motor lines at the Turkish company HDI Sigorta – a move prompted by regulatory requirements – caused the retention to increase in the Retail International segment. The rise of retention in the Retail Germany segment can be attributed above all to the contraction in gross written premium. The reduced retention in Non-Life Reinsurance – which saw a drop from 94.1% to 88.9% – was due in large measure to the growth in gross premium volume, which increased by 10.3%.
The net loss ratio in the segments aft er Group restructuring developed as follows in a year-on-year comparison:
| Net loss ratio by segments | 2010 | 2009 |
|---|---|---|
| % | ||
| Industrial Lines | 82.0 | 68.6 |
| Retail Germany | 69.4 | 62.5 |
| Retail International | 75.6 | 71.6 |
| Non-Life Reinsurance | 72.0 | 72.8 |
| Total Non-Life Insurance | 73.6 | 70.5 |
The moderate level of the loss ratios in past years refl ects our prudent underwriting policy and successes in active claims management. On the level of the Talanx Group the loss ratio for the non-life insurers climbed by altogether 3.1 percentage points in the year under review. The sharply higher loss ratio in the Industrial Lines segment can be attributed to increased strains asso ciated in particular with major loss events. The loss ratio in the previous year had been driven by a generally favorable claims experience. The rise in the Retail Germany segment was due to motor insurance business in the year under review as well as the favorable claims experience in 2009. In the Retail International segment fl ooding and frost damage in Poland as well as well as earthquakes in Chile caused the loss ratio to surge sharply higher. In the Non-Life Reinsurance segment the loss ratio remained slightly below the level of the previous year – despite the burden of major losses (increase in catastrophe loss ratio from 4.6% in the previous year to 12.3% in the year under review) – thanks to a favorable run-off of claims incurred in prior years as well as a pleasing basic loss trend.
In order to ensure that the existing benefi t commitments can be fulfi lled at all times, corresponding provisions are established and their adequacy is continuously analyzed using actuarial methods. These also provide insights into the quality of the written risks, their spread across individual lines with diff ering risk exposures as well as the anticipated future claims payments. In addition, our portfolios are subject to active claims management. Analyses of the distribution of loss amounts and claim frequencies facilitate systematic management of the risks.
The loss reserves calculated in the reinsurance sector using actuarial methods are supplemented where necessary by additional reserves based on our own actuarial loss estimations and the IBNR (incurred but not reported) reserve for losses that have already occurred but have not yet been reported to us. Especially in casualty business, IBNR reserves – diff erentiated by risk classes and regions – are constituted in view of the long run-off of such claims.
The adequate measurement of loss reserves for asbestos-related claims and pollution damage is a highly complex matter, since in some cases several years or even decades may elapse between the causation of the loss or injury and its notifi cation. The Group's exposure to asbestos-related claims and pollution damage is, however, relatively slight. The adequacy of these reserves is normally measured using the so-called "survival ratio". This ratio expresses how many years the reserves would cover if the average level of paid claims over the past three years were to continue. At the end of the year under review our survival ratio in the reinsurance sector stood at 22.8 (24.3) years; the reserves for asbestos-related claims and pollution damage amounted to EUR 212 (198) million.
Licensed scientifi c simulation models, supplemented by the expertise of the relevant specialist departments, are used to assess the material catastrophe risks from natural hazards (earthquake, windstorm) for the Non-Life Reinsurance segment. Furthermore, we establish the risk to our portfolio from various scenarios (e.g. hurricanes in the US, windstorms in Europe, earthquakes in the US) in the form of probability distributions. The monitoring of the natural hazards exposure of the portfolio (accumulation control) is rounded out by the progressive inclusion of realistic extreme loss scenarios.
We analyze extreme scenarios and accumulations that could lead to large losses. Based on the current and most recently calculated fi gures, the potential net loss burdens for the Group are as follows:
| Accumulation scenarios 1) | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| 250-year loss US windstorm | 709 | 763 |
| 250-year loss California earthquake | 531 | 504 |
| 250-year loss European windstorm | 530 | 581 |
| 250-year loss Tokyo earthquake | 460 | 426 |
| 250-year loss Japanese windstorm | 386 | 369 |
| 250-year loss Sydney earthquake | 183 | 325 |
1) The actual natural catastrophe experiences may diverge fr om the model assumptions
Peak exposures from accumulation risks are protected against through the use of carefully and individually selected reinsurance covers. In this way we are able to eff ectively limit – and hence render plannable – large individual losses and the impact of accumulation events.
Run-off triangles are another tool used to verify our assumptions within the Group. Such triangles show the changes over time in the reserves as a consequence of paid claims and in the recalculation of the reserves that are to be established as at each balance sheet date. Adequacy is monitored using actuarial methods (see here also our explanatory remarks on the balance sheet item 20 "Loss and loss adjustment expense reserve", pages 219 et seqq.).
In property/casualty insurance the reserving risk is monitored and managed through analysis of the loss reserves using actuarial methods. In the case of the annuity reserve – as part of the loss and loss adjustment expense reserve – we also monitor the interest rate trend. A fall in interest rates would result in a charge to income owing to establishment of a reserve. The annuity reserve is calculated using the latest annuity tables as an actuarial basis.
An increase of 5 percentage points in the net loss ratio in the area of property/casualty insurance and non-life reinsurance would reduce the net profi t aft er tax by EUR 321 (298) million.
Typical risks in life insurance (life primary insurance and life/health reinsurance) are associated with the fact that policies contain long-term benefi t guarantees. Along with interest rate risks, biometric risks and lapse risks are therefore particularly relevant here. Biometric actuarial bases such as mortality, longevity and morbidity are established at the inception of a contract in order to calculate premiums and reserves and measure deferred acquisition costs. Over time, however, these assumptions may prove to be no longer accurate and may therefore necessitate additional expenditures. The adequacy of the biometric actuarial bases is therefore regularly reviewed.
In view of the aforementioned risks, the calculation bases and our expectations may prove inadequate. Our life insurers use a variety of tools to counter this possibility:
In life and health reinsurance, too, the previously described biometric risks are of special importance. The reserves in life and health reinsurance are based principally upon the information provided by ceding companies. The plausibility of the fi gures is checked using reliable biometric actuarial bases. Furthermore, local insurance regulators ensure that the reserves calculated by ceding companies satisfy all requirements with respect to actuarial methods and assumptions (e.g. use of mortality and morbidity tables, assumptions regarding the lapse rate etc.). The lapse and credit risks are also of importance with regard to the prefi nancing of cedants' new business acquisition costs. The interest guarantee risk, on the other hand, is of only minimal risk relevance in most instances due to the structure of the contracts.
The volume of reinsurance protection relative to the gross written premium can be measured according to the level of retained premium; shown below broken down by segments, this indicates the proportion of written risks retained for our risk:
| Retention by segments | 2010 | 2009 |
|---|---|---|
| % | ||
| Retail Germany | 92.9 | 90.4 |
| Retail International | 84.1 | 83.3 |
| Life/Health Reinsurance | 91.7 | 90.7 |
| Total | 91.8 | 90.1 |
We measure sensitivity to these risks using an embedded value analysis. The Market Consistent Embedded Value (MCEV) is a key risk management tool. It refers to the present value of future shareholders' earnings plus the shareholders' equity less the cost of capital for the life insurance and life/ health reinsurance portfolio aft er appropriate allowance for all risks underlying this business. The embedded value is market-consistent inasmuch as it is arrived at using a capital market valuation that meets certain requirements: free of arbitrage, risk-neutral, the modeling of the fi nancial instruments provides the current market prices.
The New Business Value (NBV) is also taken into consideration. The MCEV and NBV denote the present value of future shareholders' earnings from business in life insurance and life/health reinsurance aft er appropriate allowance for all risks underlying the business in question.
The MCEV is calculated for our major life insurers as well as the life/health reinsurance business written by Hannover Re. Sensitivity analyses highlight the areas in which the Group's life insurers and hence the Group as a whole are exposed in the life sector, and they provide pointers to the areas which should be emphasized from a risk management standpoint. Sensitivities to mortalities, lapse rates, administrative expenses as well as interest rate and equity price levels are considered in the analyses.
The degree of exposure of the Group's life insurers varies according to the type of insurance product. Thus, a lower-than-expected mortality has a positive eff ect on products primarily involving a death and/or disability risk and a negative impact on products with a longevity risk – with corresponding implications for the MCEV.
Under contracts with a right of surrender the recognized benefi t reserve is at least as high as the corresponding surrender value, and hence the economic impact of the lapse pattern tends to be more infl uenced by the level of lapse discounts and other product characteristics. A higher-thenexpected lapse rate would to some extent negatively aff ect the MCEV.
Higher-then-expected administrative expenses would result in a reduction of the MCEV.
The commitment to generate the minimum return for the contractually guaranteed benefi ts gives rise to a considerable interest guarantee risk in life primary insurance. The fi xed-income investments normally have a shorter duration than the obligations under the insurance contracts (durations mismatch). This creates a reinvestment risk for already accumulated credit balances and a new investment risk for future premiums. If the investment income generated across the remaining settlement period of the liabilities falls short of the interest due under the guarantees, this leads to a reduction in income and a decrease in the MCEV. A decline in the equity price level would also negatively impact the MCEV.
Insurance products may include the following major options on the part of the policyholder, insofar as they were agreed upon when the contract was taken out:
Under unit-linked products the policyholder can opt for transfer of the relevant units upon maturity of the contract instead of payment of their equivalent value.
Bad debts may arise on receivables due under insurance business. In order to limit this risk we take care to ensure the good credit quality of debtors, as measured on the basis of standard market rating categories. The selection of reinsurers also takes into account internal and external expert assessments, e.g. market information from brokers. Accounts receivable from policyholders and insurance intermediaries are unsecured. The default risk on these receivables is subject to constant monitoring within the scope of our risk management. At stake here are a large number of receivables in relatively modest single amounts, which are due from a diversifi ed array of debtors. Such accounts receivable are normally due from policyholders that do not have a rating. Only commercial clients in excess of certain dimensions are able to obtain external assessments of their credit status.
The insurance intermediaries are either individual brokers or broker organizations, which similarly do not normally have a rating. Default risks in reinsurance business are controlled largely with the aid of system-supported cession management: cession limits are specifi ed for individual retrocessionaires and the remaining available capacities are calculated for short-, medium- and long-term business.
With a view to countering possible delays in or defaults on premium payment in collections directly from policyholders or from intermediaries, each of the Group companies operates an eff ective collections procedure intended to minimize outstandings. Intermediaries are also subject to credit checks.
Credit risks additionally arise in primary insurance business in connection with accounts receivable from reinsurers and in reinsurance business from recoverables due from retrocessionaires on account of the fact that the gross business written is not always fully retained, but instead portions are (retro)ceded as necessary. In passive reinsurance we pay close attention to a high level of fi nancial soundness on the part of the reinsurer, especially in the case of long-tail accounts. Our reinsurance partners are carefully selected by Security Committees in light of external ratings, their credit status is constantly monitored and – where necessary – appropriate measures are taken to secure receivables.
As the equivalent of the maximum exposure to default risks on the balance sheet date, the book value of fi nancial assets deriving from the insurance business – irrespective of collateral or other agreements that serve to minimize the default risk – was as follows (excluding funds held by ceding companies):
| 31.12.2010 1) | ||||||
|---|---|---|---|---|---|---|
| Statement of book values of fi nancial assets deriving from insurance contracts |
Industrial Lines | Retail Germany | Retail International | Non-Life Reinsurance |
Life/Health Reinsurance |
|
| Figures in EUR million | ||||||
| Receivables | ||||||
| Policy loans | — | 198 | 2 | — | — | |
| Accounts receivable from policyholders |
290 | 149 | 291 | 61 | 5 | |
| Accounts receivable from insurance intermediaries |
272 | 146 | 39 | 298 | — | |
| Accounts receivable from reinsurance business |
1,047 | 57 | 23 | 1,330 | 1,003 | |
| Other assets | ||||||
| Reinsurance recoverables on technical provisions |
2,967 | 873 | 254 | 914 | 515 | |
| Total | 4,576 | 1,423 | 609 | 2,603 | 1,523 |
1) Presentation aft er elimination of intra-Group relations between segments
| 31.12.2009 1) | |||||
|---|---|---|---|---|---|
| Statement of book values of fi nancial assets deriving from insurance contracts |
Industrial Lines 2) | Retail Germany | Retail International | Non-Life Reinsurance |
Life/Health Reinsurance |
| Figures in EUR million | |||||
| Receivables | |||||
| Policy loans | — | 199 | 2 | — | — |
| Accounts receivable from policyholders |
370 | 169 | 228 | 45 | 3 |
| Accounts receivable from insurance intermediaries |
138 | 157 | 41 | 277 | — |
| Accounts receivable from reinsurance business |
430 | 47 | 16 | 1,480 | 941 |
| Other assets | |||||
| Reinsurance recoverables on technical provisions |
2,980 | 888 | 234 | 1,595 | 265 |
| Total | 3,918 | 1,460 | 521 | 3,397 | 1,209 |
1) Presentation aft er elimination of intra-Group relations between segments
Adjusted on the basis of IAS 8
The funds held by ceding companies represent the cash and securities deposits furnished by Group companies to cedants that do not trigger any cash fl ows and cannot be realized by cedants without the consent of our companies. The durations of these deposits are matched to the corresponding provisions. In the event of default on such a deposit the technical provision is reduced to the same extent. The credit risk is therefore limited; with this in mind, it was not shown in the above table.
With respect to business ceded, we reduce the default risk on accounts receivable from reinsurers by carefully selecting reinsurers through our Group's internal reinsurance broker Protection Reinsurance Intermediaries AG and reviewing their credit status on the basis of opinions from internationally respected rating agencies.
In the three primary insurance segments the claims arising out of passive reinsurance, i.e. the cession of our assumed risks – the reinsurance recoverables – were unchanged year-on-year at EUR 4.1 billion. The resulting reinsurance recoverables on unpaid claims totaled EUR 3.1 (3.0) billion.
The ratings of the counterparties for the reinsurance recoverables on unpaid claims were as follows on the Group level:
| AAA | AA | A | BBB | < BBB | No rating | |
|---|---|---|---|---|---|---|
| % | ||||||
| Reinsurance recoverables on technical | ||||||
| provisions | 2 (11) | 40 (23) | 44 (54) | — (1) | — (—) | 14 (11) |
86 (88)% of our reinsurers are rated A or better. In determining the ratings, allowance has already been made for any collateral received – such as deposits or letters of credit.
The accounts receivable from passive reinsurance business in the three primary insurance segments (aft er deduction of value adjustments) amounted to EUR 740 (389) million. As at the balance sheet date more than 60 (67)% of these accounts receivable were rated A or better.
In the two reinsurance segments the claims due from retrocessions amounted to EUR 1.4 (1.9) billion as at the balance sheet date. Altogether 92 (96)% of retrocessionaires have an investment grade rating. Of these, almost 92 (94)% are rated A or better. The large proportion of reinsurers with top ratings refl ects our policy of avoiding default risks in this area wherever possible.
The accounts receivable from insurance business that were overdue but not impaired at the balance sheet date can be broken down as follows:
| 31.12.2010 | 31.12.2009 | |||
|---|---|---|---|---|
| > 3 months < 1 year |
> 1 year | > 3 months < 1 year |
> 1 year | |
| Figures in EUR million | ||||
| Accounts receivable from policyholders | 59 | 14 | 112 | 8 |
| Accounts receivable from insurance intermediaries | 44 | 22 | 31 | 21 |
| Accounts receivable from reinsurance business | 445 | 305 | 232 | 148 |
| Total | 548 | 341 | 375 | 177 |
The overdue receivables from insurance business are composed of accounts receivable that had not been paid by the due date and were still outstanding as at the balance sheet date. The presentation dispenses with the short duration range of "1 day to 3 months" in view of the diff erent processes used throughout the Group in this regard. Responsibility for receivables management within the Group is borne locally by the individual subsidiaries. The receivables management process – refl ecting the underlying business risks – consequently varies (inter alia diff ering treatment of receivables at risk of default (derecognition or value adjustment); diff ering points in time when receivables management is activated and diff ering tools used in receivables management). Only once a receivable is overdue by more than 90 days do the aforementioned reasons become insignifi cant, hence making Group-wide observations possible.
The primary insurers had accounts receivable from policyholders and insurance intermediaries in primary insurance business that were overdue by more than 90 days as at the balance sheet date totaling EUR 73 (120) million and EUR 66 (52) million respectively. These fi gures were equivalent to levels of 9 (15)% and 9 (9)% respectively. The combined average default rate over the past three years was 2.3 (2.5)%. The accounts receivable from passive reinsurance business with arrears of more than 90 days amounted to altogether EUR 325 (229) million, corresponding to a level of 41 (46)%. The annual default rate was 1.0 (1.5)%.
Relative to the Non-Life Reinsurance and Life/Health Reinsurance segments, which are represented by the companies of the Hannover Re Group, EUR 149 (151) million – or 4.3 (5.2)% – of our accounts receivable from reinsurance business totaling EUR 3.5 (2.9) billion were older than 90 days as at the balance sheet date and in some cases impaired. The average default rate over the past three years was unchanged year-on-year at 0.2%.
Of our total reinsurance recoverables, 31.7% were secured by deposits or letters of credit – a level virtually unchanged from the previous year. In the case of most of our retrocessionaires we also function as reinsurer, meaning that a potential normally exists for off setting against our own liabilities.
Value adjustments were not taken on accounts receivable from insurance business insofar as the default risk associated with the assets is reduced by collateral (such as letters of credit, cash deposits, securities deposits).
| 31.12.2010 | 31.12.2009 | |||||
|---|---|---|---|---|---|---|
| Analysis of individually adjusted fi nancial assets deriving from insurance contracts |
Risk provision | Thereof 2010 | Book value after risk provision |
Risk provision | Thereof 2009 | Book value after risk provision |
| Figures in EUR million | ||||||
| Accounts receivable from policyholders | 25 | –8 | 796 | 33 | –1 | 815 |
| Accounts receivable from insurance intermediaries |
21 | –36 | 755 | 57 | –20 | 613 |
| Accounts receivable from reinsurance business |
57 | –52 | 3,460 | 110 | –21 | 2,914 |
| Total | 103 | –96 | 5,011 | 200 | –42 | 4,342 |
In the year under review risk provision of EUR 52 million for accounts receivable from reinsurance business was released. This risk provision is no longer needed because in the previous year we signifi cantly reduced the remaining credit risks through the securitization of default risks resulting from reinsurance recoverables.
The value adjustments on accounts receivable from insurance business that we recognize in separate adjustment accounts developed as follows in the year under review:
| Development of value adjustments on accounts receivable from insurance business |
2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Cumulative value adjustments at 31.12. of the previous year | 200 | 242 |
| Change in consolidated group | — | — |
| Value adjustments in the fi nancial year | 7 | 25 |
| Write-ups | 91 | 63 |
| Allocation (+)/Release (–) | — | –3 |
| Exchange rate fl uctuations | 3 | –1 |
| Other changes | –16 | — |
| Cumulative value adjustments at 31.12. of the year under review | 103 | 200 |
The default risks on fi nancial assets deriving from insurance contracts were determined on the basis of individual analyses. Any existing collateral was taken into account. The proportion of impaired receivables stood at 2 (5)%.
Specifi cally, the annual impairment rates were as follows:
| Impairment rates | 31.12.2010 | 31.12.2009 | 31.12.2008 | 31.12.2007 |
|---|---|---|---|---|
| % | ||||
| Accounts receivable from policyholders | 3.1 | 3.9 | 4.0 | 4.0 |
| Accounts receivable from insurance intermediaries | 2.6 | 8.5 | 11.2 | 8.6 |
| Accounts receivable from reinsurance business | 1.6 | 3.6 | 4.2 | 7.3 |
| Default rates | 31.12.2010 | 31.12.2009 | 31.12.2008 | 31.12.2007 |
|---|---|---|---|---|
| % | ||||
| Accounts receivable from policyholders | 1.6 | 1.8 | 4.2 | 2.1 |
| Accounts receivable from insurance intermediaries | 1.1 | 2.2 | 2.7 | 1.8 |
| Accounts receivable from reinsurance business | 0.2 | 0.2 | 0.1 | 0.3 |
| 2010 | Interest income |
Interest expense |
Value adjustment |
Write-ups | Total |
|---|---|---|---|---|---|
| Figures in EUR million | |||||
| Funds held by ceding companies | 425 | — | — | 2 | 427 |
| Funds held under reinsurance treaties | — | 145 | — | — | –145 |
| Reinsurance recoverables on technical provisions |
— | — | –2 | 23 | 25 |
| Total | 425 | 145 | –2 | 25 | 307 |
| 2009 | Interest income |
Interest expense |
Value adjustment |
Write-ups | Total |
|---|---|---|---|---|---|
| Figures in EUR million | |||||
| Funds held by ceding companies | 447 | — | 1 | 3 | 449 |
| Funds held under reinsurance treaties | — | 207 | — | — | –207 |
| Reinsurance recoverables on technical provisions |
— | — | 10 | 33 | 23 |
| Total | 447 | 207 | 11 | 36 | 265 |
The risks from investments principally encompass the market risk (includes the foreign currency risk, the risk associated with changes in fair value due to interest rate movements, the cash fl ow risk due to interest rate movements and the market price risk), the default risk and the liquidity risk.
The structure of the investments under own management (excluding funds held by ceding companies) is regularly examined in order to review the strategic asset allocation. The breakdown for the Group as at 31 December 2010 was as follows:
| Weighting of major asset classes | Parameter as per investment guidelines |
Position as at 31.12.2010 |
Position as at 31.12.2009 |
|---|---|---|---|
| % | |||
| Bonds (direct holdings and investment funds) | At least 50 | 86 | 84 |
| Listed equities (direct holdings and | |||
| investment funds) | At most 25 | 2 | 3 |
| Real estate (direct holdings and investment funds) | At most 5 | 2 | 2 |
In this regard it is evident that the bonds, equities and real estate are within the defi ned Group limits. In accordance with the company's risk-carrying capacity and regulatory requirements, the investment goals of security, profi tability, liquidity as well as mix and spread are given adequately balanced consideration under our holistic asset/liability management systems. The main opposing risks are market risks, default risks and liquidity risks.
The market risk consists primarily of the risk of changes in the market prices of fi xed-income assets and equities as well as the exchange rate risk associated with fl uctuations in exchange rates if there is no matching cover. This may necessitate value adjustments or lead to the realization of losses in the event of disposal of fi nancial assets. A decline in the interest rate level can also lead to reduced investment income.
A vital tool used to monitor and manage market price risks is constant analysis of the value at risk (VaR), which is increasingly evolving from an assets-side measurement approach into an assets/ liabilities concept. The VaR defi nes the estimated maximum loss that will not be exceeded within a set holding period (e.g. 10 days) and with a set probability (e.g. 95%).
The VaR is established daily on the basis of historical data. Within the scope of these calculations the loss potentials of both the total portfolio and partial portfolios are monitored and limited. The calculation of this maximum loss potential is performed on the basis of a confi dence level of 95% and a holding period of ten days. This means that this estimated loss potential will be exceeded within 10 days with a probability of 5%.
The daily updated holdings are fed into the calculation as input data. The scope of the market data history used for risk analysis is 181 weeks. On this basis, 180 weekly changes are calculated for each relevant market parameter, such as equity prices, exchange rates and interest rates, and these are then used to establish the value at risk. Market observations of the recent past are weighted more heavily through the use of a decay factor in order to refi ne the sensitivity of the VaR model to current volatility changes and hence improve the forecast quality. The time series on the basis of which the risk parameters are calculated are updated weekly. In this context, the market parameters of the oldest week are removed and replaced by those of the current week. The risk model is recalibrated on the basis of the updated market data.
The risk model used is based on a multi-factor model. This multi-factor model is grounded on numerous representative time series, e.g. interest rates, exchange rates and stock indices. All riskrelevant factors can be determined from these time series using main component analysis. The correlations existing between the time series are incorporated into the weighting of the risk factors. In this way allowance is made in the risk assessment for cumulative and diversifi cation eff ects. The individual elements of the portfolio are analyzed through regression towards these factors. The factor weightings thereby determined create a correlation between the movements in the factors derived from the movements in the representative time series and the movements in the securities. The risks associated with securities are arrived at through simulation of the factor developments. The risk associated with options is arrived at through a comprehensive simulation. Consideration is thus given to the non-linear correlations between option prices and the price movements of the underlying instruments.
Normal market scenarios are used to calculate the value at risk. In addition, stress tests are conducted in order to be able to map extreme scenarios. In this context, the loss potentials are simulated on the basis of already occurred or notional extreme events. Actual market developments may diverge from the model assumptions.
The VaR (confi dence level of 95%, holding period of 10 days) as at 31 December 2010 amounted to EUR 1.1 billion, a fi gure equivalent to 1.6% of the assets under consideration.
The range of management tools is complemented by stress tests and scenario analyses. In the case of interest-rate-sensitive products and equities, we calculate a possible change in fair value using a historic "worst case" scenario on a daily basis, estimating the potential loss under extreme market conditions. With the aid of scenarios we simulate changes in equity prices, exchange rates and yields on the basis of historical data. Interest rate risks refer to an unfavorable change in the value of fi nancial assets held in the portfolio due to changes in the market interest rate level. Declining market yields lead to increases and rising market yields to decreases in the fair value of fi xedincome securities portfolios. Share price risks derive from unfavorable changes in the value of equities and equity or index derivatives due, for example, to downward movements on particular stock indices. We spread these risks through systematic diversifi cation across various sectors and regions. Currency risks are of considerable importance to an internationally operating insurance enterprise that writes a signifi cant proportion of its business in foreign currencies.
The following table shows scenarios for the development of investments held by the Group as at the balance sheet date. The amounts shown are gross amounts; in particular, the eff ects illustrated disregard taxes and the provision for premium refunds. Eff ects arising on the basis of the surplus participation of policyholders in life primary insurance thus do not form part of the analysis. Making allowance for these eff ects, the repercussions indicated for the results and shareholders' equity would be considerably reduced.
| Portfolio | Scenario | Recognized in the state ment of income 1) |
Recognized directly in equity 1) |
31.12.2010 Portfolio change based on fair value 2) |
31.12.2009 Portfolio change based on fair value 2) |
|
|---|---|---|---|---|---|---|
| Figures in EUR million |
||||||
| Equity securities 3) | Share prices | +20% | +17 | +345 | +361 | +347 |
| Share prices | +10% | +8 | +173 | +181 | +170 | |
| Share prices | –10% | –8 | –184 | –191 | –166 | |
| Share prices | –20% | –14 | –367 | –382 | –320 | |
| Fixed-income securities |
Yield increase | +200 basis points | –37 | –2,149 | –6,297 | –5,613 |
| Yield increase | +100 basis points | –19 | –1,122 | –3,346 | –2,977 | |
| Yield decrease | –100 basis points | +19 | +1,203 | +3,456 | +2,966 | |
| Yield decrease | –200 basis points | +38 | +2,501 | +7,245 | +6,202 | |
| Exchange-rate sensitive invest ments |
Change in exchange rates 4) |
+10% | –1,614 | –136 | –1,750 | –1,493 |
| thereof USD | –894 | –95 | –989 | –911 | ||
| thereof GBP | –188 | –6 | –194 | –164 | ||
| thereof AUD | –150 | — | –150 | –108 | ||
| thereof other | –381 | –36 | –418 | –310 | ||
| Change in exchange rates 4) |
–10% | +1,614 | +136 | +1,750 | +1,493 | |
| thereof USD | +894 | +95 | +989 | +911 | ||
| thereof GBP | +188 | +6 | +194 | +164 | ||
| thereof AUD | +150 | — | +150 | +108 | ||
| thereof other | +381 | +36 | +418 | +310 |
Scenarios for changes in the fair value of assets held by the Group as at the balance sheet date:
1) Amounts shown are gross (before taxes and surplus participation)
2) Including fi nancial assets belonging to the categories "loans and receivables" and "held to maturity" 3) Including derivative holdings
4) Exchange-rate fl uctuations of +/–10% against the euro based on balance sheet values
The breakdown of our investments by currency was as follows:
| Currency | 31.12.2010 | 31.12.2009 |
|---|---|---|
| % | ||
| EUR | 76 | 78 |
| USD | 13 | 13 |
| GBP | 3 | 2 |
| AUD | 2 | 2 |
| Other | 6 | 5 |
| Total | 100 | 100 |
We use short-call and long-put options as well as swaps to partially hedge portfolios, especially against price, exchange and interest rate risks. In the year under review we also used derivative fi nancial instruments to optimize our portfolio in light of risk/return considerations. The contracts are concluded solely with fi rst-class counterparties and compliance with the standards defi ned in the investment guidelines is strictly controlled in order to avoid risks – especially credit risks – associated with the use of such transactions. By systematically adhering to the principle of matching currency coverage, we are also able to signifi cantly reduce the foreign currency risk within the Group.
The risks of counterparty default requiring monitoring consist of counterparty credit risks and issuer's risks. Along with the lists of counterparties and issuers specifi ed by the Board of Management, monitoring of the limits defi ned per rating category constitutes a vital precondition for investment decisions. We pay close attention to the good credit status of counterparties and debtors in order to avoid default risks. Key indicators here are the ratings assigned by external agencies such as S&P or Moody's. New investments are restricted to investment grade securities in order to limit the credit risk.
The maximum default risk exposure on the balance sheet date, exclusive of collateral or other agreements that serve to minimize the default risk, was as follows:
| 31.12.2010 | Measured at amortized cost |
Measured at fair value |
Total |
|---|---|---|---|
| Figures in EUR million | |||
| Investments in affi liated companies and participat ing interests |
74 | — | 74 |
| Loans and receivables | 32,343 | — | 32,343 |
| Financial assets held to maturity | 2,999 | — | 2,999 |
| Financial assets available for sale | — | 30,635 | 30,635 |
| Financial assets at fair value through profi t or loss | |||
| Financial assets classifi ed at fair value through profi t or loss |
— | 989 | 989 |
| Financial assets held for trading | — | 232 | 232 |
| Other invested assets | 114 | 4,071 | 4,185 |
| 31.12.2009 | Measured at amortized cost |
Measured at fair value |
Total |
|---|---|---|---|
| Figures in EUR million | |||
| Investments in affi liated companies and participat | |||
| ing interests | 61 | — | 61 |
| Loans and receivables | 31,548 | — | 31,548 |
| Financial assets held to maturity | 2,858 | — | 2,858 |
| Financial assets available for sale | — | 26,477 | 26,477 |
| Financial assets at fair value through profi t or loss | |||
| Financial assets classifi ed at fair value through profi t or loss |
— | 861 | 861 |
| Financial assets held for trading | — | 238 | 238 |
| Other invested assets | 119 | 4,014 | 4,133 |
Investments are serviced regularly by the debtors. Collateral exists above all with respect to covered bonds and asset-backed securities as well as mortgage loans secured by a charge over property.
With the exception of the mortgage loans, the portfolio did not contain any overdue, unadjusted assets as at the balance sheet date since overdue securities are written down immediately. The mortgage loans show arrears totaling EUR 24 (22) million; this fi gure includes receivables overdue by more than 12 months of EUR 5 million. Since these receivables are adequately secured by charges over property, no value adjustment was taken. Under the contractual provisions, realization is possible only in the event of a failure to properly perform. The reader is referred to item 29 of the Notes, page 234, with regard to the impairments taken on investments in the year under review.
The fi xed-income investments and loans (excluding other invested assets) are divided into the following debtor groups and corresponding ratings:
| 31.12.2010 | Measured at amortized cost |
Measured at fair value |
Total |
|---|---|---|---|
| Figures in EUR million | |||
| EU member states | 1,329 | 4,670 | 5,999 |
| Foreign governments | 398 | 3,173 | 3,571 |
| Semi-governmental entities1) | 9,563 | 5,369 | 14,932 |
| Corporations | 7,771 | 10,126 | 17,897 |
| Covered bonds/asset-backed securities | 14,499 | 5,054 | 19,553 |
| Mortgage loans | 1,239 | — | 1,239 |
| Investment fund units | — | 666 | 666 |
| Other | 543 | 314 | 857 |
1) In the year under review this includes securities in amounts of EUR 2,305 million (measured at amortized cost) and EUR 3,039 million (measured at fair value) which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.
| 31.12.2009 | Measured at amortized cost |
Measured at fair value |
Total |
|---|---|---|---|
| Figures in EUR million | |||
| EU member states | 1,193 | 3,866 | 5,059 |
| Foreign governments | 368 | 2,763 | 3,131 |
| Semi-governmental entities1) | 9,338 | 5,423 | 14,761 |
| Corporations | 8,351 | 7,862 | 16,213 |
| Covered bonds/asset-backed securities | 13,156 | 4,129 | 17,285 |
| Mortgage loans | 1,383 | — | 1,383 |
| Investment fund units | — | 745 | 745 |
| Other | 619 | 336 | 955 |
1) In the year under review this includes securities in amounts of EUR 2,674 million (measured at amortized cost) and EUR 3,850 million (measured at fair value) which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.
More than 96 (95)% of the covered bonds/asset-backed securities were German covered bonds (Pfandbriefe) as at the balance sheet date.
The rating structure of the fi xed-income investments (excluding other invested assets, policy loans and mortgage loans) were as follows:
| Rating | Government bonds |
Securities issued by semi-govern mental entities1) |
Covered bonds/ Corporate asset-backed bonds securities |
Other | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| EUR | EUR | EUR | EUR | EUR | ||||||||||||||||
| % | million | % | million | % | million | % | million | % | million | |||||||||||
| AAA | 74 | 7,077 | 36 | 5,308 | 2 | 321 | 79 | 15,526 | 23 | 310 | ||||||||||
| AA | 5 | 519 | 58 | 8,721 | 25 | 4,556 | 17 | 3,273 | 2 | 27 | ||||||||||
| A | 11 | 1,097 | 5 | 806 | 54 | 9,611 | 1 | 260 | 15 | 192 | ||||||||||
| BBB | 7 | 646 | 1 | 90 | 17 | 2,971 | 1 | 136 | 29 | 383 | ||||||||||
| <bbb< td=""> | 2 | 165 | — | — | 1 | 182 | 2 | 311 | 20 | 260 | </bbb<>2 | 165 | — | — | 1 | 182 | 2 | 311 | 20 | 260 |
| None | 1 | 66 | — | 7 | 1 | 256 | — | 47 | 11 | 151 | ||||||||||
| Total | 100 | 9,570 | 100 | 14,932 | 100 | 17,897 | 100 | 19,553 | 100 | 1,323 |
1) The securities issued by semi-governmental entities include securities in an amount of EUR 5,344 (6,524) million which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.
At the end of the reporting period 98 (98)% of our investments in fi xed-income securities were issued by obligors with an investment grade rating (AAA to BBB), while 91 (92)% were rated A or better. Borrower's note loans and registered debentures are assigned an internal rating upon acquisition that is derived where possible from the issuer's rating.
Loans secured by a charge over property with a total volume of EUR 1,239 (1,383) million were granted to private individuals who do not have a rating. Policy loans, other assets-side fi nancial instruments and equity papers are also unrated.
The other fi nancial instruments on the assets side encompass primarily receivables not connected with investments or the insurance business. They have predominantly short-term maturities. Since the portfolio of accounts receivable is comprised of a relatively large number of debtors, we consider the default risk on these fi nancial instruments to be slight.
A broad mix and spread of individual asset classes is observed in order to minimize the portfolio risk. The concentration risk is limited by the investment guidelines and constantly monitored; overall, it is comparatively slight, even though bank mergers – in particular – result in appreciable increases in concentrations. What is more, the extent to which investments may be made in more heavily risk-exposed assets is restricted.
Overall, the measurement and monitoring mechanisms described here result in a prudent, broadly diversifi ed investment strategy. This is refl ected in the fact that within its portfolio of assets under own management the Group's exposure to government bonds and securities issued by semigovernmental entities of the so-called PIIGS states amounts to altogether EUR 1.5 billion on a fair value basis; this corresponds to a proportion of 2%. The amortized costs and fair values of the bonds issued by the aff ected states as at the balance sheet date were as follows:
| thereof issuer country = investor country |
||||||
|---|---|---|---|---|---|---|
| Issuer | Amortized cost | Fair value | Amortized cost | Fair value | ||
| Figures in EUR million | ||||||
| Portugal | 77 | 70 | — | — | ||
| Ireland | 299 | 233 | 3 | 3 | ||
| Italy | 466 | 455 | 329 | 322 | ||
| Greece | 155 | 111 | — | — | ||
| Spain | 674 | 611 | 2 | 2 | ||
| Total | 1,671 | 1,480 | 334 | 327 |
No impairments had to be taken on these holdings. There is currently no risk of default here on account of bailout mechanisms existing on the European level (Eurozone safety net).
The liquidity risk refers to the risk of being unable to convert investments and other assets into cash in a timely manner in order to meet our fi nancial obligations when they become due. Due to illiquidity of the markets, it may not be possible to sell holdings (or to do so only aft er delays) or to close open positions (or to do so only with price markdowns). We counter the liquidity risk through regular liquidity planning and by matching the durations of investments with fi nancial obligations. A liquid asset structure ensures that at all times the Group is in a position to make the necessary payments. With regard to payment obligations in connection with underwriting business, we are guided inter alia by the expected maturities that refl ect the run-off patterns of the reserves.
In order to monitor liquidity risks each category of security is assigned a liquidity code that indicates how quickly a security can be sold. These codes are regularly reviewed by Portfolio Management. The plausibility of changes is checked in Risk Controlling and the codes are modifi ed as appropriate. The data is then included in the standardized portfolio reporting to the Chief Financial Offi cers. Defi ned minimum and maximum limits for liquidity are observed. Oversteps of risk limits are brought to the attention of the Chief Financial Offi cers and Portfolio Management without delay.
For a presentation of the investments and the gross provisions as well as the reinsurers' shares thereof (broken down by their expected or contractual maturities), please see the notes on the corresponding balance sheet items.
The following table shows the cash fl ows of the major net technical provisions (benefi t reserve, loss and loss adjustment expense reserve) and the fi nancial liabilities which are relevant to the management of liquidity risks. The technical provisions are broken down into the expected maturities, the liabilities into the contractual maturities:
| 2010 | Carrying amount |
3 months to 1 year |
1 through 5 years |
5 through 10 years |
10 through 20 years |
More than 20 years |
No maturity |
|---|---|---|---|---|---|---|---|
| Figures in EUR million | |||||||
| Technical provisions 1) | 77,778 | 12,277 | 19,434 | 13,099 | 12,289 | 7,161 | 6,744 |
| Financial liabilities | |||||||
| Subordinated liabilities | 2,791 | 138 | 508 | — | 746 | 500 | 899 |
| Notes payable and loans | 747 | — | 747 | — | — | — | — |
| Other liabilities 2) | 4,858 | 495 | 211 | 13 | 3 | 12 | 2 |
| thereof: liabilities from derivatives, excluding hedging instruments 3) |
85 | 9 | 59 | 12 | 2 | 1 | 2 |
| thereof: negative fair values from hedging instruments 3) |
149 | — | 149 | — | — | — | — |
| Total | 86,174 | 12,910 | 22,900 | 13,112 | 13,038 | 7,673 | 7,645 |
| 2009 4) | Carrying amount |
3 months to 1 year |
1 through 5 years |
5 through 10 years |
10 through 20 years |
More than 20 years |
No maturity |
|---|---|---|---|---|---|---|---|
| Figures in EUR million | |||||||
| Technical provisions 1) | 73,531 | 11,134 | 18,599 | 12,210 | 11,893 | 6,932 | 6,242 |
| Financial liabilities | |||||||
| Subordinated liabilities | 2,003 | — | — | 524 | 746 | 138 | 595 |
| Notes payable and loans | 675 | 2 | 673 | — | — | — | — |
| Other liabilities 2) | 4,561 | 54 | 386 | 6 | 2 | 2 | 304 |
| thereof: liabilities from derivatives, excluding hedging instruments 3) |
30 | 3 | 16 | 6 | — | — | 5 |
| thereof: negative fair values from hedging instruments 3) |
42 | 8 | 34 | — | — | — | — |
| Total | 80,770 | 11,190 | 19,658 | 12,740 | 12,641 | 7,072 | 7,141 |
1) Under the technical provisions only the benefi t reserves and loss reserves are split according to maturities. The provision for premium refunds encompasses the claims of policyholders under commercial law, to the extent that they have not already been fi nally allocated and paid to individual policyholders. Essentially, therefore, unambiguous allocation to the individual insurance contracts and maturities is not possible. The unearned premium reserve consists of the portion of gross written premium allocable to subsequent fi nancial year(s) as income for a particular period aft er the balance sheet date. The unearned premium reserve does not involve future liquidity-aff ecting cash fl ows
2) Under the other liabilities the liabilities to policyholders and intermediaries as well as the reinsurance payable are not broken down by maturities, since these liabilities are directly connected with insurance contracts and hence cannot be considered in isolation fr om them
3) The undiscounted cash fl ows with respect to such derivatives are not presented for reasons of materiality. Instead, the fair values of the derivative fi nancial instruments are stated
4) Adjusted on the basis of IAS 8
The funds held under reinsurance treaties represent collateral withheld for technical provisions ceded to reinsurers and retrocessionaires and to this extent do not trigger any cash fl ows. The changes in funds held under reinsurance treaties are normally determined by changes in the corresponding ceded technical provisions. Such funds held under reinsurance treaties therefore have no contractually fi xed maturity; they are liquidated in step with the run-off of the corresponding provisions.
In addition to the assets made available to cover provisions and liabilities, the Group has at its disposal the following lines of credit that can be drawn upon as required:
The Talanx Group has concluded a fi rm agreement with a broad consortium of banks regarding an available fl oating-rate line of credit that may be drawn upon as necessary. As at the balance sheet date we had used a tranche amounting to altogether EUR 550 million. The nominal amount of the line of credit was EUR 1.5 billion as at the balance sheet date.
In addition, facilities exist with various fi nancial institutions for letters of credit, including two unsecured syndicated guarantee facilities from 2005 and 2006. Following the contractual maturity of the fi rst half of the line from 2005 in January 2010, it amounted to an equivalent of EUR 0.8 (1.4) billion as at the balance sheet date. The second half of this line matures in January 2012. The line from 2006, the amount of which as at the balance sheet date was equivalent to EUR 1.5 (1.4) billion, matures in January 2013.
Letter of credit facilities with various terms and a total volume equivalent to EUR 1.3 (1.1) billion also exist on a bilateral basis with fi nancial institutions. For further information on the furnished letters of credit please see our remarks in the section of the Notes entitled "Other information", subsection "Contingent liabilities and other fi nancial commitments", pages 251 et seq.
A long-term unsecured line of credit with a total volume equivalent to at most EUR 566 (523) million was concluded in December 2009. It is intended specifi cally for US life reinsurance business.
A number of LOC facilities include standard market clauses that allow the banks rights of cancellation in the event of material changes in the shareholding structure of our Group company Hannover Re or trigger a requirement to furnish collateral upon materialization of major events, for example if its rating is signifi cantly downgraded.
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Gross book value at 31.12. of the previous year | 741 | 677 |
| Currency translation at 01.01. of the year under review | 13 | 20 |
| Gross book value after currency translation at 01.01. | ||
| of the year under review | 754 | 697 |
| Change in consolidated group | — | 15 |
| Additions | — | 28 |
| Currency exchange rate diff erences | — | 1 |
| Gross book value at 31.12. of the year under review | 754 | 741 |
| Accumulated depreciation and accumulated impairment losses | ||
| at 31.12. of the previous year | 148 | 56 |
| Currency translation at 01.01. of the year under review | — | — |
| Accumulated depreciation and accumulated impairment losses after | ||
| currency translation at 01.01. of the year under review | 148 | 56 |
| Impairments | 17 | 92 |
| Accumulated deprecation and accumulated impairment losses | ||
| at 31.12. of the year under review | 165 | 148 |
| Balance at 31.12. of the previous year | 593 | 621 |
| Balance at 31.12. of the year under review | 589 | 593 |
The recognized goodwill derived mainly from the acquisition of HDI Seguros de Automóveis e Bens S. A., Brazil, in 2005, the purchase of the former Gerling Group by Talanx AG in 2006, the increase of the interest held by the Group in PB Versicherungen to 100% in 2007 and the purchase of 100% stakes in PBV Lebensversicherung AG (previously: BHW Lebensversicherung AG) and PB Pensionskasse AG (previously: BHW Pensionskasse AG) (both also 2007).
The decrease in goodwill to EUR 589 million was attributable to impairments of EUR 17 million taken in the year under review in the Retail International segment in connection with impairment tests (see our explanatory remarks in the following subsection).
Goodwill is allocated to cash-generating units (CGUs) pursuant to IFRS 3 in conjunction with IAS 36. It is allocated to those CGUs which are expected to generate a value in use (in the form of cash fl ows) as a result of the business combination that gave rise to the goodwill. Each CGU to which goodwill is allocated should represent the lowest entity level on which goodwill is monitored for internal management purposes.
In 2010 we adjusted the grouping of assets for the purposes of identifying cash-generating units in line with the structural changes in the Group's primary insurance sector, which also aff ected the previous confi guration of the CGUs. Until the end of 2009 the individual CGUs were defi ned according to the responsibilities on the holding company's Board of Management and the internal reporting at that time and hence essentially according to the former defi nition of the business segments within the meaning of IAS 8. The impairment test in the previous year was therefore performed for the last time on the basis of the CGUs Property/Casualty Primary Insurance, the group of companies combined under the former HDI-Gerling Leben Serviceholding AG, the bancassurance group and the two CGUs Non-Life Reinsurance and Life/Health Reinsurance.
With eff ect from 2010 onwards the Group is managing and reporting both internally and externally according to the new Group structure. Since then, the Group has reorganized its insurance activities in primary insurance in conformity with a change in the responsibilities of the members of the Board of Management (compare here our remarks in the section "Accounting policies", subsection "Change in segment reporting", page 121 and the section "Segment reporting" on page 144). The two existing primary insurance segments of Property/Casualty Primary Insurance and Life Primary Insurance were transformed across lines into the three reportable segments of Industrial Lines, Retail Germany and Retail International. For the purpose of identifying CGUs in primary insurance, this reorganization means that the segments of Industrial Lines and Retail Germany, which also satisfy the defi nition of an operating segment pursuant to IAS 8, each constitute a CGU. In the Retail International segment each foreign market constitutes a separate CGU. In this segment crosscompany synergistic potentials (in relation to cash fl ows) can only be realized in those countries in which we are represented by several companies. In terms of their products and sales structures, the individual foreign units otherwise operate largely self-suffi ciently. The CGUs of the Group are therefore as follows:
The CGUs of the Retail International segment are as follows:
| Industrial Lines | Retail Germany | Retail International |
Non-Life Reinsurance |
Corporate Operations |
Total | |
|---|---|---|---|---|---|---|
| Figures in EUR million | ||||||
| Balance at 31.12.2008 | 89 | 415 | 106 | 8 | 3 | 621 |
| Currency translation at 01.01.2009 | — | — | 20 | — | — | 20 |
| Balance after currency translation at | ||||||
| 01.01.2009 | 89 | 415 | 126 | 8 | 3 | 641 |
| Change in consolidated group | — | — | 15 | — | — | 15 |
| Additions | — | 28 | — | — | — | 28 |
| Impairments | 29 | 46 | 14 | — | 3 | 92 |
| Currency exchange rate diff erences | — | — | 1 | — | — | 1 |
| Balance at 31.12.2009 | 60 | 397 | 128 | 8 | — | 593 |
| Currency translation at 01.01.2010 | — | — | 13 | — | — | 13 |
| Balance after currency translation at | ||||||
| 01.01.2010 | 60 | 397 | 141 | 8 | — | 606 |
| Impairments | — | — | 17 | — | — | 17 |
| Balance at 31.12.2010 | 60 | 397 | 124 | 8 | — | 589 |
On account of the internal Group restructuring activities, the goodwill can be broken down as follows according to the revised allocation set out in the segment reporting:
In order to establish whether an impairment expense needs to be recognized, the carrying value of the CGU including its allocated goodwill is compared with its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and the value in use. For all CGUs with the exception of the two reinsurance segments, the recoverable amount is established on the basis of the value in use – which is calculated by the Group using a recognized measurement method, namely the discounted cash fl ow method. Insofar as CGUs are composed of more than one Group company, a sum-of-the-parts approach is used.
When it comes to measuring the value of the property/casualty insurers in the CGUs of Industrial Lines, Retail Germany and Retail International, the point of departure for establishing the present value of future cash fl ows consists of planned income statements. The planning calculations are drawn up on a stand-alone basis assuming that the entity will continue with a generally unchanged concept; they record the post-tax net income of the fi ve subsequent years as well as an extrapolation of the sixth year as a perpetuity factor. Entity-specifi c approximations are made in the detailed planning (at the time of the planning). In particular, the possibilities for growth in the market environment as well as profi tability according to the claims and cost trend are estimated in the context of planned measures on the company level. Investment income is projected in relation to the specifi c asset portfolio. The planning calculations on which measurement is based are approved by the management of the companies concerned. The discount factor (capitalization rate) for the Group companies consists of a risk-free basic interest rate, country-specifi c yield curves, a market risk premium and an individual company beta factor (calculated on the basis of the Capital Asset Pricing Model). What is more, in order to extrapolate the cash fl ows beyond the period of the detailed planning we also use – on the basis of conservative assumptions – constant growth rates. The fi gures are arrived at from past experience and future expectations and do not exceed the long-term average growth rates for the various markets in which the entities operate. Present values determined in local currency are translated at the exchange rate on the balance sheet date.
The current capitalization rate and the long-term growth rate are listed below for the property/ casualty insurers of the CGUs:
| Capitalization rate | Long-term growth rate |
|
|---|---|---|
| CGU | in % | in % |
| Industrial Lines | ||
| German-speaking countries | 8.0–8.5 | 0.2–0.5 |
| Other countries (EU only) | 8.5–9.0 | 0.25–0.5 |
| Retail Germany | 8.0 | 0.5–1.0 |
| Retail International | ||
| Brazil | 13.0 | 1.0 |
| Poland | 10.3 | 1.3 |
| Mexico | 12.6 | 0.6 |
| Chile | 11.25 | 0.25 |
Calculations of the Market Consistent Embedded Value (MCEV) form the basis for valuation of the life insurers. The value of the entity in terms of an appraisal value (MCEV allowing for the expected new business) is regularly determined with the aid of an average market multiple (1.02) weighted for up-to-dateness, which measures the ratio of appraisal value to embedded value and is based on market data. The plausibility of the multiple is regularly checked using the New Business Value (NBV).
A variant of the method normally applicable to life insurers exists for companies with long-term exclusive cooperation agreements and the associated stability in their new business. These companies are valued using a simplifi ed appraisal value method, in which the present value of the perpetuity factor for the New Business Value is added to the current MCEV forecast. Sales agreements that end at short notice may necessitate separate evaluation. The capitalization rates in the Retail Germany segment are 8.0%.
Small insurers and non-insurance companies are recognized either at the present value of future cash fl ows or with their shareholders' equity.
For the CGUs of Non-Life Reinsurance and Life/Health Reinsurance, which together correspond to the Hannover Re Group, reference is made to the market price of the Hannover Re share as the fi rst step for the purposes of the impairment test. The stock market value of Hannover Re is divided between the two segments – which are synonymous with the two CGUs – on the basis of the average net return on premium over the past three years. The recoverable amount determined in this way is compared with the carrying value including the goodwill allocated to the CGU in question. Alternatively, should the stock market price of the Hannover Re share be signifi cantly adversely aff ected on a balance sheet date by factors that do not refl ect the sustainable profi t potential of the Hannover Re Group, a method based on the present value of future cash fl ows may be used instead.
On the basis of the impairment test carried out as at 30 September 2010, the goodwill of the CGU Mexico (EUR 17 million) was entirely written off . The positive expectations as to the future development of the company's business were revised downwards. The Mexican economy continues to struggle with the repercussions of the fi nancial crisis – the domestic part of the economy even more so than that which is driven by exports. Furthermore, the anticipated results in the coming years will be increasingly strained by the investments made to put in place the foundation for generating successful growth in the Mexican market going forward. The primary focus here is on the opening of new offi ces, the modernization of IT and the appointment of new staff as well as skills enhancement of the existing workforce.
No further impairment expenses needed to be recognized.
| Insurance-related | Software | |||||
|---|---|---|---|---|---|---|
| intangible assets | Purchased | Created | Other | 2010 | 2009 1) | |
| Figures in EUR million | ||||||
| Gross book value at 31.12. | ||||||
| of the previous year | 2,785 | 357 | 110 | 42 | 3,294 | 3,162 |
| Adjustment of values carried forward from prior years 2) |
— | –89 | 5 | –3 | –87 | — |
| Gross book value at 01.01. | ||||||
| of the year under review | 2,785 | 268 | 115 | 39 | 3,207 | 3,162 |
| Change in consolidated group | — | — | — | — | — | 4 |
| Additions | — | 29 | 8 | 33 | 70 | 193 |
| Disposals | — | 5 | 1 | 18 | 24 | 66 |
| Reclassifi cation | — | 11 | — | — | 11 | — |
| Other changes | 6 | — | — | — | 6 | 1 |
| Currency exchange rate diff erences | 1 | 2 | — | 2 | 5 | — |
| Gross book value at 31.12. | ||||||
| of the year under review | 2,792 | 305 | 122 | 56 | 3,275 | 3,294 |
| Accumulated depreciation and accumulated impairment losses |
||||||
| at 31.12. of the previous year | 806 | 262 | 57 | 15 | 1,140 | 845 |
| Adjustment of values carried forward from prior years 2) |
— | –89 | 5 | –3 | –87 | — |
| Accumulated depreciation and | ||||||
| accumulated impairment losses | ||||||
| at 01.01. of the year under review | 806 | 173 | 62 | 12 | 1,053 | 845 |
| Change in consolidated group | — | — | — | — | — | 1 |
| Additions | — | — | — | — | — | 3 |
| Disposals | — | 3 | — | 2 | 5 | 33 |
| Depreciation/amortization | ||||||
| Scheduled | 318 | 34 | 9 | 5 | 366 | 245 |
| Unscheduled | — | — | — | — | — | 78 |
| Reclassifi cation | — | 8 | — | — | 8 | 2 |
| Other changes | — | — | — | — | — | 1 |
| Currency exchange rate diff erences | — | 1 | — | 1 | 2 | –2 |
| Accumulated depreciation and accumulated impairment losses |
||||||
| at 31.12. of the year under review | 1,124 | 213 | 71 | 16 | 1,424 | 1,140 |
| Balance at 31.12. of the previous year 1) | 1,979 | 95 | 53 | 27 | 2,154 | 2,317 |
| Balance at 31.12. of the year under review |
1,668 | 92 | 51 | 40 | 1,851 | 2,154 |
1) Adjusted on the basis of IAS 8
2) The values carried forward were adjusted in connection with implementation of a new IT system; there were no implications for the carrying value
The "insurance-related intangible assets" derived principally from the insurance portfolios of the former Gerling Group acquired in 2006 (carrying value 2010: EUR 1.1 billion) and the portfolios of BHW Lebensversicherung AG (carrying value 2010: EUR 280 million) and PB Lebensversicherung AG (carrying value 2010: EUR 56 million) purchased in 2007 as well as from Neue Leben Lebensversiche rung AG (carrying value 2010: EUR 100 million).
The addition of EUR 193 million recognized in the gross book value of the previous year relates – in an amount of EUR 104 million – to the present value of future profi ts (PVFP) carried in connection with Hannover Re's acquisition of the ING life reinsurance portfolio. Scheduled amortization is taken on this insurance-related intangible asset over the term of the underlying reinsurance treaties in proportion to the future premium income. The period of amortization is 30 years.
Particularly due to scheduled depreciation and amortization, the insurance-related intangible assets decreased by EUR 311 million in the reporting period to EUR 1,668 million. Insofar as PVFPs are involved in the case of life insurance enterprises, these are capitalized and amortized across the period of the contracts (see also our remarks in the section "Accounting policies", subsection "Summary of major accounting policies", on page 127).
The gross PVFP recognized is composed of a shareholders' portion – on which deferred taxes are established – and a policyholders' portion. It is capitalized in order to spread the charge to Group shareholders' equity under IFRS upon acquisition of an insurance portfolio equally across future periods in step with the amortization. Only the amortization of the shareholders' portion results in a charge to future earnings. The PVFP in favor of policyholders is recognized by life insurance companies that are obliged to enable their policyholders to participate in all results through the establishment of a provision for deferred premium refunds.
The breakdown of the PVFPs for the life insurance companies is shown in the table below:
| PVFPs for life insurance companies | 31.12.2010 | 31.12.2009 1) |
|---|---|---|
| Figures in EUR million | ||
| Shareholders' portion | 720 | 861 |
| Policyholders' portion | 850 | 1,016 |
| Balance | 1,570 | 1,877 |
1) Adjusted on the basis of IAS 8
Of the depreciation/amortization on insurance-related intangible assets totaling EUR 318 million, an amount of EUR 152 million was attributable to the shareholders' portion and EUR 166 million to the policyholders' portion. The amortization on the shareholders' portion is recognized in the statement of income in the item "Other technical expenses".
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Gross book value at 31.12. of the previous year | 1,069 | 898 |
| Adjustment of values carried forward from prior years 1) | –185 | — |
| Gross book value at 01.01. of the year under review | 884 | 898 |
| Additions | 149 | 164 |
| Disposals | 32 | 23 |
| Disposal groups pursuant to IFRS 5 | — | 34 |
| Reclassifi cation | 29 | 1 |
| Other changes 1) | — | –1 |
| Currency exchange rate diff erences | 12 | –4 |
| Gross book value at 31.12. of the year under review | 1,042 | 1,069 |
| Accumulated depreciation and accumulated impairment losses at 31.12. of the previous year |
343 | 314 |
| Adjustment of values carried forward from prior years 1) | –185 | — |
| Accumulated depreciation and accumulated impairment losses at 01.01. of the year under review |
158 | 314 |
| Disposals | 4 | 3 |
| Depreciation/impairment | ||
| Scheduled | 15 | 9 |
| Unscheduled | 6 | 8 |
| Disposal groups pursuant to IFRS 5 | — | 5 |
| Reclassifi cation | 7 | 3 |
| Other changes 1) | — | 7 |
| Accumulated depreciation and accumulated impairment losses at 31.12. of the year under review |
182 | 343 |
| Balance at 31.12. of the previous year | 726 | 584 |
| Balance at 31.12. of the year under review | 860 | 726 |
1) The values carried forward were adjusted in connection with implementation of a new IT system; there were no implications for the carrying value
The additions of EUR 149 million relate principally to the Non-Life Reinsurance segment (EUR 136 million) and are attributable inter alia to the sharply increased investment activities of Hannover Re Real Estate Holdings, Inc., and Hannover Re Euro RE Holdings GmbH. A further EUR 8 million was due to the Retail Germany segment.
The fair value of investment property amounted to EUR 901 (790) million as at the balance sheet date. The fair values were determined largely internally within the Group using discounted cash fl ow methods and in individual cases on the basis of external expert opinions. The directly allocable operating expenses (including repairs and maintenance) totaled EUR 24 million with respect to properties rented out; operating expenses of EUR 2 million were incurred on properties with which no rental income was generated.
Of the total investment property, EUR 387 (415) million was allocated to special cover funds.
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Affi liated companies | 13 | 13 |
| Participating interests | 61 | 48 |
| Balance at 31.12. of the year under review | 74 | 61 |
Associated companies that are not recognized at equity owing to their subordinate importance for the presentation of the net assets, fi nancial position and results of operations are recognized under participating interests (see also our remarks in the section "Accounting policies", subsection "Summary of major accounting policies", pages 127 et seq.). For these associated companies not valued at equity we have recognized assets of EUR 52 million, debts of EUR 21 million, profi ts for the year of EUR 0.2 million and revenues of EUR 9 million.
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Balance at 31.12. of the previous year | 134 | 135 |
| Change in consolidated group | 14 | — |
| Additions | — | 4 |
| Disposals | 2 | — |
| Adjustment recognized in income | — | –6 |
| Adjustment recognized outside income | –2 | — |
| Currency exchange rate diff erences | — | 1 |
| Balance at 31.12. of the year under review | 144 | 134 |
The change in the consolidated group (EUR 14 million) was largely attributable to the acquisition of a stake in the listed funds provider C-QUADRAT Investment AG, Vienna. The company is recognized in the Corporate Operations segment.
The goodwill of all associated companies valued at equity amounted to EUR 24 (20) million as at year-end. Of the associated companies, Apulia Prontoprestito S.p.A., Rome, and C-QUADRAT Investment AG, Vienna, are publically listed. The market price of our interests was EUR 32 (11) million as at the balance sheet date.
For all associated companies combined we recognized assets of EUR 2.3 billion, debts of EUR 1.8 billion, profi ts for the year of EUR 26 million and revenues of EUR 360 million.
For further information on our associated companies please see the section "Consolidation" on pages 161 et seq. as well as the subsection "List of shareholdings" on pages 256 et seqq.
| Unrealized | ||||||
|---|---|---|---|---|---|---|
| Amortized cost | gains/losses | Fair value | ||||
| 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | ||||||
| Mortgage loans | 1,239 | 1,383 | 106 | 3 | 1,345 | 1,386 |
| Loans and prepayments on insurance policies |
200 | 201 | — | — | 200 | 201 |
| Loans and receivables due from governmental or semi-governmental |
||||||
| entities 1) | 9,728 | 9,454 | 304 | 262 | 10,032 | 9,716 |
| Corporate securities | 7,342 | 7,930 | 97 | 104 | 7,439 | 8,034 |
| Covered bonds, asset backed securities |
13,491 | 12,163 | 341 | 312 | 13,832 | 12,475 |
| Participation rights | 343 | 417 | –6 | –14 | 337 | 403 |
| Total | 32,343 | 31,548 | 842 | 667 | 33,185 | 32,215 |
1) The loans and receivables due fr om governmental or semi-governmental entities include securities of EUR 2,114 (2,310) million which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.
The item "Covered bonds, asset-backed securities" includes German covered bonds (Pfandbriefe) with a carrying amount of EUR 13,464 (11,869) million (99 (98)%).
| Amortized cost | Fair value | |||
|---|---|---|---|---|
| Contractual maturity | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 |
| Figures in EUR million | ||||
| Due in one year | 1,290 | 2,049 | 1,306 | 2,063 |
| Due after one through two years | 1,380 | 1,146 | 1,422 | 1,181 |
| Due after two through three years | 1,601 | 1,352 | 1,612 | 1,415 |
| Due after three through four years | 3,046 | 1,501 | 3,081 | 1,557 |
| Due after four through fi ve years | 2,986 | 2,740 | 3,107 | 2,805 |
| Due after fi ve through ten years | 9,252 | 11,344 | 9,553 | 11,666 |
| Due after ten years | 12,788 | 11,416 | 13,104 | 11,528 |
| Total | 32,343 | 31,548 | 33,185 | 32,215 |
| Amortized cost | |||
|---|---|---|---|
| Rating structure of loans and receivables | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||
| AAA | 13,553 | 12,297 | |
| AA | 11,780 | 11,513 | |
| A | 4,521 | 4,699 | |
| BBB or lower | 2,489 | 3,039 | |
| Total | 32,343 | 31,548 |
The rating categories are based on the classifi cations of leading international rating agencies.
The rating category of "BBB or lower" includes unrated loans and receivables of EUR 1.5 (1.5) billion. They consist principally of mortgage loans and policy loans.
| Unrealized | |||||||
|---|---|---|---|---|---|---|---|
| Amortized cost | gains/losses | Fair value | |||||
| 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | ||
| Figures in EUR million | |||||||
| Government debt securities of EU member states |
438 | 378 | 13 | — | 451 | 378 | |
| US Treasury Notes | 386 | 355 | 45 | 35 | 431 | 390 | |
| Other foreign government debt securities |
11 | 14 | 1 | 1 | 12 | 15 | |
| Debt securities issued by semi-governmental entities 1) |
726 | 698 | 34 | 28 | 760 | 726 | |
| Corporate securities | 429 | 421 | 18 | 21 | 447 | 442 | |
| Mortgage bonds, asset-backed securities |
1,009 | 992 | 44 | 46 | 1,053 | 1,038 | |
| Total | 2,999 | 2,858 | 155 | 131 | 3,154 | 2,989 |
1) The debt securities issued by semi-governmental entities include securities of EUR 191 (364) million which are guaranteed by the Federal Republic of Germany, other EU states or German federal states
The item "Mortgage bonds, asset-backed securities" includes covered bonds with a carrying amount of EUR 998 (962) million (99 (97)%).
| Amortized cost | Fair value | |||
|---|---|---|---|---|
| Contractual maturity | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 |
| Figures in EUR million | ||||
| Due in one year | 344 | 108 | 347 | 119 |
| Due after one through two years | 483 | 281 | 499 | 291 |
| Due after two through three years | 377 | 470 | 396 | 492 |
| Due after three through four years | 404 | 367 | 437 | 383 |
| Due after four through fi ve years | 857 | 300 | 911 | 318 |
| Due after fi ve through ten years | 480 | 1,287 | 512 | 1,344 |
| Due after ten years | 54 | 45 | 52 | 42 |
| Total | 2,999 | 2,858 | 3,154 | 2,989 |
| Amortized cost | |||
|---|---|---|---|
| Rating structure of fi nancial assets held to maturity | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||
| AAA | 1,731 | 1,776 | |
| AA | 728 | 582 | |
| A | 407 | 368 | |
| BBB or lower | 133 | 132 | |
| Total | 2,999 | 2,858 |
The rating categories are based on the classifi cations of leading international rating agencies.
The rating category of "BBB or lower" includes unrated fi xed-income securities of EUR 8 (8) million.
| Unrealized | |||||||
|---|---|---|---|---|---|---|---|
| Amortized cost | gains/losses | Fair value | |||||
| 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 | ||
| Figures in EUR million | |||||||
| Fixed-income securities | |||||||
| Government debt securities | |||||||
| of EU member states | 4,719 | 3,771 | –65 | 68 | 4,654 | 3,839 | |
| US Treasury Notes | 2,059 | 2,020 | 66 | 15 | 2,125 | 2,035 | |
| Other foreign government debt securities |
950 | 612 | 14 | 3 | 964 | 615 | |
| Debt securities issued by semi-governmental entities 1) |
5,165 | 5,214 | 98 | 111 | 5,263 | 5,325 | |
| Corporate securities | 9,538 | 7,357 | 115 | 194 | 9,653 | 7,551 | |
| Investment funds | 640 | 716 | –3 | 14 | 637 | 730 | |
| Mortgage bonds, asset-backed securities |
4,742 | 3,811 | 80 | 91 | 4,822 | 3,902 | |
| Participation rights | 210 | 227 | 2 | 2 | 212 | 229 | |
| Total fi xed-income securities | 28,023 | 23,728 | 307 | 498 | 28,330 | 24,226 | |
| Variable-yield securities | |||||||
| Equities | 926 | 743 | 250 | 299 | 1,176 | 1,042 | |
| Investment funds | 1,035 | 1,124 | 58 | 49 | 1,093 | 1,173 | |
| Participation rights | 36 | 35 | — | 1 | 36 | 36 | |
| Other | — | — | — | — | — | — | |
| Total variable-yield securities | 1,997 | 1,902 | 308 | 349 | 2,305 | 2,251 | |
| Total securities | 30,020 | 25,630 | 615 | 847 | 30,635 | 26,477 |
1) The debt securities issued by semi-governmental entities include securities of EUR 3,039 (3,850) million
which are guaranteed by the Federal Republic of Germany, other EU states or German federal states
The item "Mortgage bonds, asset-backed securities" includes covered bonds with a carrying amount of EUR 4,220 (3,331) million (88 (85)%).
| Fair value | Amortized cost | |||
|---|---|---|---|---|
| Contractual maturity of fi xed-income securities | 31.12.2010 | 31.12.2009 | 31.12.2010 | 31.12.2009 |
| Figures in EUR million | ||||
| Due in one year | 3,516 | 3,711 | 3,498 | 3,663 |
| Due after one through two years | 3,512 | 3,108 | 3,468 | 3,044 |
| Due after two through three years | 3,489 | 3,003 | 3,396 | 2,924 |
| Due after three through four years | 3,725 | 3,286 | 3,644 | 3,155 |
| Due after four through fi ve years | 3,726 | 3,291 | 3,708 | 3,209 |
| Due after fi ve through ten years | 6,987 | 5,814 | 7,000 | 5,726 |
| Due after ten years | 3,375 | 2,013 | 3,309 | 2,007 |
| Total | 28,330 | 24,226 | 28,023 | 23,728 |
| Fair value | |||
|---|---|---|---|
| Rating structure of fi xed-income securities | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||
| AAA | 13,186 | 11,562 | |
| AA | 4,514 | 4,550 | |
| A | 6,924 | 5,224 | |
| BBB or lower | 3,706 | 2,890 | |
| Total | 28,330 | 24,226 |
The rating categories are based on the classifi cations of leading international rating agencies.
The rating category of "BBB or lower" includes unrated fi xed-income securities of EUR 309 (80) million.
| Fair value | ||
|---|---|---|
| 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | ||
| Fixed-income securities | ||
| Government debt securities of EU member states | 14 | 26 |
| Other foreign government debt securities | 34 | 59 |
| Debt securities issued by semi-governmental entities | 97 | 95 |
| Corporate securities | 467 | 305 |
| Investment funds | 30 | 15 |
| Covered bonds/asset-backed securities | 230 | 227 |
| Participation rights | 102 | 107 |
| Total fi xed-income securities | 974 | 834 |
| Investment funds (variable-yield securities) | 15 | 18 |
| Other variable-yield securities | — | 9 |
| Total fi nancial assets classifi ed at | ||
| fair value through profi t or loss | 989 | 861 |
| Fixed-income securities | ||
| Government debt securities of EU member states | 3 | 2 |
| Other foreign government debt securities | 49 | 53 |
| Debt securities issued by semi-governmental entities | 9 | 3 |
| Corporate securities | 7 | 6 |
| Other securities | 1 | — |
| Total fi xed-income securities | 69 | 64 |
| Investment funds (variable-yield securities) | 83 | 62 |
| Derivatives | 80 | 112 |
| Total fi nancial assets held for trading | 232 | 238 |
| Total securities | 1,221 | 1,099 |
The item "Covered bonds/asset-backed securities" includes German covered bonds (Pfandbriefe) with a carrying amount of EUR 121 (126) million (53 (56)%).
| Fair value | |||
|---|---|---|---|
| Contractual maturity of fi xed-income securities | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||
| Due in one year | 481 | 191 | |
| Due after one through two years | 73 | 336 | |
| Due after two through three years | 116 | 40 | |
| Due after three through four years | 45 | 49 | |
| Due after four through fi ve years | 3 | 43 | |
| Due after fi ve through ten years | 41 | 26 | |
| Due after ten years | 284 | 213 | |
| Total | 1,043 | 898 |
| Fair value | |||
|---|---|---|---|
| Rating structure of fi xed-income securities | 31.12.2010 | 31.12.2009 | |
| Figures in EUR million | |||
| AAA | 154 | 256 | |
| AA | 72 | 87 | |
| A | 115 | 215 | |
| BBB or lower | 702 | 340 | |
| Total | 1,043 | 898 |
The rating categories are based on the classifi cations of leading international rating agencies.
The rating category of "BBB or lower" includes unrated fi xed-income securities of EUR 194 (13) million.
The fi nancial assets classifi ed at fair value through profi t or loss (with no trading intention) include inter alia structured products, in respect of which the fair value option aff orded by IAS 39 was exercised. The carrying amount of these fi nancial assets constitutes – contrary to the purely economic perspective – the maximum credit exposure. The amount of the change in fair value attributable to changes in the credit risk of fi nancial assets is –EUR 12 million in the reporting period and EUR 8 million on an accumulated basis. There are no credit derivatives or similar hedging instruments for these securities.
The other invested assets of altogether EUR 4.2 (4.1) billion are composed principally of the following items:
The participating interests in partnerships relate principally to participating interests in private equity fi rms and are allocated to the "available for sale" category. The fair value (carrying amount) of these participating interests was EUR 1,017 (695) million as at the balance sheet date. The amortized cost of the participations amounted to EUR 722 (578) million; in addition, unrealized gains of EUR 298 (126) million and unrealized losses of EUR 3 (9) million from these investments were recognized directly in equity via the other income/expenses (item: "Other reserves").
The loans to affi liated companies were measured largely at amortized cost. The carrying amount as at the balance sheet date was EUR 114 (117) million.
The short-term investments recognized consist predominantly of overnight money, time deposits and money market securities with a maturity of up to one year in an amount of EUR 3,037 (3,302) million, which were generally measured outside income at fair value. The amortized cost of these fi nancial assets was EUR 3,034 (3,300) million; unrealized gains of EUR 3 (2) million were recognized outside income. The short-term investments are categorized within the Group as "fi nancial assets available for sale".
For the purposes of the disclosure requirements pursuant to IFRS 7 "Financial Instruments: Disclosures", the fi nancial instruments to be recognized at fair value in the balance sheet are to be assigned to a three-level fair value hierarchy. The purpose of this new requirement, inter alia, is to set out the market proximity of the data included in the determination of fair values. The following classes of fi nancial instruments are aff ected: fi nancial assets available for sale, fi nancial assets at fair value through profi t or loss, other fi nancial assets – insofar as they are recognized at fair value, negative fair values from derivative fi nancial instruments (included in the balance sheet item "Other liabilities") as well as hedging instruments (derivatives in the context of hedge accounting).
The fi nancial assets recognized at fair value were allocated as follows as at the balance sheet date in accordance with the three levels of the fair value hierarchy:
■ Level 1: Quoted prices (unadjusted) in active markets for identical assets and liabilities. This includes fi rst and foremost listed equities, futures and options, investment funds and highly liquid bonds traded on regulated markets. As at the balance sheet date the proportion of fi nancial instruments in the total portfolio of fi nancial assets measured at fair value allocated to level 1 was 45 (50)%.
The following table shows the carrying amounts of the fi nancial assets recognized at fair value broken down according to the three levels of the fair value hierarchy:
| Carrying amounts of fi nancial instruments recognized at fair value |
Level 1 | Level 2 | Level 3 1) | Balance at 31.12.2010 |
|---|---|---|---|---|
| Figures in EUR million | ||||
| Assets measured at fair value | ||||
| Financial assets available for sale | ||||
| Fixed-income securities | 11,054 | 17,216 | 60 | 28,330 |
| Variable-yield securities | 1,706 | 314 | 285 | 2,305 |
| Financial assets at fair value through profi t or loss | ||||
| Financial assets classifi ed at fair value through profi t or loss |
130 | 836 | 23 | 989 |
| Financial assets held for trading | 153 | 79 | — | 232 |
| Other invested assets | 3,016 | 158 | 897 | 4,071 |
| Total amount of fi nancial assets measured at fair value |
16,059 | 18,603 | 1,265 | 35,927 |
| Financial liabilities measured at fair value | ||||
| Other liabilities (negative fair values from derivative fi nancial instruments) |
||||
| Negative fair values from derivatives (trading portfolio) |
2 | 83 | — | 85 |
| Negative fair value from hedging instruments | 109 | 40 | — | 149 |
| Total amount of fi nancial liabilities measured at fair value |
111 | 123 | — | 234 |
1) Categorization in level 3 has no quality implications;
no conclusions may be drawn as to the credit rating of the issuers.
| Carrying amounts of fi nancial instruments recognized at fair value |
Level 1 | Level 2 | Level 3 1) | Balance at 31.12.2009 |
|---|---|---|---|---|
| Figures in EUR million | ||||
| Assets measured at fair value | ||||
| Financial assets available for sale | ||||
| Fixed-income securities | 10,522 | 13,570 | 134 | 24,226 |
| Variable-yield securities | 1,610 | 89 | 552 | 2,251 |
| Financial assets at fair value through profi t or loss | ||||
| Financial assets classifi ed at fair value through profi t or loss |
188 | 641 | 32 | 861 |
| Financial assets held for trading | 150 | 88 | — | 238 |
| Other invested assets | 3,237 | 64 | 713 | 4,014 |
| Total amount of fi nancial assets measured at fair value |
15,707 | 14,452 | 1,431 | 31,590 |
| Financial liabilities measured at fair value | ||||
| Other liabilities (negative fair values from derivative fi nancial instruments) |
||||
| Negative fair values from derivatives (trading portfolio) |
— | 30 | — | 30 |
| Negative fair value from hedging instruments | 2 | 40 | — | 42 |
| Total amount of fi nancial liabilities measured at fair value |
2 | 70 | — | 72 |
1) Categorization in level 3 has no quality implications;
no conclusions may be drawn as to the credit rating of the issuers.
In the fi nancial year just-ended securities with a fair value of EUR 614 million were no longer classifi ed as level 1 fi nancial assets – as in the previous year – but were instead allocated to level 2. The reclassifi cation was carried out above all as a consequence of the reduced liquidity of the instruments. We reclassifi ed securities with a fair value of EUR 74 million, which in the previous year were recognized as level 2 fi nancial assets, to level 1 in 2010. Overall, the reclassifi cations for the most part aff ect fi xed-income securities allocated to the category "fi nancial assets available for sale".
In the year under review variable-yield securities allocated to the category "fi nancial assets available for sale" with a volume of EUR 257 million were correctly reclassifi ed – since in this regard required parameters at fair value are based on observable market data – from level 3 to level 2. This allocation aff ects in an amount of EUR 250 million solely investment fund units. In addition, we reclassifi ed securities with a fair value of EUR 53 million – of which EUR 25 million is attributable to variable-yield securities in our portfolio of fi nancial assets classifi ed at fair value through profi t or loss – from level 3 to level 1. Listed market prices were available for these instruments in the reporting period.
The following table provides a reconciliation of the fi nancial assets included in level 3 at the beginning of the reporting period with the values as at 31 December of the fi nancial year.
| Financial assets available for sale/ |
Financial assets available for sale/ |
Financial assets classifi ed at |
Other invested | ||
|---|---|---|---|---|---|
| Development of fi nancial assets recognized at fair value |
Fixed-income securities |
Variable-yield securities |
fair value through profi t or loss |
assets (measured at fair value) |
Total amount of fi nancial assets |
| Figures in EUR million | |||||
| Balance at 01.01.2009 | 96 | 608 | 41 | 719 | 1,464 |
| Income and expenses | |||||
| recognized in the statement of income |
–1 | –40 | 4 | –71 | –108 |
| recognized directly in equity | 30 | –12 | — | –3 | 15 |
| Transfers to level 3 | — | — | — | — | — |
| Transfers from level 3 | — | — | — | — | — |
| Additions | 9 | 44 | — | 90 | 143 |
| Disposals | — | 47 | 13 | 16 | 76 |
| Currency exchange rate diff erences | — | –1 | — | –6 | –7 |
| Balance at 01.01.2010 | 134 | 552 | 32 | 713 | 1,431 |
| Income and expenses | |||||
| recognized in the statement of income |
1 | –8 | 2 | –18 | –23 |
| recognized directly in equity | 2 | –7 | — | 95 | 90 |
| Transfers to level 3 | — | — | — | — | — |
| Transfers from level 3 | –6 | –279 | –25 | — | –310 |
| Additions | 12 | 35 | 13 | 168 | 228 |
| Disposals | 80 | 12 | — | 64 | 156 |
| Currency exchange rate diff erences | –3 | 4 | 1 | 3 | 5 |
| Balance at 31.12.2010 | 60 | 285 | 23 | 897 | 1,265 |
The income and expenses for the period recognized in the consolidated statement of income including the gains and losses on assets and liabilities held in the portfolio at the end of the reporting period that were included in level 3 are shown in the following table:
| Presentation of eff ects on profi t or loss of the fi nancial assets recognized at fair value in level 3 |
Financial assets available for sale/ Fixed-income securities |
Financial assets available for sale/ Variable-yield securities |
Financial assets classifi ed at fair value through profi t or loss |
Other invested assets (measured at fair value) |
Total amount of fi nancial assets |
|---|---|---|---|---|---|
| Figures in EUR million | |||||
| Gains and losses in the 2009 fi nancial year |
|||||
| Income from investments | 4 | — | 6 | 11 | 21 |
| Expenses for investments | –5 | –40 | –2 | –82 | –129 |
| Thereof attributable to fi nancial assets included in the portfolio at 31.12.2009 |
|||||
| Income from investments | 4 | — | 6 | 11 | 21 |
| Expenses for investments | –3 | –33 | –2 | –82 | –120 |
| Gains and losses in the 2010 fi nancial year |
|||||
| Income from investments | 2 | — | 5 | 3 | 10 |
| Expenses for investments | –1 | –8 | –3 | –21 | –33 |
| Thereof attributable to fi nancial assets included in the portfolio at 31.12.2010 |
|||||
| Income from investments | 2 | — | 5 | 1 | 8 |
| Expenses for investments | –1 | –2 | –3 | –7 | –13 |
If models are used to measure fi nancial assets included in level 3 under which the adoption of reasonable alternative inputs leads to a material change in fair value, IFRS 7 requires disclosure of the eff ects of these alternative assumptions. Of the fi nancial assets included in level 3 with fair values of altogether EUR 1.3 (1.4) billion as at the balance sheet date, the Group generally measures fi nancial assets with a volume of EUR 1.2 (1.3) billion using the Net Asset Value method, in respect of which alternative inputs within the meaning of the standard cannot reasonably be established. For the remaining fi nancial assets included in level 3 with a volume of EUR 28 (101) million, the eff ects of alternative inputs and assumptions are immaterial.
We use derivative fi nancial instruments to hedge against interest rate, exchange and other market price risks and to a limited extent also to optimize returns or realize intentions to buy/sell. In this context, the applicable regulatory requirements and the standards set out in the Group's internal investment guidelines are strictly observed and fi rst-class counterparties are always selected.
In addition, embedded derivatives in structured products and insurance contracts are – where required under the standards of IAS 39 "Financial Instruments: Recognition and Measurement" and IFRS 4 "Insurance Contracts" – separated from the underlying contracts and recognized separately at fair value.
In the context of initial measurement derivative fi nancial instruments are recognized at the fair value attributable to them on the date of contract materialization. Subsequent measurement is then also made at the fair value applicable on the relevant balance sheet date. Regarding the valuation models used, please see the subsection entitled "Determination of fair values" in the section "Accounting policies" on pages 133 et seq.
The method of recognizing gains and losses is dependent upon whether or not the derivative fi nancial instrument is used as a hedging instrument within the meaning of hedge accounting pursuant to IAS 39 – and, if it was, on the type of hedged position/risk. In the case of derivatives which are not hedging instruments, the fl uctuations in value are recognized in the statement of income within investment income. This approach also applies to separated embedded derivatives of structured fi nancial instruments and those from insurance contracts. With respect to hedging instruments, the Group distinguishes between derivatives according to their intended use as fair value hedges and cash fl ow hedges (see separate subsection of this item of the Notes).
The recognition of derivative fi nancial instruments in the balance sheet is broken down in the following table:
| Balance sheet recognition of derivative fi nancial instruments |
Hedging instrument as per IAS 39 |
31.12.2010 | 31.12.2009 |
|---|---|---|---|
| Figures in EUR million | |||
| Balance sheet items (positive fair values) | |||
| Financial assets at fair value through profi t or loss, fi nancial assets held for trading (derivatives) |
No | 80 | 112 |
| Balance sheet items (negative fair values) | |||
| Liabilities, other liabilities (derivatives) | No | –85 | –30 |
| Yes | –149 | –42 | |
| Total (net) | –154 | 40 |
In the fi nancial year just-ended the derivative fi nancial instruments – excluding derivatives used as hedging instruments – produced an unrealized loss of –EUR 20 million. This contrasted with a gain of EUR 14 million in the previous year. The loss realized on positions closed in 2010 amounted to –EUR 21 million, compared to a gain of EUR 19 million in the previous year.
The fair values of our open derivative positions including the relevant nominal values as at the balance sheet date are shown below diff erentiated according to risk types and maturities. Positive and negative fair values are netted in the table. Open positions from derivatives therefore existed in an amount of –EUR 154 (40) million at the balance sheet date, corresponding to 0.1 (0.04)% of the balance sheet total.
| Due after one | Due after fi ve | ||||||
|---|---|---|---|---|---|---|---|
| Maturities of derivative | Due in | through | through | Due after | |||
| fi nancial instruments | one year | fi ve years | ten years | ten years | Other | 31.12.2010 | 31.12.2009 |
| Figures in EUR million | |||||||
| Interest rate hedges | |||||||
| Fair value | 1 | –143 | — | –1 | 14 | –129 | –25 |
| Notional values | 52 | 1,856 | — | 5 | 375 | 2,288 | 1,165 |
| Currency hedges | |||||||
| Fair value | –5 | –18 | –11 | — | — | –34 | –15 |
| Notional values | 22 | 47 | 42 | — | — | 111 | 168 |
| Equity and index hedges | |||||||
| Fair value | — | — | –6 | — | — | –6 | 25 |
| Notional values | — | — | 1 | — | — | 1 | 474 |
| Infl ation hedges | |||||||
| Fair value | — | –31 | — | — | — | –31 | — |
| Notional values | — | 2,535 | — | — | — | 2,535 | — |
| Derivatives in connection with insurance contracts1) |
|||||||
| Fair value | — | — | — | — | 46 | 46 | 55 |
| Other risks | |||||||
| Fair value | — | — | — | — | — | — | — |
| Notional values | — | — | — | — | — | — | 3 |
| Total hedges | |||||||
| Fair value | –4 | –192 | –17 | –1 | 60 | –154 | 40 |
| Notional values | 74 | 4,438 | 43 | 5 | 375 | 4,935 | 1,810 |
1) The fi nancial instruments relate exclusively to derivatives in connection with reinsurance business which under IFRS 4 are to be separated fr om the underlying insurance contract and recognized separately at fair value. In view of the characteristics of these derivatives, a maturity disclosure/presentation of nominal values is not reasonably possible and has therefore been omitted. The derivatives are recognized at fair value.
In the year under review the Group acquired derivative fi nancial instruments in the reinsurance sector to hedge infl ation risks within the loss reserves. These transactions resulted in the recognition of negative fair values of EUR 31 million (balance sheet item: 26 "Other liabilities", page 229).
In the context of hedge accounting the Group seeks to compensate for the changes in value/ changes in cash fl ows of an underlying caused by changes in market price by taking out a hedging instrument (derivative), the changes in value or changes in cash fl ows of which develop along approximately opposite lines. Hedging is carried out on the level of individual transactions (micro hedge). On closing of the transaction we document the hedge relationship between the underlying and the hedging instrument, the purpose of risk management and the underlying hedging strategy. In addition, at the outset of the hedge relationship we document our assessment of the extent to which the hedging instruments are eff ective in off setting the corresponding changes of the underlying. Proof of the eff ectiveness of the hedge relationships has been furnished.
In order to hedge changes in the fair value of equities (underlyings), the Group designated equity swaps as hedging derivatives in 2010. Under these fair value hedges, the changes in the fair value of the derivative are recognized with the changes in the fair value of the underlying allocable to the hedged risk in the investment income. In the year under review losses of –EUR 1 million from the underlying transactions and gains of EUR 1 million from the hedging derivatives were recognized in income for the fair value hedges. There was no ineff ectiveness in the case of these hedges.
The Group uses interest rate swaps in the context of cash fl ow hedges in order to hedge cash fl ows relating to certain fl oating-rate commitments (underlyings) against the associated interest rate risk. The plain vanilla interest rate swaps serve to protect against adverse eff ects in the net profi t or loss for the period in the event of rising interest rates. The interest payments received from the swaps (fl oating rates) are opposed by interest payments in the same amount in connection with the liabilities; in addition, the Group undertakes to make fi xed interest payments to the swap partners. The selection of highly rated counterparties ensures that we avoid entering into a signifi cant credit risk. The fl oating rate varies according to the 3-month EURIBOR. In addition, in 2010 the Group hedged future transactions that are very likely to occur against the interest rate risk. In this connection valuation units are established consisting of forward transactions in securities (forward purchases) and planned securities purchases. The forward purchases are used to hedge the risk associated with already fi rm future reinvestments that it may only be possible in future to generate low returns on reinvestments due to falling interest rates. The underlying in relation to the hedging instruments is the future investment at the then applicable returns/rates. IAS 39 only permits the hedging of planned transactions to be captured as cash fl ow hedges.
The eff ective part of the hedging instruments measured at fair value is recognized directly in equity in the cash fl ow hedge reserve aft er allowance for deferred taxes. The ineff ective part of such changes in value, on the other hand, is booked directly in the statement of income in the investment income – in the case of eff ective hedging of fl oating-rate liabilities in other income/expenses. The underlying continues to be measured at amortized cost in accordance with allocation to the category pursuant to IAS 39. If the hedged transactions result in the recognition of fi nancial assets, the amounts carried in shareholders' equity are amortized over the maturity period of the acquired asset.
The following table presents a reconciliation of the cash fl ow hedge reserve (before taxes):
| Changes in the cash fl ow hedge reserve | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Balance at 31.12. of the previous year | –33 | –26 |
| Allocations (hedging of cash fl ows from fl oating interest rates) | 7 | –7 |
| Reductions (hedging of planned transactions) | –110 | — |
| Balance at 31.12. of the year under review (before taxes) | –136 | –33 |
The negative balance of the cash fl ow hedge reserve increased in the year under review by –EUR 103 (–7) million (before taxes) and –EUR 100 (–5) million (aft er taxes).
An amount of EUR 1.2 (0.2) million was recognized in income in the year under review owing to the ineff ectiveness of cash fl ow hedges.
The expected cash fl ows from the cash fl ow hedges and their respective contribution to profi t or loss are as follows:
| Cash fl ows of the hedged transaction | < 1 year | > 1 year and < 5 years |
Expected total amount |
31.12.2010 1) | 31.12.2009 1) |
|---|---|---|---|---|---|
| Figures in EUR million | |||||
| Cash fl ow of the underlyings | –10 | –903 | –913 | –5 | –10 |
| Cash fl ow of the hedging instruments | –16 | –9 | –25 | –21 | –16 |
| Profi t/loss | –26 | –15 | –41 | –26 | –26 |
1) Cash fl ow of the period in question
The fair values of the derivative fi nancial instruments designated in the context of hedge accounting were as follows as at the balance sheet date:
| Hedging instruments | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Fair value hedges | ||
| Equity swaps | –6 | — |
| Cash fl ow hedges | ||
| Interest rate swaps | –33 | –42 |
| Forward securities transactions | –110 | — |
| Total | –149 | –42 |
The net gains or losses on derivatives used for hedging carried in the statement of income amounted to –EUR 22 (–16) million in the year under review and relate chiefl y to current interest payments (–EUR 21 (–16) million), changes in value recognized in income on grounds of ineff ectiveness (EUR 1.2 (0.2) million), EUR 1 million from hedging derivatives in connection with fair value hedges and –EUR 3 million from other payments.
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Accounts receivable on direct written insurance business | 1,551 | 1,428 |
| thereof: | ||
| From policyholders | 796 | 815 |
| From insurance intermediaries | 755 | 613 |
| Accounts receivable on reinsurance business | 3,460 | 2,914 |
| Balance at 31.12. of the year under review | 5,011 | 4,342 |
| 2010 2009 |
||||||
|---|---|---|---|---|---|---|
| Gross business |
Reinsurance recoverables |
Net business |
Gross business |
Reinsurance recoverables |
Net business |
|
| Figures in EUR million | ||||||
| Balance at 31.12. of the previous year |
3,899 | 355 | 3,544 | 4,137 | 628 | 3,509 |
| Change in consolidated group |
— | — | — | — | — | — |
| Portfolio entries/ withdrawals |
10 | 1 | 9 | — | 1 | –1 |
| Newly capitalized acquisition costs |
624 | –4 | 628 | 273 | –195 | 468 |
| Amortized acquisition costs |
658 | 65 | 593 | 561 | 78 | 483 |
| Currency adjustments | 138 | 6 | 132 | 50 | –1 | 51 |
| Other changes | — | 5 | –5 | — | — | — |
| Balance at 31.12. of the year under review |
4,013 | 298 | 3,715 | 3,899 | 355 | 3,544 |
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Own-use real estate | 646 | 612 |
| Tax refund claims | 266 | 216 |
| Plant and equipment | 140 | 148 |
| Interest and rent due | 15 | 12 |
| Sundry assets | 714 | 667 |
| Balance at 31.12. of the year under review | 1,781 | 1,655 |
| Development of own-use real estate | 2010 | 2009 |
| Figures in EUR million | ||
| Gross book value at 31.12. of the previous year | 822 | 757 |
| Adjustment of values carried forward from prior years 1) | –23 | — |
| Gross book value at 01.01. of the year under review | 799 | 757 |
| Change in consolidated group | — | 1 |
| Additions | 56 | 62 |
| Disposals | 136 | 1 |
| Reclassifi cation | –32 | 2 |
| Currency exchange rate diff erences | 2 | 1 |
| Gross book value at 31.12. of the year under review | 689 | 822 |
| Accumulated depreciation and accumulated impairment losses at 31.12. of the previous year |
210 | 185 |
| Adjustment of values carried forward from prior years 1) | –23 | — |
| Accumulated depreciation and accumulated impairment losses | ||
| at 01.01. of the year under review | 187 | 185 |
| Change in consolidated group | — | — |
| Additions | — | 15 |
| Disposals | 134 | — |
| Depreciation/impairment | ||
| Scheduled | 12 | 11 |
| Unscheduled | 1 | 2 |
| Reclassifi cation | –23 | –3 |
| Accumulated depreciation and accumulated impairment losses | ||
| at 31.12. of the year under review | 43 | 210 |
| Balance at 31.12. of the previous year | 612 | 572 |
| Balance at 31.12. of the year under review | 646 | 612 |
1) The values carried forward were adjusted in connection with implementation of a new IT system;
there were no implications for the carrying value
The fair value of the own-use real estate amounted to EUR 697 (691) million as at the balance sheet date. These fair values were calculated largely using the discounted cash fl ow method. The methods used to determine the book values are set out in the section entitled "Accounting policies", subsection "Summary of major accounting policies" on page 127.
An amount of EUR 245 (253) million was allocated from the own-use real estate to special cover funds. The expenditures capitalized for buildings under construction amounted to EUR 96 (42) million as at the balance sheet date. Contractual commitments for the acquisition of property, plant and equipment totaled EUR 2 (—) million as at the balance sheet date.
| Development of plant and equipment | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Gross book value at 31.12. of the previous year | 411 | 343 |
| Adjustment of values carried forward from prior years 1) | –27 | — |
| Gross book value at 01.01. of the year under review | 384 | 343 |
| Change in consolidated group | — | 15 |
| Additions | 42 | 71 |
| Disposals | 38 | 24 |
| Reclassifi cation | 1 | — |
| Disposal group pursuant to IFRS 5 | — | 2 |
| Currency exchange rate diff erences | 8 | 4 |
| Gross book value at 31.12. of the year under review | 397 | 411 |
| Accumulated depreciation and accumulated impairment losses | ||
| at 31.12. of the previous year | 263 | 221 |
| Adjustment of values carried forward from prior years 1) | –27 | — |
| Accumulated depreciation and accumulated impairment losses | ||
| after currency translation at 01.01. of the year under review | 236 | 221 |
| Change in consolidated group | — | 2 |
| Additions | — | 1 |
| Disposals | 30 | — |
| Depreciation/impairments | ||
| Scheduled | 45 | 34 |
| Unscheduled | 1 | 1 |
| Reclassifi cation | 1 | — |
| Other changes | — | 2 |
| Currency exchange rate diff erences | 4 | 2 |
| Accumulated depreciation and accumulated impairment losses | ||
| at 31.12. of the year under review | 257 | 263 |
| Balance at 31.12. of the previous year | 148 | 122 |
| Balance at 31.12. of the year under review | 140 | 148 |
1) The values carried forward were adjusted in connection with implementation of a new IT system; there were no implications for the carrying value
| Other assets | 31.12.2010 | 31.12.2009 |
|---|---|---|
| Figures in EUR million | ||
| Trade accounts receivable | 77 | 93 |
| Receivables relating to investments | 75 | 170 |
| Receivables from non-group lead business | 68 | 84 |
| Other tangible assets | 8 | 11 |
| Claims under insurance for pension commitments | 55 | 50 |
| Prepaid insurance benefi ts | 175 | 116 |
| Surrender values | 33 | 28 |
| Prepaid expenses | 37 | 18 |
| Sundry assets | 186 | 97 |
| Total | 714 | 667 |
Shareholders' equity is shown as a separate component of the consolidated fi nancial statement in accordance with IAS 1 "Presentation of Financial Statements" and IAS 32 "Financial Instruments: Disclosure and Presentation" in conjunction with IAS 39 "Financial Instruments: Recognition and Measurement". The change in shareholders' equity comprises not only the net income deriving from the statement of income but also the changes in the value of asset and liability items not recognized in the statement of income.
The share capital of Talanx AG remains unchanged at EUR 260 million and is divided into 260,000 registered no-par shares. The share capital is fully paid up. With regard to the composition of the shareholders' equity, please see the "Consolidated statement of changes in equity" on page 112.
Minority interests are established in accordance with the shares held by companies outside the Group in the shareholders' equity of the subsidiaries – principally in the shareholders' equity of the Hannover Re Group.
| Minority interests | 2010 | 2009 1) |
|---|---|---|
| Figures in EUR million | ||
| Unrealized gains and losses from investments | 225 | 169 |
| Minority interest in net profi t | 450 | 408 |
| Other shareholder's equity | 2,360 | 2,002 |
| Total | 3,035 | 2,579 |
1) Adjusted on the basis of IAS 8
The equity-aff ecting changes in fi nancial instruments – allocated to the category of "fi nancial assets available for sale" within the Group – before allowance for policyholders, minority interests and deferred taxes were as follows:
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Allocation of gains/losses from the fair value measurement of the " fi nancial assets available for sale" (unrealized gains and losses) |
97 | 1,098 |
| Transfer of gains/losses from the fair value measurement of the "fi nancial assets available for sale" to the result for the reporting period |
–216 | –95 |
IAS 1 "Presentation of Financial Statements" requires detailed disclosures in the Notes that enable the readers of the fi nancial statements to understand the objectives, methods and processes of capital management and provide supplementary information on changes in Group shareholders' equity.
In this context please see the following remarks as well as the information contained in the management report regarding capital management and performance management as well as valuebased management.
The preservation and consistent strengthening of its equity base is a key strategic objective for the Talanx Group. As part of its approach to capital management the Talanx Group considers the policyholders' surplus over and above the shareholders' equity reported in the balance sheet.
The policyholders' surplus is defi ned as the sum total of
The policyholders' surplus totaled EUR 10.8 (9.2) billion as at the balance sheet date.
The chart below illustrates the growth of the policyholders' surplus over the last fi ve reporting years.
1) Adjusted on the basis of IAS 8
The Talanx Group uses "Intrinsic Value Creation" (IVC) as its central value-based management indicator for measuring the value created by our Group companies and segments. This concept as well as the objectives and principles in accordance with which we conduct our enterprise governance and capital management is described in our remarks on capital management and performance management in the relevant subsections of the management report.
In terms of its capital resources the Talanx Group satisfi es the expectations of the rating agencies that assess the Group's fi nancial strength. Some Group companies are subject to additional national capital and solvency requirements. All Group companies met the applicable local minimum capital requirements in the year under review.
Within the scope of Group-wide capital management Talanx AG monitors the capital resources of its subsidiaries with the utmost diligence.
In order to optimize the Group's capital structure and to safeguard the liquidity (solvency) required (by regulators), various Group companies have in the past taken out long-term liabilities that predominantly take the form of subordinated debt and are in some cases exchange-listed.
Specifi cally, the long-term subordinated debt is comprised of the following fi nancial instruments:
| Nominal value, coupon, | |||
|---|---|---|---|
| issue/maturity, debt rating (A. M. Best; S&P) |
2010 | 2009 | |
| Figures in EUR million | |||
| Talanx AG | EUR 300 million, fi xed then fl oating rate, 2010/no fi nal maturity, (—; BBB) |
300 | — |
| Talanx AG issued a subordinated registered bond in 2010 with a contractual conver sion obligation to Talanx shares in the event of an initial public off ering; it may be called by the issuer after ten years at the earliest. |
|||
| Hannover Finance (Luxembourg) S. A. | EUR 500 million, fi xed (5.75%) then fl oating rate, 2010/2040, (a; A) |
500 | — |
| The guaranteed subordinated bond was issued in 2010 on the European capital | market. It may be called in 2014 at the earliest and at each coupon date thereafter. | ||
| Hannover Finance (Luxembourg) S. A. | EUR 750 million, fi xed (5.75%) then fl oating rate, 2004/2024, (a; A) |
747 | 746 |
| The guaranteed subordinated debt was placed on the European capital market. It may be redeemed in 2014 at the earliest and at each coupon date thereafter. |
|||
| Hannover Finance (Luxembourg) S. A. | EUR 500 million, fi xed (5%) then fl oating rate, 2005/no fi nal maturity, (a; A) |
484 | 481 |
| Part of the volume of the guaranteed subordinated debt was off ered to the holders of the debt issued in 2001 by way of exchange. The debt may be called by the issuer on 01.06.2015 at the earliest and at each coupon date thereafter. |
|||
| Hannover Finance (Luxembourg) S. A. 1) | EUR 138 million, fi xed (6.25%) then fl oating rate, 2001/2031, (a; A) |
138 | 138 |
| The guaranteed subordinated debt was originally issued in an amount of EUR 350 million. The holders of this debt were off ered the opportunity to exchange into the new debt issued in 2005. Nominal participation in the exchange was EUR 212 mil lion. The debt may be called by the issuer in March 2011 at the earliest. |
|||
| HDI-Gerling Industrie Versicherung AG | EUR 250 million, fi xed (7%) then fl oating rate, 2004/2024, (bbb+; A–) |
265 | 269 |
| Exchange and may be called by the issuer in 2014 at the earliest. | The subordinated bond is listed on the Euro MTF Market of the Luxembourg Stock | ||
| HDI-Gerling Lebensversicherung AG 2) | EUR 110 million, 6.75%, 2005/no fi nal maturity (—; A–) |
115 | 105 |
| The subordinated debt is listed on the Euro MTF Market of the Luxembourg Stock Exchange. It may be called by the issuer in 2015 at the earliest. |
|||
| Talanx Finanz 3) | EUR 243 million, 4.5%, 2005/2025, (bbb; BBB) |
242 | 264 |
| The bond was originally issued in an amount of EUR 350 million. The guaranteed subordinated debt is listed on the Luxembourg Stock Exchange. |
|||
| Balance at 31.12 . of the fi nancial year | 2.791 | 2.003 |
1) The remaining volume of this debt in an amount of EUR 138 million was repaid on 14 March 2011
2) In the fi rst quarter of 2010 external companies acquired portions of the debt in a nominal amount of EUR 10 million; the remaining volume was increased accordingly
3) In the fi rst quarter of 2010 the issuer bought back, amortized and cancelled portions of the debt in a nominal amount of EUR 10 million fr om a Group company. In the third quarter of 2010 Group companies purchased portions of the debt in a nominal amount of EUR 22 million; the remaining volume was reduced accordingly
The increase in subordinated debt resulted principally from the two debts issued in the year under review.
On 14 September 2010 our subsidiary Hannover Finance (Luxembourg) S. A. placed subordinated debt on the European capital market with a nominal value of EUR 500 million. It has a maturity of 30 years with a fi rst scheduled call option aft er ten years. The bond carries a fi xed coupon of 5.75% p.a. in the fi rst ten years, aft er which the interest basis changes to a fl oating rate of threemonth EURIBOR +423.5 basis points.
In November of the year under review Talanx AG signed a contract with the Japanese insurer Meiji Yasuda Life Insurance Company, Tokyo, regarding a long-term strategic cooperation backed by a capital participation. In this context Talanx AG issued a subordinated debt on 18 November 2010 with a nominal volume of EUR 300 million. The creditor is Meiji Yasuda Life Insurance Company. The bond has no fi nal maturity and entails a contractual obligation for conversion into shares of Talanx AG in the event of an initial public off ering. In the fi rst ten years this debt carries a fi xed coupon; it has a fi rst scheduled call option by the issuer aft er 10 years.
| 2010 | Amortized cost | Unrealized gains or losses |
Accrued interest | Fair value |
|---|---|---|---|---|
| Figures in EUR million | ||||
| Debts measured at amortized cost | 2,791 | –86 | 66 | 2,771 |
| 2009 | Amortized cost | Unrealized gains or losses |
Accrued interest | Fair value |
|---|---|---|---|---|
| Figures in EUR million | ||||
| Debts measured at amortized cost | 2,003 | –132 | 58 | 1,929 |
The fair value of the extended subordinated loans is normally based on quoted, active market prices. If such price information was not available, fair value was determined on the basis of the recognized eff ective interest rate method or estimated using other fi nancial assets with similar rating, duration and return characteristics. Under the eff ective interest rate method the current market interest rate levels in the relevant interest rate fi xing periods are always taken as a basis.
The net result of EUR 126 (104) million from subordinated liabilities in the year under review consisted of interest expenses in an amount of EUR 126 (102) million and expenses from amortization (EUR — (2) million).
Of the total subordinated liabilities, an amount of EUR 646 (524) million has a maturity of up to 5 years, EUR 746 (746) million has a maturity of 10–20 years, EUR 500 (138) million has a maturity of more than 20 years and EUR 899 (595) million has no fi xed maturity. A detailed presentation of the maturities is provided in the section entitled "Nature of risks associated with insurance contracts and fi nancial instruments" (subsection "Management of liquidity risks", pages 184 et seqq.).
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Figures in EUR million | ||||||
| Balance at 31.12. of the previous year |
5,026 | 414 | 4,612 | 4,894 | 409 | 4,485 |
| Change in the consolidated group | — | — | — | 69 | 24 | 45 |
| Portfolio entries/withdrawals | –3 | –1 | –2 | –54 | 2 | –56 |
| Allocations | 906 | 90 | 816 | 1,361 | 38 | 1,323 |
| Releases | 722 | 116 | 606 | 1,294 | 62 | 1,232 |
| Other changes | — | –1 | 1 | –1 | — | –1 |
| Currency exchange rate diff erences | 204 | 20 | 184 | 51 | 3 | 48 |
| Balance at 31.12. of the year under review |
5,411 | 406 | 5,005 | 5,026 | 414 | 4,612 |
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Figures in EUR million | ||||||
| Balance at 31.12. of the previous year |
39,754 | 799 | 38,955 | 36,386 | 929 | 35,457 |
| Change in the consolidated group | — | — | — | 985 | — | 985 |
| Portfolio entries/withdrawals | –61 | 217 | –278 | 385 | –98 | 483 |
| Allocations | 4,168 | –11 | 4,179 | 3,863 | 78 | 3,785 |
| Releases | 1,739 | — | 1,739 | 1,918 | 108 | 1,810 |
| Other changes | –2 | — | –2 | — | — | — |
| Currency exchange rate diff erences | 346 | –28 | 374 | 53 | –2 | 55 |
| Balance at 31.12. of the year under review |
42,466 | 977 | 41,489 | 39,754 | 799 | 38,955 |
| 2010 | 2009 | |||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Figures in EUR million | ||||||
| Less than one year | 2,874 | 36 | 2,838 | 2,933 | 46 | 2,887 |
| Between one and fi ve years | 8,490 | 196 | 8,294 | 8,085 | 193 | 7,892 |
| Between fi ve and ten years | 8,856 | 155 | 8,701 | 7,990 | 166 | 7,824 |
| Between ten and twenty years | 9,888 | 187 | 9,701 | 9,230 | 204 | 9,026 |
| After more than twenty years | 6,067 | 80 | 5,987 | 5,630 | 92 | 5,538 |
| Deposits | 6,291 | 323 | 5,968 | 5,886 | 98 | 5,788 |
| Total | 42,466 | 977 | 41,489 | 39,754 | 799 | 38,955 |
| 2010 | 2009 1) | |||||
|---|---|---|---|---|---|---|
| Gross | Retro | Net | Gross | Retro | Net | |
| Figures in EUR million | ||||||
| Balance at 31.12. of the previous year |
27,256 | 4,734 | 22,522 | 27,161 | 5,480 | 21,681 |
| Change in consolidated group | –2 | — | –2 | 13 | 2 | 11 |
| Portfolio entries/withdrawals | 124 | –11 | 135 | –25 | –1 | –24 |
| Plus incurred claims and claims expenses (net) |
||||||
| Year under review | 13,746 | 1,391 | 12,355 | 9,671 | 1,180 | 8,491 |
| Previous years | 579 | 134 | 445 | 1,369 | –216 | 1,585 |
| Total | 14,325 | 1,525 | 12,800 | 11,040 | 964 | 10,076 |
| Less claims and claims expenses paid (net) |
||||||
| Year under review | 6,814 | 518 | 6,296 | 4,984 | 421 | 4,563 |
| Previous years | 6,340 | 1,077 | 5,263 | 5,954 | 1,291 | 4,663 |
| Total | 13,154 | 1,595 | 11,559 | 10,938 | 1,712 | 9,226 |
| Other changes | –1,210 | –741 | –469 | –3 | 22 | –25 |
| Currency exchange rate diff erences | 1,199 | 161 | 1,038 | 8 | –21 | 29 |
| Balance at 31.12. of the year under review |
28,538 | 4,073 | 24,465 | 27,256 | 4,734 | 22,522 |
1) Adjusted on the basis of IAS 8
The other changes and currency exchange rate diff erences include the fi gures for the disposal group in accordance with IFRS 5 in an amount of EUR 1.3 billion (gross). In this regard please see our remarks on the disposal group on pages 164 et seq.
The run-off triangles establish the correlation between the loss occurrence year and the loss run-off year. In line with previous years, we show the constituted loss reserves not by occurrence years but by the run-off of the reserve reported in the balance sheet. For the sake of improved understanding, we split the disclosure into primary insurance and reinsurance, with only the corresponding net loss reserves being shown.
The following two tables set out the net loss reserves for the years 2000 to 2010 split into our property/casualty companies in the primary insurance segments and the Group segment of Non-Life Reinsurance. The tables show the changes made over time in the loss reserve established as at each balance sheet date due to payments rendered, supplementary premiums brought to account in years aft er they were written and revised estimates of outstanding payments. The diff erence between the original loss reserve and the current reserve is refl ected in the net run-off results.
These results are signifi cantly infl uenced by movements in the euro relative to major foreign currencies. Despite opposing eff ects associated with other major foreign currencies, the depreciation of the euro against the US dollar year-on-year was a particularly signifi cant factor in the rise in the loss reserves on a euro basis.
The chart shows the run-off of the net loss reserves established by our property/casualty insurance companies as at each balance sheet date, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years. The run-off of the reserves for individual occurrence years is not shown.
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Figures in EUR million | |||||||||||
| Loss and loss adjustment expense | |||||||||||
| reserve | 3,942 | 3,912 | 3,903 | 4,217 | 4,879 | 5,818 | 6,095 | 6,242 | 6,042 | 6,122 | 6,700 |
| Cumulative payments for the year in question and previous years |
|||||||||||
| One year later | 1,031 | 802 | 872 | 632 | 740 | 1,150 | 991 | 1,486 | 1,008 | 1,355 | |
| Two years later | 1,344 | 1,206 | 1,237 | 1,030 | 1,269 | 1,696 | 1,800 | 1,908 | 1,787 | ||
| Three years later | 1,596 | 1,449 | 1,528 | 1,409 | 1,667 | 2,255 | 2,030 | 2,484 | |||
| Four years later | 1,755 | 1,677 | 1,831 | 1,730 | 2,115 | 2,401 | 2,491 | ||||
| Five years later | 1,904 | 1,907 | 2,091 | 2,083 | 2,219 | 2,805 | |||||
| Six years later | 2,100 | 2,131 | 2,366 | 2,121 | 2,554 | ||||||
| Seven years later | 2,278 | 2,363 | 2,347 | 2,392 | |||||||
| Eight years later | 2,462 | 2,343 | 2,527 | ||||||||
| Nine years later | 2,465 | 2,511 | |||||||||
| Ten years later | 2,609 | ||||||||||
| Loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve |
|||||||||||
| One year later | 3,696 | 3,426 | 3,824 | 3,863 | 4,493 | 5,077 | 5,205 | 5,659 | 5,356 | 5,917 | |
| Two years later | 3,337 | 3,276 | 3,628 | 3,806 | 4,387 | 5,011 | 5,161 | 4,976 | 5,066 | ||
| Three years later | 3,198 | 3,334 | 3,671 | 3,895 | 4,381 | 5,089 | 4,760 | 5,398 | |||
| Four years later | 3,234 | 3,319 | 3,802 | 3,941 | 4,536 | 4,760 | 5,038 | ||||
| Five years later | 3,196 | 3,505 | 3,842 | 4,065 | 4,302 | 4,999 | |||||
| Six years later | 3,321 | 3,507 | 3,912 | 3,904 | 4,524 | ||||||
| Seven years later | 3,501 | 3,614 | 3,807 | 4,124 | |||||||
| Eight years later | 3,492 | 3,538 | 3,970 | ||||||||
| Nine years later | 3,434 | 3,675 | |||||||||
| Ten years later | 3,535 | ||||||||||
| Run-off result of the loss reserve | 407 | 238 | –68 | 93 | 355 | 819 | 1,056 | 844 | 975 | 205 | |
| Of which currency exchange rate diff erences |
50 | 114 | 121 | 36 | –94 | –123 | –81 | 82 | –71 | –103 | |
| Run-off result excluding currency | |||||||||||
| exchange rate diff erences | 357 | 124 | –189 | 57 | 449 | 942 | 1,137 | 762 | 1,046 | 308 | |
| As percentage of original loss reserve | 9 | 3 | –5 | 1 | 9 | 16 | 19 | 12 | 17 | 5 |
The run-off triangles show the run-off of the net loss reserve established as at each balance sheet date in the Non-Life Reinsurance segment, this reserve comprising the provisions constituted in each case for the current and preceding occurrence years. The run-off of the reserve for individual occurrence years is not shown in this regard, but rather the run-off of the reserve constituted annually in the balance sheet as at the balance sheet date.
| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Figures in EUR million | |||||||||||
| Loss and loss adjustment expense | |||||||||||
| reserve | 8,482 | 12,183 | 12,863 | 13,462 | 13,121 | 14,296 | 13,280 | 12,718 | 13,354 | 13,780 | 15,255 |
| Cumulative payments for the year in question and previous years |
|||||||||||
| One year later | 2,108 | 2,242 | 2,118 | 3,623 | 4,496 | 3,051 | 2,665 | 2,476 | 2,928 | 2,807 | |
| Two years later | 3,112 | 3,775 | 5,024 | 7,322 | 6,611 | 5,072 | 4,390 | 4,250 | 4,573 | ||
| Three years later | 4,174 | 6,032 | 7,765 | 8,780 | 7,590 | 6,205 | 5,696 | 5,371 | |||
| Four years later | 5,745 | 8,589 | 8,909 | 9,519 | 8,356 | 7,306 | 6,501 | ||||
| Five years later | 7,581 | 9,400 | 9,467 | 10,102 | 9,137 | 7,935 | |||||
| Six years later | 8,114 | 9,786 | 9,897 | 10,734 | 9,596 | ||||||
| Seven years later | 8,405 | 10,122 | 10,457 | 11,082 | |||||||
| Eight years later | 8,611 | 10,533 | 10,724 | ||||||||
| Nine years later | 8,891 | 10,735 | |||||||||
| Ten years later | 9,024 | ||||||||||
| Loss and loss adjustment expense reserve (net) for the year in question and previous years plus payments made to date on the original reserve at the end of the year |
|||||||||||
| One year later | 9,422 | 11,604 | 11,743 | 13,636 | 14,433 | 13,074 | 12,366 | 12,171 | 13,265 | 14,303 | |
| Two years later | 8,878 | 10,477 | 11,845 | 14,237 | 13,533 | 12,366 | 11,868 | 11,926 | 13,263 | ||
| Three years later | 8,186 | 10,744 | 12,373 | 13,597 | 13,061 | 11,977 | 11,645 | 12,040 | |||
| Four years later | 8,354 | 11,544 | 11,731 | 13,307 | 12,771 | 11,773 | 11,670 | ||||
| Five years later | 9,102 | 11,051 | 11,666 | 13,122 | 12,618 | 11,769 | |||||
| Six years later | 8,756 | 11,164 | 11,686 | 13,054 | 12,578 | ||||||
| Seven years later | 8,864 | 11,219 | 11,707 | 12,988 | |||||||
| Eight years later | 8,936 | 11,262 | 11,670 | ||||||||
| Nine years later | 8,933 | 11,166 | |||||||||
| Ten years later | 8,866 | ||||||||||
| Run-off result of the loss reserve | 67 | 28 | –58 | 29 | –26 | –36 | –29 | –90 | 116 | –525 | |
| Of which currency exchange rate diff erences |
–94 | –27 | –28 | –42 | –47 | –69 | –65 | –90 | –139 | –137 | |
| Run-off result excluding currency exchange rate diff erences |
161 | 55 | –30 | 71 | 21 | 33 | 36 | — | 255 | –388 | |
| As percentage of original loss reserve | 2 | 1 | — | 1 | — | — | — | — | 2 | –3 |
The carrying amount of the reinsurance recoverables on unpaid claims of EUR 4.1 (4.7) billion includes cumulative specifi c value adjustments of EUR 4 (24) million. The total amount of the net reserves was EUR 24.4 (22.5) billion. The following breakdown of the durations refers to this amount.
| 2010 2009 1) |
||||||
|---|---|---|---|---|---|---|
| Duration of the reserve | Gross | Retro | Net | Gross | Retro | Net |
| Figures in EUR million | ||||||
| One year or less | 9,403 | 1,516 | 7,887 | 8,201 | 1,427 | 6,774 |
| Between one and fi ve years | 10,944 | 1,570 | 9,374 | 10,514 | 2,069 | 8,445 |
| Between fi ve and ten years | 4,243 | 559 | 3,684 | 4,220 | 775 | 3,445 |
| Between ten and twenty years | 2,401 | 244 | 2,157 | 2,663 | 318 | 2,345 |
| More than twenty years | 1,094 | 84 | 1,010 | 1,302 | 73 | 1,229 |
| Deposits | 453 | 100 | 353 | 356 | 72 | 284 |
| Total | 28,538 | 4,073 | 24,465 | 27,256 | 4,734 | 22,522 |
1) Adjusted on the basis of IAS 8
| 2010 | 2009 1) | |||||
|---|---|---|---|---|---|---|
| Gross | Retro | Netto | Net | Retro | Net | |
| Figures in EUR million | ||||||
| Balance at 31.12. of the previous year |
1,274 | 1 | 1,273 | 973 | 1 | 972 |
| Change in the consolidated group | — | — | — | 2 | — | 2 |
| Portfolio entries/withdrawals | — | — | — | — | — | — |
| Allocations/releases (—) | –164 | — | –164 | 452 | — | 452 |
| Disposals | ||||||
| Life insurance policies | –1 | — | –1 | 163 | — | 163 |
| Liability/accident policies with a premium refund |
11 | — | 11 | 8 | — | 8 |
| Other changes | 12 | — | 12 | 18 | — | 18 |
| Currency exchange rate diff erences | 1 | — | 1 | — | — | — |
| Balance at 31.12. of the year under review |
1,113 | 1 | 1,112 | 1,274 | 1 | 1,273 |
1) Adjusted on the basis of IAS 8
The Group companies normally award their employees pension commitments based on defi ned contribution or defi ned benefi t plans. The type of pension commitment is given in accordance with the relevant pension plan and encompasses retirement, disability, widows' and orphans' benefi ts. The pension entitlement is dependent on length of service and salary. The vast majority of pension commitments are based on defi ned benefi t pension plans.
Under defi ned benefi t plans the pension benefi ciary is promised a specifi c benefi t; in contrast to defi ned contribution plans, the expenditures to be incurred by the company on the basis of the benefi t commitments are not fi xed from the outset. The commitments to employees in Germany predominantly comprise commitments funded by the company; no pension funds exist.
In addition, employees have an opportunity to accumulate further old-age provision by way of deferred compensation through membership of HDI-Gerling Pensionskasse AG. The benefi ts provided by HDI-Gerling Pensionskasse AG are guaranteed for its members and their surviving dependants and comprise traditional pension plans with bonus increases as well as unit-linked hybrid annuities. Employees of the former Gerling Group also have the option of obtaining pension commitments through deferred compensation with Gerling Versorgungskasse VVaG. In this case the employer companies meet the administrative expenses and assume responsibility for ensuring that the life insurance contracts can be fulfi lled through their liability to make additional contributions.
Provisions for pensions are established in accordance with IAS 19 "Employee Benefi ts" using the Projected Unit Credit Method. They are established in accordance with actuarial principles and make allowance for the length of service and estimated rate of compensation increase of pension benefi ciaries. The benefi t entitlements are discounted using a single Group-wide blended rate of interest.
The pension commitments are measured on the basis of the following assumptions:
| 2010 | 2009 | |||||||
|---|---|---|---|---|---|---|---|---|
| Measurement parameters/assumptions weighted in % | ||||||||
| Discount rate | 4.52 | 5.31 | ||||||
| Projected long-term yield on plan assets | 5.78 | 6.08 | ||||||
| 2010 | 2009 | |||||||
| Measurement para | ||||||||
| meters/assumptions | Germany | USA | UK | Other | Germany | USA | UK | Other |
| Figures in % | ||||||||
| Rate of compensation | ||||||||
| increase | 2.75 | — | — | 2.5–5.0 | 3 | — | 4.75 | 2.5–5.2 |
| Indexation | 2 | 2 | 3.4 | 2.0–3.0 | 2.25 | 2 | 3.25 | 2.0–3.0 |
The change in the projected benefi t obligation of the pension commitments for the various defi ned benefi t plans of the Group was as follows:
| Change in the projected benefi t obligation | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Projected benefi t obligation at 01.01. of the year under review | 1,424 | 1,246 |
| Current service cost | 12 | 14 |
| Interest cost | 74 | 76 |
| Deferred compensation | 1 | 2 |
| Actuarial gain/loss | 131 | 113 |
| Currency translation | 5 | 42 |
| Benefi ts paid during the year | –68 | –66 |
| Past service cost | 1 | — |
| Business combinations, divestitures and other activities | –1 | –1 |
| Plan curtailments | — | –2 |
| Projected benefi t obligation at 31.12. of the year under review | 1,579 | 1,424 |
The funded status of the defi ned benefi t obligation is shown in the following table:
| Change in the projected benefi t obligation | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Projected benefi t obligation from unfunded plans | 1,506 | 1,366 |
| Projected benefi t obligation from wholly or partially funded plans | 73 | 58 |
| Projected benefi t obligation at 31.12. of the year under review | 1,579 | 1,424 |
| Fair value of plan assets | –82 | –70 |
| Funded status | 1,497 | 1,354 |
The fair value of the plan assets developed as follows:
| Change in plan assets | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Fair value at 01.01. of the year under review | 70 | 57 |
| Expected return on plan assets | 3 | 2 |
| Actuarial gain/loss | 7 | 6 |
| Currency translation | 4 | 3 |
| Employer contributions | 4 | 4 |
| Benefi ts paid during the year | –3 | –2 |
| Eff ect of plan settlements | –3 | — |
| Business combinations, divestitures and other activities | — | — |
| Fair value at 31.12. of the year under review | 82 | 70 |
The structure of the asset portfolio underlying the plan assets was as follows:
| Portfolio structure of plan assets | 2010 | 2009 |
|---|---|---|
| as % of plan assets | ||
| Fixed-income securities | 54 | 54 |
| Equities | 18 | 19 |
| Other | 28 | 27 |
| Total | 100 | 100 |
The expected long-term return on plan assets per asset class is based on studies of historical and estimated future rates of return.
The fair value of plan assets as at the balance sheet date included amounts totaling EUR 33 (30) million for own fi nancial instruments.
The actual return on the plan assets amounted to EUR 3 (5) million in the year under review.
The following table presents a reconciliation of the defi ned benefi t obligations with the provisions for pensions recognized as at the balance sheet date:
| Funded status of the defi ned benefi t obligation | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Defi ned benefi t obligations at 31.12. of the year under review | 1,579 | 1,424 |
| Fair value of plan assets at 31.12. of the year under review | –82 | –70 |
| Funded status at 31.12. of the year under review | 1,497 | 1,354 |
| Unrealized actuarial gain/loss | –180 | –56 |
| Unrecognized past service cost | –1 | — |
| Net provisions for pensions at 31.12. of the year under review | 1,316 | 1,298 |
The recognized provision for pensions developed as follows in the year under review:
| Change in the provisions for pensions | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Net provisions for pensions at 01.01. of the year under review | 1,298 | 1,272 |
| Currency translation | 1 | — |
| Change in consolidated group | –6 | — |
| Net periodic pension cost | 92 | 92 |
| Deferred compensation | — | — |
| Amounts paid during the year | –2 | –3 |
| Benefi ts paid during the year | –68 | –66 |
| Reclassifi cation and other movements | 1 | 3 |
| Disposal groups pursuant to IFRS 5 | — | — |
| Net provisions for pensions at 31.12. of the year under review | 1,316 | 1,298 |
The components of the net periodic pension cost for defi ned benefi t plans recognized in the statement of income were as follows:
| Net periodic pension cost | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Current service cost for the year under review | 12 | 13 |
| Interest cost | 74 | 76 |
| Expected return on plan assets | –3 | –2 |
| Recognized actuarial gain/loss | 9 | 7 |
| Past service cost | — | — |
| Eff ect of plan curtailments | — | –2 |
| Net periodic pension cost for the year under review | 92 | 92 |
For the 2011 fi nancial year the Group anticipates employer contributions of EUR 2 (3) million, which will be paid into the defi ned benefi t plans shown here.
The net periodic pension cost was recognized in the consolidated statement of income in amounts of EUR 12 (14) million under acquisition costs and administrative expenses, EUR 79 (77) million under other expenses and EUR 1 (1) million under other investment expenses.
Defi ned contribution plans are funded via external pension funds or similar institutions. In this case fi xed contributions (e.g. based on the relevant income) are paid to these institutions and the pension benefi ciary's claim is against the said institution; in eff ect, the employer has no further obligation beyond payment of the contributions. The expense recognized for these obligations in the year under review amounted to EUR 4 (4) million, of which only a minimal amount was attributable to commitments to employees in key positions.
The provisions for taxes can be broken down as follows:
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Provision for income tax | 569 | 639 |
| Other tax provisions | 174 | 132 |
| Total | 743 | 771 |
The sundry provisions, which are measured by the likely amounts used, developed as follows:
| Restructur ing/ Integration |
Assump tion of third-party pension commit ments in return for payment |
Bonuses and incentives |
Anni versary bonuses |
Early re tirement/ partial retirement arrange ments |
Other personnel expenses |
Out standing invoices |
Other | Total | |
|---|---|---|---|---|---|---|---|---|---|
| Figures in EUR million | |||||||||
| Balance at 01.01.2009 | 47 | 75 | 55 | 24 | 54 | 23 | 72 | 175 | 525 |
| Change in consolidated group | — | — | — | — | — | — | — | — | — |
| Additions | 1 | — | 49 | 6 | 17 | 48 | 96 | 74 | 291 |
| Utilization | 30 | — | 42 | 2 | 3 | 26 | 66 | 37 | 206 |
| Release | — | — | 2 | — | 1 | 1 | 6 | 14 | 24 |
| Change in fair value of plan assets | — | — | — | — | –9 | — | — | — | –9 |
| Other changes | — | — | — | — | — | — | — | — | — |
| Currency exchange rate diff erences | — | — | — | — | — | –1 | –1 | — | –2 |
| Balance at 31.12.2009 | 18 | 75 | 60 | 28 | 58 | 43 | 95 | 198 | 575 |
| Change in consolidated group | — | — | — | — | — | — | — | — | — |
| Additions | 16 | — | 52 | 1 | 15 | 54 | 196 | 250 | 584 |
| Utilization | 7 | — | 44 | 3 | 13 | 32 | 160 | 123 | 382 |
| Release | 2 | — | 6 | — | — | 1 | 9 | 125 | 143 |
| Change in fair value of plan assets | — | — | — | — | –1 | — | — | — | –1 |
| Other changes | –6 | — | –2 | — | –3 | 5 | –5 | 75 | 64 |
| Currency exchange rate diff erences | — | — | –1 | — | — | –1 | –1 | –2 | –5 |
| Balance at 31.12.2010 | 19 | 75 | 59 | 26 | 56 | 68 | 116 | 273 | 692 |
Reclassifi cations in accordance with IFRS 5 in an amount of EUR 9 million were carried under the "Other changes" in 2010. In addition, a sundry provision of EUR 55 million was established for expenses from the valuation of the disposal group (item: Other); for further explanation please see the section "Non-current assets held for sale and disposal groups", pages 164 et seq.
In this item the Group reports loan liabilities of EUR 747 (675) million, chiefl y in connection with the fi nancing of acquired interests or other investment activities.
The rise of EUR 72 million in the liabilities to EUR 747 million in the year under review is attributable solely to the Non-Life Reinsurance segment and results from increased borrowing requirements as a consequence of the investment activities of Hannover Re Real Estate Holdings, Inc. The largest loan in a nominal amount of EUR 68 million runs until March 2015.
In addition, loans of EUR 559 million are apportionable to the Corporate Operations segment and are connected above all with the fi nancing of interests acquired in 2007 (purchase of all shares of BHW Lebensversicherung AG and BHW Pensionskasse AG as well as increase in the interests held in the PB insurers to 100%). Talanx AG took out a fl oating-rate bank liability in an amount of EUR 550 million in order to fi nance these acquisitions. The Group uses derivative fi nancial instruments to hedge the interest rate risk (for further information see item 12 of the Notes, subsection "Hedge accounting", page 209). A further EUR 9 million is attributable to a bearer debenture issued in 2003 with a term until July 2013. The interest expenditures (EUR 8 million) resulting from these liabilities are recognized under the item "Financing costs".
The net result from notes payable and loans is EUR 15 (14) million and consists solely of interest expenditures including amortization of EUR 1 (—) million.
The carrying amount of this item corresponds to the amortized cost. Cash outfl ows occur annually until fi nal maturity in the amount of the interest payments. The total amount does not include any liabilities with a maturity of less than one year (see also the subsection "Management of liquidity risks" in the section "Nature of risks associated with insurance contracts and fi nancial instruments", pages 184 et seqq.).
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR million | ||
| Liabilities under direct written insurance business | 2,155 | 2,237 |
| thereof to policyholders | 1,548 | 1,659 |
| thereof to insurance intermediaries | 607 | 578 |
| Reinsurance payable | 1,968 | 1,570 |
| Liabilities due to banks | — | 57 |
| Trade accounts payable | 68 | 39 |
| Liabilities relating to investments | 145 | 206 |
| Liabilities under non-group lead business | 71 | 35 |
| Liabilities from derivatives | 234 | 72 |
| thereof negative fair values from derivative hedging instruments | 149 | 42 |
| Deferred income | 26 | 27 |
| Interest | 15 | 11 |
| Liabilities due to social insurance institutions | 11 | 11 |
| Other liabilities | 165 | 296 |
| Balance at 31.12. of the year under review | 4,858 | 4,561 |
In the year under review Talanx AG paid back liabilities due to banks in an amount of EUR 57 million.
Explanatory remarks on the maturities of the fi nancial instruments included in the other liabilities are provided in the section "Nature of risks associated with insurance contracts and fi nancial instruments". Detailed information on liabilities from derivatives is provided in item 12 of the Notes, page 208.
The following table presents a breakdown of the deferred tax assets and liabilities into the balance sheet items from which they are derived.
| 31.12.2010 | 31.12.2009 1) | |
|---|---|---|
| Figures in EUR million | ||
| Deferred tax assets | ||
| Loss and loss adjustment expense reserves | 338 | 251 |
| Technical provisions | 290 | 269 |
| Loss carry-forwards | 306 | 271 |
| Benefi t reserves | 50 | 52 |
| Provisions | 208 | 132 |
| Accounts receivable on insurance business | 12 | 20 |
| Investments | 68 | 54 |
| Contract deposits | 309 | 537 |
| Premium refunds | 13 | 14 |
| Other invested assets | 3 | 14 |
| Value adjustment | –180 | –267 |
| Other | 400 | 232 |
| Total | 1,817 | 1,579 |
| Deferred tax liabilities | ||
| Equalization reserve | 1,088 | 1,060 |
| Deferred acquisition costs2) | 488 | 511 |
| Contract deposits | 51 | 96 |
| Accounts receivable on insurance business | 381 | 99 |
| Present value of future profi ts (PVFP) | 302 | 285 |
| Benefi t reserves | 167 | 342 |
| Technical provisions | 47 | 95 |
| Investments | 197 | 191 |
| Loss and loss adjustment expense reserves | 30 | 59 |
| Other invested assets | 63 | 23 |
| Debt consolidation | 18 | 12 |
| Provisions | 55 | 16 |
| Other | 95 | 64 |
| Total | 2,982 | 2,853 |
| Deferred tax liabilities (net) | 1,165 | 1,274 |
1) Adjusted on the basis of IAS 8
2) The deferred taxes on deferred acquisition costs are shown for net, i.e. aft er allowance for the shares of reinsurers.
The deferred tax assets and deferred tax liabilities were recognized as follows:
| 31.12.2010 | 31.12.2009 | |
|---|---|---|
| Figures in EUR million | ||
| Deferred tax assets | 268 | 235 |
| Deferred tax liabilities | 1,433 | 1,509 |
| Deferred tax liabilities (net) | 1,165 | 1,274 |
The gross written premium includes the savings elements of premiums under unit-linked life and annuity policies. These savings elements were eliminated from the net premium earned.
| 2010 1) | Industrial Lines |
Retail Germany |
Retail International |
Non-Life Reinsurance |
Life/Health Reinsurance |
Total |
|---|---|---|---|---|---|---|
| Figures in EUR million | ||||||
| Gross written premium including premium from unit-linked life and annuity insurance |
3,048 | 6,802 | 2,233 | 5,973 | 4,813 | 22,869 |
| Savings elements of premium from unit-linked life and annuity insurance |
— | 932 | 207 | — | — | 1,139 |
| Ceded written premium | 1,363 | 210 | 88 | 692 | 414 | 2,767 |
| Change in gross unearned premium | 41 | 45 | 18 | –276 | –13 | –185 |
| Change in ceded unearned premium | 42 | –6 | 28 | –39 | — | 25 |
| Net premium earned | 1,684 | 5,711 | 1,928 | 5,044 | 4,386 | 18,753 |
| 2009 1) | Industrial Lines |
Retail Germany |
Retail International |
Non-Life Reinsurance |
Life/Health Reinsurance |
Total |
|---|---|---|---|---|---|---|
| Figures in EUR million | ||||||
| Gross written premium including premium from unit-linked life and |
||||||
| annuity insurance | 3,062 | 6,596 | 1,827 | 5,281 | 4,157 | 20,923 |
| Savings elements of premium from unit-linked life and annuity insurance |
— | 835 | 144 | — | — | 979 |
| Ceded written premium | 1,402 | 271 | 110 | 332 | 415 | 2,530 |
| Change in gross unearned premium | 20 | 167 | –32 | –193 | –29 | –67 |
| Change in ceded unearned premium | –39 | 86 | –6 | –20 | 3 | 24 |
| Net premium earned | 1,719 | 5,571 | 1,547 | 4,776 | 3,710 | 17,323 |
1) Presentation aft er elimination of intra-Group relations
| (29) Investment income | ||||||
|---|---|---|---|---|---|---|
| 2010 1) | Industrial Lines |
Retail Germany |
Retail International |
Non-Life Reinsurance |
Life/Health Reinsurance |
Corporate Operations |
Total |
|---|---|---|---|---|---|---|---|
| Figures in EUR million | |||||||
| Income from real estate | 7 | 51 | 1 | 32 | — | — | 91 |
| Dividends2) | 9 | 23 | 3 | 6 | 1 | 7 | 49 |
| Current interest income3) | 208 | 1,463 | 119 | 634 | 189 | 3 | 2,616 |
| Other income | 3 | 11 | — | 9 | 2 | 1 | 26 |
| Ordinary investment income | 227 | 1,548 | 123 | 681 | 192 | 11 | 2,782 |
| Appreciation | — | 10 | — | 27 | — | — | 37 |
| Realized gains on investments | 24 | 191 | 26 | 207 | 39 | 3 | 490 |
| Unrealized gains on investments | 3 | 21 | 24 | 12 | 14 | — | 74 |
| Investment income | 254 | 1,770 | 173 | 927 | 245 | 14 | 3,383 |
| Realized losses on investments | 10 | 28 | 3 | 55 | 9 | — | 105 |
| Unrealized losses on investments | 1 | 12 | 6 | 44 | 23 | — | 86 |
| Total | 11 | 40 | 9 | 99 | 32 | — | 191 |
| Impairments/depreciation on invest ment property |
|||||||
| Scheduled | 1 | 7 | — | 7 | — | — | 15 |
| Unscheduled | — | 6 | — | — | — | — | 6 |
| Impairments on equity securities | 2 | 28 | 8 | 1 | — | 6 | 45 |
| Impairments on fi xed-income securities |
— | 9 | — | 8 | — | — | 17 |
| Impairments on other investments | 3 | 18 | — | 8 | — | 3 | 32 |
| Expenses for the administration of investments |
4 | 11 | 1 | 9 | 2 | 98 | 125 |
| Other expenses | 8 | 17 | 1 | 25 | 2 | 2 | 55 |
| Other investment expenses/ | |||||||
| impairments | 18 | 96 | 10 | 58 | 4 | 109 | 295 |
| Investment expenses | 29 | 136 | 19 | 157 | 36 | 109 | 486 |
| Net income from investments under own management |
225 | 1,634 | 154 | 770 | 209 | –95 | 2,897 |
| Interest income on funds withheld and contract deposits |
— | — | — | 19 | 406 | — | 425 |
| Interest expense on funds withheld and contract deposits |
1 | 24 | — | 7 | 113 | — | 145 |
| Net interest income on funds withheld and contract deposits |
–1 | –24 | — | 12 | 293 | — | 280 |
| Net investment income | 224 | 1,610 | 154 | 782 | 502 | –95 | 3,177 |
1) Adjusted on the basis of IAS 8; presentation aft er elimination of intra-Group relations between segments 2) The profi t or loss on investments in associated companies amounts to EUR 2 million and was recognized under dividends in 2010;
the previous year was adjusted accordingly
3) Amortization amounts fr om diff erences on fi xed-income investments are recognized under current interest income (previously "Other income"); the previous year was adjusted accordingly
| Industrial | Retail | Retail | Non-Life | Life/Health | Corporate | ||
|---|---|---|---|---|---|---|---|
| 2009 1) | Lines | Germany | International | Reinsurance | Reinsurance | Operations | Total |
| Figures in EUR million | |||||||
| Income from real estate | 4 | 54 | 2 | 5 | — | — | 65 |
| Dividends2) | 6 | 36 | 4 | –3 | — | 8 | 51 |
| Current interest income3) | 209 | 1,357 | 116 | 606 | 162 | 7 | 2,457 |
| Other income | 5 | 17 | — | 10 | 2 | — | 34 |
| Ordinary investment income | 224 | 1,464 | 122 | 618 | 164 | 15 | 2,607 |
| Appreciation | — | — | — | 21 | — | — | 21 |
| Realized gains on investments | 68 | 240 | 20 | 154 | 30 | 8 | 520 |
| Unrealized gains on investments | 4 | 31 | 6 | 18 | 114 | — | 173 |
| Investment income | 296 | 1,735 | 148 | 811 | 308 | 23 | 3,321 |
| Realized losses on investments | 44 | 165 | 6 | 59 | 10 | — | 284 |
| Unrealized losses on investments | 1 | 88 | 1 | 25 | 6 | — | 121 |
| Total | 45 | 253 | 7 | 84 | 16 | — | 405 |
| Impairments/depreciation on investment property |
|||||||
| Scheduled | 2 | 7 | — | — | — | — | 9 |
| Unscheduled | — | 7 | — | 1 | — | — | 8 |
| Impairments on equity securities | 1 | 95 | 8 | 3 | — | 5 | 112 |
| Impairments on fi xed-income securities |
3 | 47 | 5 | 46 | — | — | 101 |
| Impairments on other investments | 7 | 28 | 1 | 87 | — | — | 123 |
| Expenses for the administration of investments |
3 | 12 | — | 8 | 2 | 80 | 105 |
| Other expenses | 4 | 16 | 2 | 17 | 1 | — | 40 |
| Other investment expenses/ | |||||||
| impairments | 20 | 212 | 16 | 162 | 3 | 85 | 498 |
| Investment expenses | 65 | 465 | 23 | 246 | 19 | 85 | 903 |
| Net income from investments under own management |
231 | 1,270 | 125 | 565 | 289 | –62 | 2,418 |
| Interest income on funds withheld and contract deposits |
1 | 2 | 1 | 46 | 397 | — | 447 |
| Interest expense on funds withheld and contract deposits |
1 | 27 | — | 10 | 169 | — | 207 |
| Net interest income on funds withheld and contract deposits |
— | –25 | 1 | 36 | 228 | — | 240 |
| Net investment income | 231 | 1,245 | 126 | 601 | 517 | –62 | 2,658 |
1) Adjusted on the basis of IAS 8; presentation aft er elimination of intra-Group relations between segments 2) The profi t or loss on investments in associated companies amounts to –EUR 6 million and was recognized under dividends in 2010;
the previous year was adjusted accordingly
3) Amortization amounts fr om diff erences on fi xed-income investments are recognized under current interest income (previously "Other income"); the previous year was adjusted accordingly
Of the unscheduled impairments totaling EUR 100 (344) million, an amount of EUR 32 (123) million was attributable to other investments, including EUR 7 (93) million on alternative investments. The impairments on fi xed-income securities of EUR 17 (101) million were taken predominantly on structured assets. A further EUR 45 (112) million in impairment losses were recognized on equity holdings. This contrasted with appreciation of EUR 37 (21) million on investments that had been written down in previous periods; of this total volume, EUR 3 (11) million was attributable to alternative assets and EUR 24 (10) million to fi xed-income securities.
The net gains and losses on investments shown in the following table are based largely on the classes established by the Group (see here "Classes of fi nancial instruments" in the section "Nature of risks associated with insurance contracts and fi nancial instruments", pages 166 et seq.).
Making allowance for expenses for the administration of investments (EUR 125 (105) million) and other expenses (EUR 55 (40) million), the total net investment income as at the balance sheet date amounted to EUR 3,177 (2,658) million.
| Ordinary invest ment |
Amor ti | Gains on | Losses on | Impair | Appreci | Unrealized | Unrealized | ||
|---|---|---|---|---|---|---|---|---|---|
| 2010 1) | income | zation | disposal | disposal | ments | ation | gains | losses | Total 2) |
| Figures in EUR million | |||||||||
| Investments in affi liated companies and participating interests |
3 | — | — | — | 3 | — | — | — | — |
| Loans and receivables | 1,265 | 79 | 53 | 20 | 10 | 3 | — | — | 1,370 |
| Financial assets held to maturity | 120 | — | — | — | — | — | — | — | 120 |
| Financial assets available for sale | |||||||||
| Fixed-income securities | 1,036 | 20 | 251 | 42 | 8 | 30 | — | — | 1,287 |
| Variable-yield securities | 65 | — | 121 | 16 | 51 | — | — | — | 119 |
| Financial assets at fair value through profi t or loss |
|||||||||
| Financial assets classifi ed at fair value through profi t or loss |
|||||||||
| Fixed-income securities | 42 | — | 23 | 3 | — | — | 45 | 24 | 83 |
| Variable-yield securities | — | — | — | — | — | — | 2 | — | 2 |
| Financial assets held for trading | |||||||||
| Fixed-income securities | 4 | — | — | — | — | — | 1 | — | 5 |
| Variable-yield securities | — | — | 3 | 1 | — | — | — | 1 | 1 |
| Derivatives | 4 | — | 23 | 23 | — | — | 20 | 2 | 22 |
| Other invested assets, insofar as they are fi nancial assets |
29 | — | 7 | — | 22 | 4 | 4 | — | 22 |
| Other1) | 109 | 6 | 9 | — | 21 | — | 2 | 59 | 46 |
| Investments under own management | 2,677 | 105 | 490 | 105 | 115 | 37 | 74 | 86 | 3,077 |
| Funds held by ceding companies/ funds held under reinsurance treaties |
280 | — | — | — | — | — | — | — | 280 |
| Total | 2,957 | 105 | 490 | 105 | 115 | 37 | 74 | 86 | 3,357 |
1) For the purposes of reconciliation with the consolidated statement of income, the "Other" item combines the gains on investment property, associated companies and derivative fi nancial instruments – insofar as the fair values are negative; derivatives held for hedging purposes within the scope of hedge accounting (see item 12 of the Notes) are not included in the list if they do not relate to hedges in the area of investments
2) Excluding expenses for the administration of investments and other expenses
| Ordinary investment |
Amor ti | Gains on | Losses on | Impair | Appreci | Unrealized gains / |
||
|---|---|---|---|---|---|---|---|---|
| 2009 1) | income | zation | disposal | disposal | ments | ation | losses 2) | Total 3) |
| Figures in EUR million | ||||||||
| Investments in affi liated companies and participating interests |
3 | — | 1 | — | — | — | — | 4 |
| Loans and receivables | 1,203 | 64 | 22 | 20 | 31 | — | — | 1,238 |
| Financial assets held to maturity | 100 | 4 | — | 3 | 1 | — | — | 100 |
| Financial assets available for sale | ||||||||
| Fixed-income securities | 965 | 24 | 233 | 81 | 69 | 10 | — | 1,082 |
| Variable-yield securities | 76 | — | 131 | 75 | 145 | — | — | –13 |
| Financial assets at fair value through profi t or loss |
||||||||
| Financial assets classifi ed at fair value through profi t or loss |
||||||||
| Fixed-income securities | 36 | 12 | 6 | 1 | — | — | –30 | 23 |
| Variable-yield securities | — | — | — | 1 | — | — | –7 | –8 |
| Financial assets held for trading | ||||||||
| Fixed-income securities | 1 | — | — | — | — | — | — | 1 |
| Variable-yield securities | 1 | — | 2 | 3 | — | — | 1 | 1 |
| Derivatives | 2 | — | 106 | 87 | — | — | 36 | 57 |
| Other invested assets, insofar as they are fi nancial assets |
39 | 1 | — | — | 88 | 11 | — | –37 |
| Other1) | 75 | 3 | 19 | 13 | 20 | — | 52 | 116 |
| Investments under own management | 2,501 | 108 | 520 | 284 | 354 | 21 | 52 | 2,564 |
| Funds held by ceding companies/ funds held under reinsurance treaties |
240 | — | — | — | — | — | — | 240 |
| Total | 2,741 | 108 | 520 | 284 | 354 | 21 | 52 | 2,804 |
1) For the purposes of reconciliation with the consolidated statement of income, the "Other" item combines the gains on investment property, associated companies and derivative fi nancial instruments – insofar as the fair values are negative; derivatives held for hedging purposes within the scope of hedge accounting (see item 12 of the Notes) are not included in the list if they do not relate to hedges in the area of investments
2) The unrealized gains and losses were shown combined in 2009; separate presentation would have required disproportionate eff ort and had therefore been omitted 3) Excluding expenses for the administration of investments and other expenses
The interest income on investments was as follows in the year under review:
| Interest income on investments | 2010 | 2009 |
|---|---|---|
| Figures in EUR million | ||
| Loans and receivables | 1,344 | 1,267 |
| Financial assets – held to maturity | 120 | 104 |
| Financial assets – available for sale | 1,056 | 989 |
| Financial assets – at fair value through profi t or loss | ||
| Financial assets classifi ed at fair value through profi t or loss | 42 | 48 |
| Financial assets held for trading | 4 | 1 |
| Other | 41 | 44 |
| Total | 2,607 | 2,453 |
| Industrial | Retail | Retail | Non-Life | Life/Health | ||
|---|---|---|---|---|---|---|
| 2010 1) | Lines | Germany | International | Reinsurance | Reinsurance | Total |
| Figures in EUR million | ||||||
| Gross | ||||||
| Claims and claims expenses paid | 1,974 | 3,721 | 1,128 | 3,380 | 3,157 | 13,360 |
| Change in loss and loss adjustment | ||||||
| expense reserve | 73 | –2 | 159 | 772 | 174 | 1,176 |
| Change in benefi t reserve | — | 1,461 | 229 | — | 744 | 2,434 |
| Expenses for premium refunds | 4 | 824 | 12 | — | — | 840 |
| Total | 2,051 | 6,004 | 1,528 | 4,152 | 4,075 | 17,810 |
| Reinsurers' share | ||||||
| Claims and claims expenses paid | 799 | 119 | 43 | 468 | 274 | 1,703 |
| Change in loss and loss adjustment | ||||||
| expense reserve | –57 | 68 | 17 | –7 | –4 | 17 |
| Change in benefi t reserve | — | –53 | — | — | 41 | –12 |
| Expenses for premium refunds | 1 | — | 3 | — | — | 4 |
| Total | 743 | 134 | 63 | 461 | 311 | 1,712 |
| Net | ||||||
| Claims and claims expenses paid | 1,175 | 3,602 | 1,085 | 2,912 | 2,883 | 11,657 |
| Change in loss and loss adjustment | ||||||
| expense reserve | 130 | –70 | 142 | 779 | 178 | 1,159 |
| Change in benefi t reserve | — | 1,514 | 229 | — | 703 | 2,446 |
| Expenses for premium refunds | 3 | 824 | 9 | — | — | 836 |
| Total | 1,308 | 5,870 | 1,465 | 3,691 | 3,764 | 16,098 |
1) Presentation aft er elimination of intra-Group relations
| 2009 1), 2) | Industrial Lines |
Retail Germany |
Retail International |
Non-Life Reinsurance |
Life/Health Reinsurance |
Total |
|---|---|---|---|---|---|---|
| Figures in EUR million | ||||||
| Gross | ||||||
| Claims and claims expenses paid | 2,033 | 3,791 | 954 | 3,440 | 2,422 | 12,640 |
| Change in loss and loss adjustment expense reserve |
–257 | –102 | 63 | –31 | 439 | 112 |
| Change in benefi t reserve | — | 1,168 | 220 | — | 579 | 1,967 |
| Expenses for premium refunds | 7 | 366 | 9 | — | — | 382 |
| Total | 1,783 | 5,223 | 1,246 | 3,409 | 3,440 | 15,101 |
| Reinsurers' share | ||||||
| Claims and claims expenses paid | 1,032 | 254 | 39 | 331 | 164 | 1,820 |
| Change in loss and loss adjustment expense reserve |
–387 | –60 | 16 | –365 | 47 | –749 |
| Change in benefi t reserve | — | –47 | –1 | — | 18 | –30 |
| Expenses for premium refunds | 1 | — | 1 | — | — | 2 |
| Total | 646 | 147 | 55 | –34 | 229 | 1,043 |
| Net | ||||||
| Claims and claims expenses paid | 1,001 | 3,537 | 915 | 3,109 | 2,258 | 10,820 |
| Change in loss and loss adjustment expense reserve |
130 | –42 | 47 | 334 | 392 | 861 |
| Change in benefi t reserve | — | 1,215 | 221 | — | 561 | 1,997 |
| Expenses for premium refunds | 6 | 366 | 8 | — | — | 380 |
| Total | 1,137 | 5,076 | 1,191 | 3,443 | 3,211 | 14,058 |
1) Presentation aft er elimination of intra-Group relations
2) Adjusted on the basis of IAS 8
| Industrial | Retail | Retail | Non-Life | Life/Health | ||
|---|---|---|---|---|---|---|
| 2010 1) | Lines | Germany | International | Reinsurance | Reinsurance | Total |
| Figures in EUR million | ||||||
| Gross | ||||||
| Payments | 363 | 980 | 374 | 1,287 | 821 | 3,825 |
| Change in deferred acquisition costs | –30 | –92 | 161 | –14 | 17 | 42 |
| Total acquisition costs | 333 | 888 | 535 | 1,273 | 838 | 3,867 |
| Administrative expenses | 230 | 389 | 122 | 163 | 116 | 1,020 |
| Total acquisition costs and | ||||||
| administrative expenses | 563 | 1,277 | 657 | 1,436 | 954 | 4,887 |
| Reinsurers' share | ||||||
| Payments | 213 | 56 | 30 | 91 | 53 | 443 |
| Change in deferred acquisition costs | –17 | 23 | 26 | –4 | 44 | 72 |
| Total acquisition costs | 196 | 79 | 56 | 87 | 97 | 515 |
| Net | ||||||
| Payments | 150 | 924 | 344 | 1,196 | 768 | 3,382 |
| Change in deferred acquisition costs | –13 | –115 | 135 | –10 | –27 | –30 |
| Total acquisition costs | 137 | 809 | 479 | 1,186 | 741 | 3,352 |
| Administrative expenses | 230 | 389 | 122 | 163 | 116 | 1,020 |
| Total acquisition costs and | ||||||
| administrative expenses | 367 | 1,198 | 601 | 1,349 | 857 | 4,372 |
1) Presentation aft er elimination of intra-Group relations
| Industrial | Retail | Retail | Non-Life | Life/Health | ||
|---|---|---|---|---|---|---|
| 2009 1) | Lines | Germany | International | Reinsurance | Reinsurance | Total |
| Figures in EUR million | ||||||
| Gross | ||||||
| Payments | 386 | 996 | 312 | 1,108 | 777 | 3,579 |
| Change in deferred acquisition costs | 11 | 195 | 69 | –36 | –25 | 214 |
| Total acquisition costs | 397 | 1,191 | 381 | 1,072 | 752 | 3,793 |
| Administrative expenses | 220 | 397 | 97 | 152 | 95 | 961 |
| Total acquisition costs and administrative expenses |
617 | 1,588 | 478 | 1,224 | 847 | 4,754 |
| Reinsurers' share | ||||||
| Payments | 238 | 73 | 40 | 37 | 43 | 431 |
| Change in deferred acquisition costs | 6 | 201 | 2 | –2 | 72 | 279 |
| Total acquisition costs | 244 | 274 | 42 | 35 | 115 | 710 |
| Net | ||||||
| Payments | 148 | 923 | 272 | 1,071 | 734 | 3,148 |
| Change in deferred acquisition costs | 5 | –6 | 67 | –34 | –97 | –65 |
| Total acquisition costs | 153 | 917 | 339 | 1,037 | 637 | 3,083 |
| Administrative expenses | 220 | 397 | 97 | 152 | 95 | 961 |
| Total acquisition costs and administrative expenses |
373 | 1,314 | 436 | 1,189 | 732 | 4,044 |
1) Presentation aft er elimination of intra-Group relations
| 2010 | 2009 1) | |
|---|---|---|
| Figures in EUR million | ||
| Other non-technical income | ||
| Exchange gains | 262 | 206 |
| Income from the recognition of negative goodwill | — | 93 |
| Income from services | 164 | 151 |
| Reversals of impairments on receivables | 98 | 107 |
| Income from contracts recognized in accordance with the deposit accounting method |
50 | 40 |
| Profi ts from the disposal of property, plant and equipment | 9 | 1 |
| Income from the release of other non-technical provisions | 143 | 24 |
| Interest income | 44 | 36 |
| Commission income | 57 | 47 |
| Rental income | 30 | 32 |
| Income from the repurchase of own securities | 4 | 30 |
| Sundry income | 86 | 200 |
| Total | 947 | 967 |
| Other non-technical expenses | ||
| Exchange losses | 120 | 94 |
| Other interest expenses | 158 | 153 |
| Depreciation and impairments | 110 | 153 |
| Expenses for the company as a whole | 182 | 177 |
| Expenses for services | 227 | 167 |
| Other taxes | 51 | 20 |
| Expenses from the recognition of disposal groups | 55 | — |
| Sundry expenses | 136 | 241 |
| Total | 1,039 | 1,005 |
| Other income/expenses | –92 | –38 |
1) Adjusted on the basis of IAS 8
The sundry income includes a profi t of EUR 9 million from the sale of Euro International Reinsurance S. A., Luxembourg (see here also our remarks in the section "Consolidation", page 158).
The goodwill impairments totaling EUR 17 (92) million are attributable entirely to the Retail International segment. For further information please see our remarks in the item of the Notes 1 "Goodwill", pages 187 et seqq.
The fi nancing costs of EUR 134 (133) million consist exclusively of interest expenses from the raising of borrowed capital not directly connected with operational insurance business. These interest expenses are attributable in an amount of EUR 126 million to our issued subordinated liabilities and in an amount of EUR 8 million to notes payable and loans.
This item includes domestic income tax as well as comparable taxes on income incurred by foreign subsidiaries. The determination of the income tax includes the calculation of deferred taxes. The principles used to recognize deferred taxes are set out in the subsection entitled "Summary of major accounting policies". Deferred taxes are established on retained earnings of major affi liated companies in cases where a distribution is concretely planned.
The actual and deferred taxes on income can be broken down as follows:
| Income tax | 2010 | 2009 1) |
|---|---|---|
| Figures in EUR million | ||
| Actual tax for the year under review | 416 | 370 |
| Actual tax for other periods | –79 | 24 |
| Deferred taxes due to temporary diff erences | –27 | 74 |
| Deferred taxes from loss carry-forwards | –82 | 1 |
| Change in deferred taxes due to changes in tax rates | — | 2 |
| Recognized tax expenditure | 228 | 471 |
1) Adjusted on the basis of IAS 8
| Domestic/foreign breakdown of recognized tax expenditure/income | 2010 | 2009 1) |
|---|---|---|
| Figures in EUR million | ||
| Current taxes | 337 | 394 |
| Germany | 249 | 306 |
| Outside Germany | 88 | 88 |
| Deferred taxes | –109 | 77 |
| Germany | –123 | 100 |
| Outside Germany | 14 | –23 |
| Total | 228 | 471 |
1) Adjusted on the basis of IAS 8
The revenue authority took the view that not inconsiderable investment income generated by the Group's reinsurance subsidiaries domiciled in Ireland was subject to taxation as foreign-sourced income at the parent company in Germany on the basis of the provisions of the Foreign Transactions Tax Act. Appeals were fi led against the relevant tax assessments – also with respect to amounts already recognized as a tax expense. Our opinion that the investment income was not subject to taxation in Germany was confi rmed in lower court proceedings and in a procedure before the Federal Fiscal Court (BFH) for the 1996 assessment period. The corresponding basic assessments have in some cases already been cancelled by the revenue authority, and the remaining cancellation assessments will be issued shortly.
The actual and deferred taxes recognized directly in equity in the fi nancial year – resulting from items charged or credited directly to equity – amounted to –EUR 20 (–94) million.
The following table presents a reconciliation of the expected expense for income taxes that would be incurred upon application of the German income tax rate to the pre-tax profi t with the actual expense for taxes.
| 2010 | 2009 1) |
|---|---|
| 898 | 1,364 |
| 31.6% | 31.6% |
| 284 | 431 |
| — | 1 |
| –42 | –115 |
| 115 | 152 |
| –83 | –65 |
| 25 | 10 |
| –84 | 45 |
| 13 | 12 |
| 228 | 471 |
1) Adjusted on the basis of IAS 8
The calculation of the expected expense for income taxes is based on the German income tax rate of 31.6%. This tax rate is made up of corporate income tax including the German reunifi cation charge and a mixed trade tax rate.
The tax ratio, i.e. the ratio of the recognized tax expense to the pre-tax profi t, stood at 25.4 (34.5)% in the year under review. The tax rate corresponds to the average income tax load borne by all Group companies.
No deferred taxes were established on loss carry-forwards of EUR 610 (748) million and deductible temporary diff erences of EUR 23 (87) million because their realization is not suffi ciently certain. In addition, tax credits of EUR 6 (22) million that had not been capitalized were available.
Availability of loss carry-forwards and tax credits that have not been capitalized:
| 1–5 years | 6–10 years | > 10 years | Unlimited | Total |
|---|---|---|---|---|
| 69 | — | 44 | 497 | 610 |
| — | — | — | 23 | 23 |
| 6 | — | — | — | 6 |
| 75 | — | 44 | 520 | 639 |
Loss carry-forwards not recognized in previous years reduced the deferred expense for taxes by EUR 12 (2) million in the year under review. The devaluation of deferred tax claims recognized in previous years led to a deferred tax expense of EUR 12 (2) million in the 2010 fi nancial year.
The average number of staff employed throughout the year can be broken down as follows:
| 2010 | 2009 | |
|---|---|---|
| Primary insurance companies | 15,256 | 14,935 |
| Reinsurance companies | 2,130 | 1,986 |
| Companies in the Corporate Operations segment | 394 | 431 |
| Total excluding apprentices and student trainees | 17,780 | 17,352 |
| Apprentices and student trainees | 442 | 453 |
| Total | 18,222 | 17,805 |
| Expenditures on personnel | 2010 | 2009 |
| Figures in EUR million | ||
| Wages and salaries | ||
| Expenditures on insurance business | 867 | 819 |
| Expenditures on the administration of investments | 58 | 52 |
| 925 | 871 | |
| Social security contributions and expenditure on provisions and assistance | ||
| Social security contributions | 137 | 141 |
| Expenditures for pension provision | 19 | 59 |
| Expenditures for assistance | 19 | 12 |
| 175 | 212 | |
| Total | 1,100 | 1,083 |
IAS 24 "Related Party Disclosures" defi nes related parties inter alia as parent companies and subsidiaries, subsidiaries of a common parent company, associated companies, legal entities under the infl uence of management and the management of the company itself.
The related entities within the Talanx Group are comprised of HDI Haft pfl ichtverband der Deutschen Industrie Versicherungsverein auf Gegenseitigkeit (HDI V. a. G.), which directly holds all shares of Talanx, as well as all unconsolidated subsidiaries – which essentially encompasses the subsidiaries not included in the consolidated fi nancial statement due their insignifi cant status – and the associated companies recognized at equity. In addition, there are the provident funds that pay benefi ts in favor of employees of Talanx AG or one of its related parties aft er termination of the employment relationship.
The related persons are the members of the Boards of Management and Supervisory Boards of Talanx AG and HDI V. a. G. Transactions between Talanx and its subsidiaries or between subsidiaries of Talanx AG are eliminated through consolidation and hence not discussed in the Notes. Business relations existing with unconsolidated companies or with associated companies are of minor importance overall.
For details of the remuneration received by the members of the Board of Management and Supervisory Board of Talanx AG please see the remarks on the compensation of the management boards of the parent company, pages 253 et seq.
With eff ect from 1 January 2000 the Executive Board of Hannover Re, with the consent of the Supervisory Board, introduced a virtual stock option plan that provides for the granting of stock appreciation rights to certain managerial staff . The content of the stock option plan is based solely on the Conditions for the Granting of Stock Appreciation Rights. All the members of the Hannover Re Group's senior management are eligible for the award of stock appreciation rights. Exercise of the stock appreciation rights does not give rise to any entitlement to the delivery of Hannover Re stock, but merely to payment of a cash amount linked to the performance of the Hannover Re share. Recognition of transactions involving stock appreciation rights with cash settlement is governed by the requirements of IFRS 2 "Share-based Payment".
Stock appreciation rights were fi rst granted for the 2000 fi nancial year and are awarded separately for each subsequent fi nancial year (allocation year), provided the performance criteria defi ned in the Conditions for the Granting of Stock Appreciation Rights are satisfi ed.
The internal performance criterion is achievement of the target performance defi ned by the Supervisory Board, which is expressed in terms of the diluted earnings per share (EPS) calculated in accordance with IAS 33 "Earnings per Share". If the target EPS is surpassed or undershot, the provisional basic number of stock appreciation rights initially granted is increased or reduced accordingly to produce the EPS basic number. The external performance criterion is the development of the share price in the allocation year. The benchmark used in this regard is the (weighted) RBS Global Reinsurance Index. This index encompasses the performance of listed reinsurers worldwide. Depending upon the outperformance or underperformance of this index, the EPS basic number is increased – albeit by at most 400% of the EPS basic number – or reduced – although by no more than 50% of the EPS basic number.
The maximum period of the stock appreciation rights is ten years, commencing at the end of the year in which they are awarded. Stock appreciation rights which are not exercised by the end of the 10-year period lapse. Stock appreciation rights may only be exercised aft er a waiting period and then only within four exercise periods each year. For 40% of the stock appreciation rights (fi rst tranche of each allocation year) the waiting period is two years, for each additional 20% (tranches two to four of each allocation year) of the stock appreciation rights the waiting period is extended by one year. Each exercise period lasts for ten trading days, in each case commencing on the sixth trading day aft er the date of publication of the quarterly report of Hannover Rückversicherung AG.
On 4 November 2009 the Supervisory Board of Hannover Re decided to extend the waiting period applicable to members of the Executive Board from two to four years for stock appreciation rights granted from the 2010 allocation onwards; on 23 November 2009 the Executive Board of Hannover Re decided to extend the waiting period accordingly for the other members of the Group's senior management. Upon expiry of this waiting period a maximum 60% of the stock appreciation rights awarded for an allocation year may be exercised. The waiting period for each additional 20% of the stock appreciation rights awarded for this allocation year to a member of the managerial staff is one year.
Upon exercise of a stock appreciation right the amount paid out to the entitled party is the diff erence between the basic price and the current market price of the Hannover Re share at the time of exercise. In this context, the basic price corresponds to the arithmetical mean of the closing prices of the Hannover Re share on all trading days of the fi rst full calendar month of the allocation year in question. The current market price of the Hannover Re share at the time when stock appreciation rights are exercised is determined by the arithmetical mean of the closing prices of the Hannover Re share on the last 20 trading days prior to the fi rst day of the relevant exercise period.
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 of the employment relationship 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 fi rst exercise period thereaft er. Stock appreciation rights not exercised in this period and those in respect of which the waiting period has not yet expired shall lapse. Retirement, disability or death of the member of management shall not be deemed to be termination of the employment relationship for the purpose of exercising stock appreciation rights.
The allocations for the years 2000, 2002 to 2004, 2006, 2007 and 2009 gave rise to the following commitments in the 2010 fi nancial year. No allocations were made for 2001, 2005 or 2008.
| Stock appreciation rights | Allocation year | ||||||
|---|---|---|---|---|---|---|---|
| of Hannover Re | 2009 | 2007 | 2006 | 2004 | 2003 | 2002 | 2000 |
| Award date | 15.03.2010 | 28.03.2008 | 13.03.2007 | 24.03.2005 | 25.03.2004 | 11.04.2003 | 21.06.2001 |
| Period | 10 Years | 10 Years | 10 Years | 10 Years | 10 Years | 10 Years | 10 Years |
| Waiting period | 2 Years | 2 Years | 2 Years | 2 Years | 2 Years | 2 Years | 2 Years |
| Basic price (in EUR) | 22.70 | 34.97 | 30.89 | 27.49 | 24.00 | 23.74 | 25.50 |
| Participants in year of issue | 137 | 110 | 106 | 109 | 110 | 113 | 95 |
| Number of rights granted | 1,569,855 | 926,565 | 817,788 | 211,171 | 904,234 | 710,429 | 1,138,005 |
| Fair value at 31.12.2010 (in EUR) | 7.30 | 7.86 | 9.77 | 16.16 | 8.99 | 8.79 | 5.49 |
| Maximum value (in EUR) | 8.76 | 10.79 | 10.32 | 24.62 | 8.99 | 8.79 | 5.49 |
| Weighted exercise price | — | 1.52 | 5.32 | 8.51 | 8.99 | 8.79 | 5.49 |
| Number of rights existing at 31.12.2010 |
1,535,600 | 889,858 | 691,751 | 126,622 | 3,316 | 2,365 | — |
| Provisions at 31.12.2010 (in EUR million) |
3.90 | 6.10 | 6.48 | 2.05 | 0.03 | 0.02 | — |
| Amounts paid out in the 2010 fi nancial year (in EUR million) |
— | 0.02 | 0.50 | 0.25 | 0.49 | 0.07 | 0.01 |
| Expense in the 2010 fi nancial year (in EUR million) |
3.90 | 2.40 | 2.53 | 0.59 | 0.01 | — | — |
In the 2010 fi nancial year the waiting period expired for 100% of the stock appreciation rights awarded in 2000 and 2002 to 2004, 60% of those awarded in 2006 and 40% of those awarded in 2007. 1,503 stock appreciation rights from the 2000 allocation year, 7,682 stock appreciation rights from the 2002 allocation year, 52,581 stock appreciation rights from the 2003 allocation year, 29,832 stock appreciation rights from the 2004 allocation year, 95,380 stock appreciation rights from the 2006 allocation year and 10,399 stock appreciation rights from the 2007 allocation year were exercised. The total amount paid out stood at EUR 1.3 million.
The stock appreciation rights of Hannover Re developed as follows:
| Development of the stock appreciation rights of Hannover Re/ |
Allocation year | ||||||
|---|---|---|---|---|---|---|---|
| Number of options | 2009 | 2007 | 2006 | 2004 | 2003 | 2002 | 2000 |
| Granted in 2001 | — | — | — | — | — | — | 1,138,005 |
| Exercised in 2001 | — | — | — | — | — | — | — |
| Lapsed in 2001 | — | — | — | — | — | — | — |
| Number of options at 31.12.2001 | — | — | — | — | — | — | 1,138,005 |
| Granted in 2002 | — | — | — | — | — | — | — |
| Exercised in 2002 | — | — | — | — | — | — | — |
| Lapsed in 2002 | — | — | — | — | — | — | 40,770 |
| Number of options at 31.12.2002 | — | — | — | — | — | — | 1,097,235 |
| Granted in 2003 | — | — | — | — | — | 710,429 | — |
| Exercised in 2003 | — | — | — | — | — | — | — |
| Lapsed in 2003 | — | — | — | — | — | 23,765 | 110,400 |
| Number of options at 31.12.2003 | — | — | — | — | — | 686,664 | 986,835 |
| Granted in 2004 | — | — | — | — | 904,234 | — | — |
| Exercised in 2004 | — | — | — | — | — | — | 80,137 |
| Lapsed in 2004 | — | — | — | — | 59,961 | 59,836 | 57,516 |
| Number of options at 31.12.2004 | — | — | — | — | 844,273 | 626,828 | 849,182 |
| Granted in 2005 | — | — | — | 211,171 | — | — | — |
| Exercised in 2005 | — | — | — | — | — | 193,572 | 647,081 |
| Lapsed in 2005 | — | — | — | 6,397 | 59,834 | 23,421 | 25,974 |
| Number of options at 31.12.2005 | — | — | — | 204,774 | 784,439 | 409,835 | 176,127 |
| Granted in 2006 | — | — | — | — | — | — | — |
| Exercised in 2006 | — | — | — | — | 278,257 | 160,824 | 153,879 |
| Lapsed in 2006 | — | — | — | 14,511 | 53,578 | 22,896 | 10,467 |
| Number of options at 31.12.2006 | — | — | — | 190,263 | 452,604 | 226,115 | 11,781 |
| Granted in 2007 | — | — | 817,788 | — | — | — | — |
| Exercised in 2007 | — | — | — | 12,956 | 155,840 | 110,426 | 3,753 |
| Lapsed in 2007 | — | — | 8,754 | 13,019 | 38,326 | 10,391 | — |
| Number of options at 31.12.2007 | — | — | 809,034 | 164,288 | 258,438 | 105,298 | 8,028 |
| Granted in 2008 | — | 926,565 | — | — | — | — | — |
| Exercised in 2008 | — | — | — | 1,699 | 121,117 | 93,747 | — |
| Lapsed in 2008 | — | — | 3,103 | 1,443 | 2,162 | 944 | — |
| Number of options at 31.12.2008 | — | 926,565 | 805,931 | 161,146 | 135,159 | 10,607 | 8,028 |
| Granted in 2009 | — | — | — | — | — | — | — |
| Exercised in 2009 | — | — | — | 1,500 | 79,262 | 560 | 6,525 |
| Lapsed in 2009 | — | 17,928 | 16,158 | 3,192 | — | — | — |
| Number of options at 31.12.2009 | — | 908,637 | 789,773 | 156,454 | 55,897 | 10,047 | 1,503 |
| Granted in 2010 | 1,569,855 | — | — | — | — | — | — |
| Exercised in 2010 | — | 10,399 | 95,380 | 29,832 | 52,581 | 7,682 | 1,503 |
| Lapsed in 2010 | 34,255 | 8,380 | 2,642 | — | — | — | — |
| Number of options at 31.12.2010 | 1,535,600 | 889,858 | 691,751 | 126,622 | 3,316 | 2,365 | — |
The existing stock appreciation rights are valued on the basis of the Black/Scholes option pricing model.
The calculations were based on the year-end closing price of the Hannover Re share of EUR 41.38 as at 22 December 2010, expected volatility of 39.69% (historical volatility on a fi ve-year basis), a dividend yield of 5.32% and risk-free interest rates of 1.02% for the 2002 allocation year, 1.39% for the 2003 allocation year, 1.76% for the 2004 allocation year, 2.38% for the 2006 allocation year, 2.64% for the 2007 allocation year and 3.05% for the 2009 allocation year.
On this basis the aggregate provisions, which are recognized in the sundry non-technical provisions, amounted to EUR 18.6 (10.5) million for the 2010 fi nancial year. The expense totaled altogether EUR 9.4 (7.5) million.
As a consequence of the merger with Gerling Konzern Allgemeine Versicherungs-AG, HDI-Gerling Industrie Versicherung AG – as the acquirer – became party to anti-trust administrative proceedings. In March 2005 the Federal Cartel Offi ce had imposed a fi ne of EUR 19 million on Gerling Konzern Allgemeine Versicherungs-AG – along with other German insurers – on account of alleged cartel agreements in the German industrial insurance market. In January 2010 the Dusseldorf Higher Regional Court (OLG) cleared HDI-Gerling Industrie Versicherung AG of the cartel accusations because liability as the legal successor to Gerling Konzern Allgemeine Versicherungs-AG was out of the question. The chief public prosecutor's offi ce in Dusseldorf than appealed the ruling, as a result of which the matter is now before the Federal Court of Justice awaiting a decision.
In the context of the acquisition of Lion Insurance Company, Trenton/USA, by our subsidiary Hannover Finance, Inc., Wilmington/USA, a legal dispute exists with the former owners of Lion Insurance Company regarding the release of a trust account in an amount of around USD 14 million that serves as security for liabilities of the former owners in connection with a particular business segment.
The proceedings with the revenue authority relating to investment income generated by the reinsurance subsidiaries of some Group companies domiciled in Ireland were resolved in favor of the Talanx Group in the year under review when the Federal Fiscal Court (BFH) handed down its decision in October 2010. With regard to the implications we would refer the reader to our explanatory remarks in the Notes (item 35 "Taxes on income") pages 242 et seq. and to the corresponding subsection in the risk report.
With the exception of the aforementioned proceedings, no signifi cant court cases were pending during the year under review or as at the balance sheet date – with the exception of proceedings within the scope of ordinary insurance and reinsurance business activities.
Hannover Re has placed four subordinated debts on the European capital markets through its subsidiary Hannover Finance (Luxembourg) S. A. Hannover Re has secured by subordinated guarantee both the debt issued in 2001, the volume of which now stands at EUR 138 million, and the debts from fi nancial years 2004 in an amount of EUR 750 million as well as 2005 and 2010 in amounts of EUR 500 million each (for further information on the subordinated debts please see the item of the Notes 17 "Subordinated liabilities", pages 216 et seq.).
The guarantees given by Hannover Re for the subordinated debts take eff ect if the issuer in question fails to render payments due under the bonds. The guarantees cover the relevant bond volumes as well as interest due until the repayment dates. Given the fact that interest on the bonds is partly dependent on the capital market rates applicable at the interest payment dates (fl oating rates), the maximum undiscounted amounts that can be called cannot be estimated with suffi cient accuracy. Hannover Re does not have any rights of recourse outside the Group with respect to the guarantee payments.
Talanx AG has provided a subordinated guarantee to the holders of the subordinated debt issued in February 2005 by its subsidiary Talanx Finanz (Luxemburg) S. A. The subordinated guarantee had a volume of EUR 243 million at the end of the year under review.
Pension commitments to former members of staff give rise to contingent liabilities of EUR 366 million against Group companies.
As security for technical liabilities to US clients, Hannover Re has established two trust accounts (master trust and supplemental trust) in the United States. They amounted to EUR 2,576 (2,341) million and EUR 10 (—) million respectively as at the balance sheet date. The securities held in the trust accounts are shown as available-for-sale investments. Hannover Re has furnished further collateral in an amount of EUR 299 (310) million in the form of so-called "single trust funds".
As part of its business activities Hannover Re holds collateral available outside the United States in various blocked custody accounts and trust accounts, the total amount of which in relation to the major companies of the Hannover Re Group was EUR 1,851 (1,588) million as at the balance sheet date.
HDI-Gerling Industrie Versicherung AG has blocked holdings of EUR 51 (36) million. The securities held in the master trust are shown as available-for-sale investments.
Outstanding capital commitments with respect to certain special investments exist in the amount of EUR 295 (351) million. The commitments exist at various Group companies. They involve primarily private equity funds and venture capital fi rms in the form of private limited companies.
As security for technical liabilities, various fi nancial institutions have furnished sureties for us in the form of letters of credit. The total amount as at the balance sheet date was EUR 2,842 (2,648) million. The standard market contractual clauses contained in some of the underlying letter of credit facilities regarding compliance with stipulated conditions are explained in the subsection "Management of liquidity risks" of the section "Nature of risks associated with insurance contracts and fi nancial instruments", pages 184 et seqq.
For liabilities in connection with participating interests in real estate companies and real estate transactions Hannover Re Real Estate Holdings has furnished the usual collateral under such transactions to various banks, the amount of which totaled EUR 258 (174) million as at the balance sheet date.
At some Group companies potential fi nancial obligations relating to investments existed at the end of the fi nancial year in the amount of altogether EUR 170 million in connection with structured securities through issuers' rights to take delivery. The potential amounts that could be drawn upon totaled EUR 159 million for 2011 and EUR 11 million for 2012.
In addition, other fi nancial commitments existed as at 31 December 2010 for investment volumes taken up but not yet paid out in an amount of EUR 38 million. Building loans to policyholders that had been awarded but not yet disbursed totaled EUR 1 million.
Commitments for contractually agreed future services in connection with IT outsourcing contracts amounted to altogether EUR 174 (102) million as at 31 December 2010.
Contractual obligations in an amount of EUR 12 million existed on the basis of various service agreements that had been concluded.
Further fi nancial commitments exist on the basis of guarantee facilities (EUR 7 million) and other contractual relationships (EUR 28 million).
As guarantor institutions for Gerling Versorgungskasse VVaG, various Group companies are liable pro rata for any defi cits that may be incurred by Gerling Versorgungskasse.
The Group's life insurance companies are members of the Security Fund for Life Insurers pursuant to §§124 et seq. Insurance Supervision Act (VAG). On the basis of the Security Fund Financing Ordinance (Life), the Security Fund collects annual contributions of at most 0.2 per mille of the total net technical provisions until security funds of 1 per mille of the total net technical provisions have been accumulated. In addition, the Security Fund may collect special contributions in an amount of a further 1 per mille of the total net technical provisions. Furthermore, the companies have undertaken to make fi nancial resources available to the Security Fund or alternatively to Protektor Lebensversicherung AG, Berlin, insofar as the resources of the Security Fund are not suffi cient if a company has to be rehabilitated. The commitment amounts to 1% of the total net technical provisions (German Commercial Code) aft er allowance for the contributions already made to the Security Fund at this point in time. When the aforementioned payment commitments from the contributions payable to the Security Fund are taken into account, the total commitment of the companies stands at EUR 372 million.
Several Group companies are members of the association for the reinsurance of pharmaceutical risks, the association for the insurance of German nuclear reactors and the traffi c accident pool Verkehrsopferhilfe e.V. In the event of one of the other pool members failing to meets its liabilities, an obligation exists to take over such other member's share within the framework of the quota participation.
Outstanding commitments from non-cancellable contractual relationships existed in an amount of EUR 492 million as at the balance sheet date.
| Sub sequent |
||||||
|---|---|---|---|---|---|---|
| Future rental and leasing commitments | 2011 | 2012 | 2013 | 2014 | 2015 | years |
| Figures in EUR million | ||||||
| Payments | 51 | 43 | 41 | 39 | 37 | 281 |
Operating leasing contracts produced expenditures of EUR 51 (22) million in the year under review. Multi-year lease contracts existed above all with respect to subsidiaries of Hannover Re in Africa and the United States. Further commitments refer to multi-year lease contracts entered into by primary insurance companies in Germany.
The total amount of rental income due under non-cancellable contracts in subsequent years is EUR 340 million.
| Future rental income | 2011 | 2012 | 2013 | 2014 | 2015 | Sub sequent years |
|---|---|---|---|---|---|---|
| Figures in EUR million | ||||||
| Payments to be received | 62 | 57 | 58 | 58 | 55 | 50 |
Rental income in the year under review totaled EUR 65 million. It resulted principally from the renting out of properties by a US-based real estate company in the Non-Life Reinsurance segment as well as from the renting out of properties in Germany by primary insurance companies.
Total remuneration of EUR 6,224 (8,399) thousand was paid to the Board of Management.
The total remuneration paid to the Supervisory Board amounted to EUR 1,857 (1,148) thousand.
Former members of the Board of Management and their surviving dependants received total remuneration of EUR 790 (399) thousand. An amount of EUR 11,747 (6,678) thousand was set aside to cover projected benefi t obligations due to former members of the Board of Management and their surviving dependants.
No advances or loans were extended to members of the management boards in the year under review.
IAS 24 provides for detailed presentation of the remuneration components received by members of management in key positions. Specifi cally, this group of persons encompasses the members of the Board of Management and Supervisory Board of Talanx AG. The aforementioned group of persons received the following remuneration components:
| 2010 | 2009 | |
|---|---|---|
| Figures in EUR thousand | ||
| Salaries and other remuneration due in the short term | 8,081 | 9,547 |
| Expenses for retirement provision | 4,616 | 3,088 |
| Granting of equities and other equity-based remuneration | — | — |
| Total | 12,697 | 12,635 |
The appointed auditor of the Talanx Group's consolidated fi nancial statement is KPMG AG Wirtschaft sprüfungsgesellschaft (KPMG AG).
The fees expensed by KPMG AG and its affi liated companies* in the 2010 fi nancial year within the meaning of § 318 German Commercial Code (HGB) amounted to EUR 12.7 (13.7) million. The amount includes a fee of EUR 9.2 (8.1) million for the auditing of the fi nancial statement, EUR 0.1 (1.0) million for other appraisals and valuations, EUR 0.9 (0.9) million for tax consultancy services and EUR 2.5 (3.7) million for consultancy and other services performed for the parent or subsidiary companies.
On 8 November 2010 the Executive Board and Supervisory Board of our listed subsidiary Hannover Rückversicherung AG (Hannover Re) submitted the declaration of conformity regarding the recommendations made by the Government Commission on the German Corporate Governance Code that is required pursuant to § 161 German Stock Corporation Act (AktG) and made this declaration available to the shareholders by publishing it in its annual report. The present and all previous Declarations of Conformity of the company are published on Hannover Re's website (http://www. hannover-re.com/about/corporate/declaration/index.html).
We anticipate a net burden of losses in the range of EUR 40 million to EUR 100 million from the fl ooding that occurred in the Australian city of Brisbane in January 2011.
On 22 February 2011 an earthquake with a magnitude of 6.3 occurred in New Zealand. This was the second quake to hit Christchurch in the space of fi ve months. We anticipate a net burden of losses in the order of EUR 150–160 million in primary and reinsurance business from this latest earthquake in New Zealand.
* As at 31 December 2009 KPMG AG and its affi liated companies encompassed the KPMG companies in Germany, the United Kingdom, Spain, Switzerland, Belgium, the Netherlands, Luxembourg and Turkey. The KPMG companies in the CIS countries of Russia, Ukraine, Kazakhstan, Kyrgyzstan, Georgia and Armenia were added eff ective 1 February 2010. Fees relating to 2009 were adjusted accordingly.
The magnitude 9.0 earthquake that struck Japan on 11 March 2011 will impact our account through our worldwide industrial and reinsurance activities. In view of the complexity of the event, reliable information on the total market loss for the insurance industry is not yet available. Any assessment of the loss amount is therefore still subject to considerable uncertainty. Based on initial treaty analyses, we currently anticipate a total net burden of losses for the Group in the order of EUR 300 million before taxes.
In a press release dated 20 January 2011 our subsidiary HDI-Gerling Industrie Versicherung AG, Hannover, announced that it had acquired the Dutch property/casualty insurer Nassau Verzekering Maatschappij N.V. with retroactive eff ect from 30 September 2010 for a purchase price of EUR 195 million. Since the closing is expected in the second quarter of 2011 disclosures pursuant to IFRS 3 have been omitted. It is intended that the acquired company will subsequently be merged with retroactive eff ect from 1 January 2011 into the Dutch insurer HDI Verzekeringen N.V. The latter company is a wholly owned subsidiary of HDI-Gerling Industrie Versicherung AG.
HDI-Gerling Lebensversicherung AG is currently considering the possible sale of a real estate portfolio. It is aiming for disposal in 2011. The relevant assets were not carried as "held for sale" because the requirements of IFRS 5 had not been fully satisfi ed as at the balance sheet date (see also the section "Non-current assets held for sale and disposal groups", pages 164 et seq.).
The subordinated debt of EUR 350 million issued in 2001 by Hannover Finance (Luxembourg) S. A. can be called for the fi rst time on 14 March 2011 and has a remaining volume of EUR 138.1 million aft er the off er made in 2005 to existing issue holders to exchange into a new bond. As announced on 1 February 2011, the issuer exercised its call option and repaid the outstanding bond volume in full eff ective 14 March 2011. Further details of the debt are provided in item 17 of the Notes "Subordinated liabilities", pages 216 et seq.
In a press release dated 11 January 2011 the Executive Board of Hannover Re advised that the New York State Insurance Department had allowed Hannover Re to qualify as a so-called "Eligible Reinsurer". Under this regulation the collateral requirements for our non-life reinsurance business written in the state of New York are reduced. Whereas it had previously been necessary to post collateral for 100% of the technical reserves, the required collateral level now stands at just 20%.
In October 2010 the Federal Fiscal Court (BFH) confi rmed a decision of the lower court according to which investment income of Irish subsidiaries is not subject to taxation of foreign-sourced income. Since tax assessments were amended accordingly or the amendment thereof was announced by the revenue authority in February 2011, the refund of prepaid taxes and interest in a substantial amount is anticipated for the Hannover Re subgroup in the 2011 fi nancial year. The eff ect on net income is likely to be in the order of EUR 100 to 120 million.
In a press release dated 22 December 2010 the Executive Board of Hannover Re reported that Hannover Re had reached agreement on the sale of all operational companies of its US subsidiary Clarendon Insurance Group, Inc., New York, to the Bermuda-based Enstar Group Ltd., Hamilton. Since this transaction was still subject to the customary regulatory approvals at the time when the consolidated fi nancial statement was released for publication, it remains our expectation that the sale will be closed in the second quarter of 2011. Please see our remarks in the section "Non-current assets held for sale and disposal groups".
| 1. Subsidiaries Companies included in the IFRS consolidated fi nancial statement |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Industrial Lines | |||||
| Gerling Insurance Agency, Inc., Chicago, USA 7) | 100.00 | USD | — | USD | — |
| HDI Gerling Insurance of South Africa Ltd., Johannesburg, South Africa | 100.00 | ZAR | 39,989 | ZAR | 1,688 |
| HDI HANNOVER International Espana, CÍa de Seguros y Reaseguros S. A., | |||||
| Madrid, Spain 18) | 100.00 | 44,898 | 4,911 | ||
| HDI Versicherung AG, Vienna, Austria 18) | 100.00 | 41,930 | 7,512 | ||
| HDI-Gerling America Insurance Company, Chicago, USA | 100.00 | USD | 124,801 | USD | 11,928 |
| HDI-Gerling Assurances S. A., Brussels, Belgium 18) | 100.00 | 36,637 | 4,602 | ||
| HDI-Gerling Australia Insurance Company Pty. Ltd., Sydney, Australia | 100.00 | AUD | 23,796 | AUD | –802 |
| HDI-Gerling de Mexico Seguros S. A., Mexico City, Mexico 18) | 100.00 | MXN | 53,101 | MXN | –921 |
| HDI-Gerling Industrie Versicherung AG, Hannover, Germany 3) | 100.00 | 406,536 | 130,813 | ||
| HDI-Gerling Verzekeringen N.V., Rotterdam, Netherlands 18) | 100.00 | 70,885 | 15,932 | ||
| HDI-Gerling Welt Service AG, Hannover, Germany 3) | 100.00 | 90,986 | 5,231 | ||
| HG Sach AltInvest GmbH & Co. KG, Cologne, Germany 13), 19) | 100.00 | 37,699 | 1,123 | ||
| IVEC Institutional Venture and Equity Capital AG, Cologne, Germany 13) | 100.00 | 178,003 | 21,171 | ||
| Riethorst Grundstückgesellschaft mbH, Hannover, Germany 13), 18) | 100.00 | 43,246 | –137 | ||
| Retail Germany | |||||
| Alstertor Zweite Beteiligungs- und Investitionssteuerungs-GmbH & Co. KG, | |||||
| Hamburg | 100.00 | 30,596 | –24 | ||
| CiV Grundstücksgesellschaft mbH & Co. KG, Hilden 18) | 100.00 | 25,565 | 530 | ||
| Clarus AG, Wiesbaden (formerly: DTPVO Deutsche Privatvorsorge AG, Darmstadt)3) | 100.00 | 222 | –25,189 | ||
| Erste Credit Life International AG, Hilden | 100.00 | 264 | –1,772 | ||
| GERLING Pensionsenthaftungs- und Rentenmanagement GmbH, Cologne | 100.00 | 5,458 | –2,023 | ||
| HDI Direkt Versicherung AG, Hannover 3) | 100.00 | 162,088 | 4,657 | ||
| HDI-GERLING Financial Service GmbH, Vienna, Austria | 100.00 | 781 | 112 | ||
| HDI-Gerling Firmen und Privat Versicherung AG, Hannover 3) | 100.00 | 154,926 | –56,373 | ||
| HDI-Gerling Friedrich Wilhelm Rückversicherung AG, Cologne 3) | 100.00 | 39,619 | 111,006 | ||
| HDI-Gerling Leben Betriebsservice GmbH, Cologne 3), 16) | 100.00 | 171 | 130 | ||
| HDI-Gerling Leben Vertriebsservice AG, Cologne 3), 16) | 100.00 | 4,028 | — | ||
| HDI-Gerling Lebensversicherung AG, Cologne | 100.00 | 234,593 | 15,000 | ||
| HDI-Gerling Pensionsfonds AG, Cologne | 100.00 | 5,278 | 133 | ||
| HDI-Gerling Pensionskasse AG, Cologne | 100.00 | 28,248 | — | ||
| HDI-Gerling Pensionsmanagement AG, Cologne 3), 16) | 100.00 | 6,414 | –1,462 | ||
| HDI-Gerling Rechtsschutz Schadenregulierungs-GmbH, Hannover 3), 16) | 100.00 | 288 | –27 | ||
| HDI-Gerling Rechtsschutz Versicherung AG, Hannover 3) | 100.00 | 18,951 | –21,664 | ||
| HDI-Gerling Vertrieb Firmen und Privat AG, Hannover 3), 16) | 100.00 | 55 | –2,806 | ||
| HNG Hannover National Grundstücksverwaltung GmbH & Co. KG, Hannover 18) | 100.00 | 37,957 | 3,871 | ||
| neue leben Holding AG, Hamburg | 67.50 | 75,960 | 20,456 | ||
| neue leben Lebensversicherung AG, Hamburg | 67.50 | 64,566 | 17,800 | ||
| neue leben Unfallversicherung AG, Hamburg 3) | 67.50 | 3,596 | 3,814 | ||
| PARTNER OFFICE AG, Cologne 3), 16) | 100.00 | 3,041 | –16,189 | ||
| PB Lebensversicherung AG, Hilden | 100.00 | 31,587 | 14,739 | ||
| PB Pensionsfonds AG, Hilden 3) | 100.00 | 5,038 | 235 | ||
| PB Pensionskasse AG, Hilden | 100.00 | 6,030 | 79 | ||
| PB Versicherung AG, Hilden | 100.00 | 10,473 | 4,003 | ||
| PBV Lebensversicherung AG, Hilden | 100.00 | 46,987 | 10,772 |
| 1. Subsidiaries Companies included in the IFRS consolidated fi nancial statement |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Proactiv Communication Center GmbH, Hilden 3) | 100.00 | 630 | 538 | ||
| Proactiv IT Servicegesellschaft mbH, Munich 3) | 100.00 | 50 | 453 | ||
| Proactiv Servicegesellschaft mbH, Hilden 3) | 100.00 | 7,025 | 2,176 | ||
| Talanx Deutschland AG, Hannover (formerly: HDI-Gerling Leben Serviceholding AG, Cologne) 3) |
100.00 | 2,899,468 | –428,051 | ||
| TARGO Lebensversicherung AG, Hilden | 100.00 | 73,774 | 40,119 | ||
| TARGO Versicherung AG, Hilden 3) | 100.00 | 27,106 | 16,751 | ||
| Zweite Credit Life International AG, Hilden | 100.00 | 1,854 | –684 | ||
| Retail International | |||||
| ASPECTA Assurance International AG, Vaduz, Liechtenstein 12) | 100.00 | CHF | 1,054 | CHF | –3,427 |
| ASPECTA Assurance International Luxembourg S. A., Luxembourg, Luxembourg 12) | 100.00 | 273 | –16,798 | ||
| CiV Hayat Sigorta A. Ş., Istanbul, Turkey 12) | 100.00 | TRY | 14,152 | TRY | –3,698 |
| HDI Asekuracja Towarzystwo Ubezpieczen S. A., Warsaw, Poland 12) | 100.00 | PLN | 273,770 | PLN | –34,996 |
| HDI Assicurazioni S. p. A., Rome, Italy 12) | 100.00 | 170,116 | 8,736 | ||
| HDI Immobiliare S. r. L., Rome, Italy 12) | 100.00 | 63,033 | 343 | ||
| HDI Seguros S. A. de C.V., León, Mexico 12) | 99.48 | MXN | 276,970 | MXN | 29,347 |
| HDI Seguros S. A., Santiago, Chile 12) | 99.93 | CLP | 7,145,291 | CLP | –1,534,363 |
| HDI Seguros S. A., São Paulo, Brazil 12) | 100.00 | BRL | 367,740 | BRL | 58,972 |
| HDI Sigorta A. Ş., Istanbul, Turkey 12) | 100.00 | TRY | 58,191 | TRY | 106,698 |
| HDI STRAKHUVANNYA (Ukraine), Kiev, Ukraine 12) | 99.22 | UAH | 40,537 | UAH | –16,242 |
| HDI Zahstrahovane AD, Sofi a, Bulgaria 12) | 94.00 | BGN | 8,134 | BGN | 254 |
| HDI-Gerling Zycie Towarzystwo Ubezpieczen S. A., Warsaw, Poland 12) | 100.00 | PLN | 31,226 | PLN | –8,385 |
| InChiaro Assicurazioni S. p. A., Rome, Italy 12) | 51.00 | 7,888 | –962 | ||
| InLinea S. p. A., Rome, Italy 12) | 70.00 | 591 | 145 | ||
| Inversiones HDI Limitada, Santiago, Chile 12) | 100.00 | CLP | 13,011,024 | CLP | 186,548 |
| Magyar Posta Biztosító Részvénytársaság, Budapest, Hungary 12) | 66.93 | HUF | 1,738,292 | HUF | –457,831 |
| Magyar Posta Életbiztosító Részvénytársaság, Budapest, Hungary 12) | 66.93 | HUF | 3,006,804 | HUF | 35,383 |
| OOO Strakhovaya Kompaniya "HDI Strakhovanie", Moscow, Russia 12) | 100.00 | RUB | 49,186 | RUB | 1,535 |
| OOO Strakhovaya Kompaniya CiV Life, Moscow, Russia 12) | 100.00 | RUB | 26,262 | RUB | –69,937 |
| Talanx International AG | |||||
| (formerly: HDI-Gerling International Holding AG), Hannover, Germany 3) | 100.00 | 595,337 | 21,449 | ||
| Non-Life Reinsurance | |||||
| 300 S. Orange Avenue LLC, Wilmington, USA 6), 12) | 47.71 | USD | 55,392 | USD | 1,743 |
| 402 Santa Monica Blvd. LLC, Wilmington, USA 6), 12) | 47.71 | USD | 31,673 | USD | 1,139 |
| 465 Broadway LLC, Wilmington, USA 6), 12) | 47.71 | USD | 42,394 | USD | 1,088 |
| 5115 Sedge Boulevard LP, Chicago, USA 6), 12) | 40.12 | USD | 1,012 | USD | 231 |
| 5115 Sedge Corporation, Chicago, USA 6), 12) | 47.76 | USD | 2,582 | USD | 277 |
| Atlantic Capital Corporation, Wilmington, USA 4), 21) | 50.22 | USD | –113,387 | USD | — |
| Cargo Transit Insurance (Pty) Ltd., Helderkruin, South Africa 5), 11) | 20.49 | ZAR | –269 | ZAR | –769 |
| Clarendon America Insurance Company, Trenton, USA 4), 10), 11) | 50.22 | USD | 131,093 | USD | –7,999 |
| Clarendon Insurance Group Inc., Wilmington, USA 4), 10), 11) | 50.22 | USD | –46,297 | USD | –36,624 |
| Clarendon National Insurance Company, Trenton, USA 4), 10), 11) | 50.22 | USD | –46,580 | USD | –33,254 |
| Clarendon Select Insurance Company, Tallahassee, USA 4), 10), 11) | 50.22 | USD | 13,412 | USD | –867 |
| Compass Insurance Company Limited, Johannesburg, South Africa 5) | 50.22 | ZAR | 111,083 | ZAR | –13,847 |
| Construction Guarantee (Pty.) Ltd., Parktown, South Africa 5) | 13.06 | ZAR | 1,476 | ZAR | 1,152 |
| E+S Rückversicherung AG, Hannover, Germany 14) | 31.98 | 683,413 | 176,000 |
| 1. Subsidiaries Companies included in the IFRS consolidated fi nancial statement |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Envirosure Underwriting Managers (Pty.) Ltd., Durban, South Africa 5) | 15.37 | ZAR | –1,849 | ZAR | –618 |
| Film & Entertainment Underwriters SA (Pty). Ltd., Northcliff , South Africa 5), 11) | 13.06 | ZAR | –610 | ZAR | –860 |
| Funis GmbH & Co. KG, Hannover, Germany 19) | 50.22 | 7,996 | –4 | ||
| Garagesure Consultants and Acceptances (Pty) Ltd., Johannesburg, South Africa 5) | 20.49 | ZAR | 1,926 | ZAR | 220 |
| Gem & Jewel Acceptances (Pty) Ltd., Johannesburg, South Africa 5), 11) | 17.93 | ZAR | 459 | ZAR | 393 |
| GLL HRE CORE PROPERTIES LP, Wilmington, USA 6), 12) | 47.71 | USD | 111,270 | USD | 2,058 |
| GLL Terry Francois Blvd. LLC, Wilmington, USA 6), 12) | 24.32 | USD | 24,801 | USD | 1,768 |
| Hannover America Private Equity Partners II GmbH & Co. KG, Cologne, Germany 19) | 47.85 | 167,582 | 5,832 | ||
| Hannover Euro Private Equity Partners II GmbH & Co. KG, Cologne, Germany 13), 19) | 58.52 | 5,747 | 454 | ||
| Hannover Euro Private Equity Partners III GmbH & Co. KG, Cologne, Germany 13), 15), 19) | 51.73 | 62,438 | 4,723 | ||
| Hannover Euro Private Equity Partners IV GmbH & Co. KG, Cologne, Germany 13), 15), 19) | 53.82 | 72,582 | 8,946 | ||
| Hannover Finance (Luxembourg) S. A., Luxembourg, Luxembourg 11) | 50.22 | 31,244 | –2,331 | ||
| Hannover Finance (UK) Limited, Virginia Water, United Kingdom 11) | 50.22 | GBP | 131,095 | GBP | –12 |
| Hannover Finance Inc., Wilmington, USA 9), 11) | 50.22 | USD | 307,866 | USD | –34,956 |
| Hannover Insurance-Linked Securities GmbH & Co. KG, Hannover, Germany 19) | 50.22 | 65,883 | 8,585 | ||
| Hannover Life Reassurance Africa Ltd., Johannesburg, South Africa 5), 11) | 50.22 | ZAR | 411,113 | ZAR | 69,634 |
| Hannover Re (Bermuda) Ltd., Hamilton, Bermuda 11) | 50.22 | 920,679 | 27,287 | ||
| Hannover Re Advanced Solutions Ltd., Dublin, Ireland 22) | 50.22 | 31 | — | ||
| Hannover Re Euro PE Holdings GmbH & Co. KG, Cologne, Germany 19) | 45.66 | 25,979 | 691 | ||
| Hannover Re Euro RE Holdings GmbH, Cologne, Germany 19) | 41.10 | 56,057 | –305 | ||
| Hannover Re Real Estate Holdings Inc., Orlando, USA 9), 12) | 47.76 | USD | 254,774 | USD | 2,838 |
| Hannover Reinsurance (Ireland) Ltd., Dublin, Ireland 11) | 50.22 | 462,537 | 46,010 | ||
| Hannover Reinsurance Africa Ltd., Johannesburg, South Africa 5), 11) | 50.22 | ZAR | 726,038 | ZAR | 151,044 |
| Hannover Reinsurance Group Africa (Pty) Ltd., Johannesburg, South Africa 9), 11), 14) | 50.22 | ZAR | 155,813 | ZAR | 138,961 |
| Hannover Reinsurance Mauritius Ltd., Port Louis, Mauritius 5) | 50.22 | MUR | 50,613 | MUR | 2,824 |
| Hannover ReTakaful B. S. C (c), Manama, Bahrain 11), 14) | 50.22 | BHD | 28,198 | BHD | 6,208 |
| Hannover Rück Beteiligung Verwaltungs-GmbH, Hannover, Germany 3), 14) | 50.22 | 2,621,855 | 164,970 | ||
| Hannover Rückversicherung AG, Hannover, Germany 14) | 50.22 | 1,682,903 | 302,000 | ||
| Hannover Services (UK) Ltd., Virginia Water, United Kingdom 11) | 50.22 | GBP | 763 | GBP | –17 |
| HAPEP II Holding GmbH, Cologne, Germany 19) | 47.85 | 41,565 | 1,702 | ||
| Harbor Specialty Insurance Company, Trenton, USA 4), 10), 11) | 50.22 | USD | 37,840 | USD | 1,804 |
| HEPEP II Holding GmbH, Cologne, Germany 13), 19) | 58.52 | 2,944 | 483 | ||
| HEPEP III Holding GmbH, Cologne, Germany 13), 15), 19) | 51.73 | 11,925 | 56 | ||
| HILSP Komplementär GmbH, Hannover, Germany 19) | 50.22 | 22 | — | ||
| Hospitality Industries Underwriting Consultants (Pty) Ltd., Johannesburg, South Africa 5) |
18.77 | ZAR | 3,071 | ZAR | 2,763 |
| Indoc Holdings S. A., Luxembourg, Luxembourg 5), 21) | 50.22 | CHF | — | CHF | — |
| Inter Hannover (No. 1) Ltd., London, United Kingdom 11) | 50.22 | GBP | 1 | GBP | — |
| International Insurance Company of Hannover Ltd., Bracknell, United Kingdom 11) | 50.22 | GBP | 119,353 | GBP | 9,134 |
| Landmark Underwriting Agency (Pty) Ltd., Bloemfontein, South Africa 5) | 20.62 | ZAR | 1,873 | ZAR | 374 |
| Lireas Holdings (Pty) Ltd., Johannesburg, South Africa 5) | 25.61 | ZAR | 185,175 | ZAR | 36,888 |
| Micawber 185 (Pty) Ltd., Johannesburg, South Africa 5) | 50.22 | ZAR | 18,257 | ZAR | 3,225 |
| MUA Insurance Acceptances (Pty) Ltd., Cape Town, South Africa 5) | 25.61 | ZAR | 3,751 | ZAR | 4,696 |
| MUA Insurance Company Ltd., Cape Town, South Africa 5) | 25.61 | ZAR | 19,673 | ZAR | 5,655 |
| One Winthrop Square LLC, Wilmington, USA 6), 12) | 47.71 | USD | 23,123 | USD | 1,078 |
| Oval Offi ce Grundstücks GmbH, Hannover, Germany 11), 13) | 75.11 | 57,789 | 1,878 | ||
| Peachtree (Pty) Ltd., Johannesburg, South Africa 5), 21) | 50.22 | ZAR | — | ZAR | — |
| Secquaero ILS Fund Ltd., Georgetown, Grand Cayman, Cayman Islands 11), 12) | 50.22 | USD | 51,472 | USD | 26 |
| SUM Holdings (Pty) Ltd., Johannesburg, South Africa 5) | 18.77 | ZAR | 21,469 | ZAR | 478 |
| Thatch Risk Acceptances (Pty) Ltd., Cape Town, South Africa 5) | 16.89 | ZAR | 764 | ZAR | 1,008 |
| Transit Underwriting Managers (Pty) Ltd., Cape Town, South Africa 5) | 25.61 | ZAR | 1,332 | ZAR | 2,552 |
| Woodworking Risk Acceptances (Pty) Ltd., Pietermaritzburg, South Africa 5) | 15.37 | ZAR | 1,001 | ZAR | 209 |
| 1. Subsidiaries Companies included in the IFRS consolidated fi nancial statement |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Life/Health Reinsurance | |||||
| Hannover Life Re AG, Hannover, Germany 3) | 50.22 | 1,032,596 | 23,499 | ||
| Hannover Life Re of Australasia Ltd., Sydney, Australia 11) | 50.22 | AUD | 251,641 | AUD | 27,673 |
| Hannover Life Reassurance (Ireland) Ltd., Dublin, Ireland 11) | 50.22 | 922,025 | 84,505 | ||
| Hannover Life Reassurance (UK) Ltd., Virginia Water, United Kingdom 11) | 50.22 | GBP | 40,509 | GBP | –461 |
| Hannover Life Reassurance Bermuda Ltd., Hamilton, Bermuda 12) | 50.22 | 163,387 | 15,451 | ||
| Hannover Life Reassurance Company of America, Orlando, USA 11) | 50.22 | USD | 166,599 | USD | 217 |
| Corporate Operations Alstertor Erste Beteiligungs- und Investitionssteuerungs-GmbH & Co. KG, |
|||||
| Hamburg, Germany 18) | 100.00 | 5,263 | 578 | ||
| AmpegaGerling Asset Management GmbH, Cologne, Germany 3) | 100.00 | 83,600 | 39,918 | ||
| AmpegaGerling Immobilien Management GmbH, Cologne, Germany 3) | 100.00 | 2,837 | –2,029 | ||
| AmpegaGerling Investment GmbH, Cologne, Germany 3) | 100.00 | 16,936 | 7,258 | ||
| GERLING Beteiligungs-GmbH, Cologne, Germany | 100.00 | 4,792 | –582 | ||
| HAPEP II Komplementär GmbH, Cologne, Germany 19) | 100.00 | 26 | 1 | ||
| HDI Reinsurance (Ireland) Ltd., Dublin, Ireland 18) | 100.00 | 5,102 | 102 | ||
| HEPEP II Komplementär GmbH, Cologne, Germany 19) | 100.00 | 27 | –1 | ||
| HEPEP III Komplementär GmbH, Cologne, Germany 19) | 100.00 | 21 | –1 | ||
| HEPEP IV Komplementär GmbH, Cologne, Germany 19) | 100.00 | 22 | –1 | ||
| Protection Reinsurance Intermediaries AG, Hannover, Germany 3) | 100.00 | 389 | 7,575 | ||
| Talanx Beteiligungs-GmbH & Co. KG, Hannover, Germany 8) | 100.00 | 146,024 | 1,242 | ||
| Talanx Finanz (Luxemburg) S. A., Luxembourg, Luxembourg | 100.00 | 8,260 | 2,201 | ||
| Talanx Service AG (vormals: HDI-Gerling Sach Serviceholding AG), Hannover, Germany 3), 16) |
100.00 | 1,605 | –2,593 | ||
| Talanx Systeme AG, Hannover (formerly: HDI-Gerling Gesellschaft für IT-Dienstleistungen AG, Cologne), Germany 3) |
100.00 | 130 | 7 |
| 2. Special purpose entities and special funds a) Special funds included in the consolidated fi nancial statement pursuant to IAS 27/SIC 12 |
Share of fund assets1) in % |
Fund assets2) in EUR thousand |
Change in fund assets incl. cash infl ows and outfl ows2) in EUR thousand |
||
|---|---|---|---|---|---|
| Industrial Lines | |||||
| Ampega-Vienna-Bonds-Fonds, Vienna, Austria | 100.00 | 264,297 | 53,762 | ||
| GERLING EURO-RENT 3, Cologne, Germany 18) | 100.00 | 594,660 | 169,873 | ||
| HDI Gerling-Sach Industrials, Cologne, Germany 13), 18) | 100.00 | 171,287 | –149,415 | ||
| Retail Germany | |||||
| Ampega-nl-Balanced-Fonds, Cologne 18) | 67.50 | 54,571 | –121,927 | ||
| Ampega-nl-Euro-DIM-Fonds, Cologne 18) | 67.50 | 437,366 | 24,385 | ||
| Ampega-nl-Global-Fonds, Cologne 18) | 67.50 | 47,187 | 2,293 | ||
| Ampega-nl-Rent-Fonds, Cologne 18) | 67.50 | 780,130 | 64,371 | ||
| Ampega-TAL-A-Fonds, Cologne 18) | 100.00 | 93,583 | 7,263 | ||
| Gerling Immo Spezial 1, Cologne 18) | 100.00 | 269,383 | 2,674 | ||
| GKL SPEZIAL RENTEN, Cologne 18) | 100.00 | 599,516 | 50,720 | ||
| HGLV-Corporates, Cologne 18) | 100.00 | 1,081,286 | 278,276 | ||
| HGLV-Financial, Cologne 18) | 100.00 | 1,047,099 | 117,219 | ||
| PBVL-Aktien, Cologne 18) | 100.00 | 52,062 | 8,127 | ||
| PBVL-Corporate, Cologne 18) | 100.00 | 106,927 | 58,335 | ||
| terrAssisi Aktien I AMI, Cologne | 69.02 | 7,408 | 505 | ||
| Retail International | |||||
| BNP-HDI Credit FI Renda Fixa Credito Privado, São Paulo, Brazil | 100.00 | BRL | 66,468 | BRL | 24,727 |
| Credit Suisse HDI RF Créditor, São Paulo, Brazil | 100.00 | BRL | 61,131 | BRL | 5,482 |
| CSHG Hannover FI Multimercado Credito Privado, São Paulo, Brazil | 100.00 | BRL | 20,190 | BRL | 20,190 |
| HSBC FI Renda Fixa Hannover, São Paulo, Brazil | 100.00 | BRL | 95,963 | BRL | –38,307 |
| HSBC Performance HDI RF Crédito, São Paulo, Brazil | 100.00 | BRL | 70,121 | BRL | 11,020 |
| UBS Pactual HDI RF Crédito, São Paulo, Brazil | 100.00 | BRL | 65,392 | BRL | 11,222 |
| Non-Life Reinsurance | |||||
| FRACOM FCP, Paris, France 18) | 49.90 | 708,449 | 116,703 | ||
| 2. Special purpose entities and special funds b) Special purpose entities included in the consolidated fi nancial statement pursuant to IAS 27/SIC 12 |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
| Non-Life Reinsurance | |||||
| Hannover Re (Guernsey) PCC Ltd., St. Peter Port, United Kingdom 11) | 50.22 | 261 | –42 | ||
| Kaith Re Ltd., Hamilton, Bermuda 11), 12) | 44.19 | USD | 640 | USD | –441 |
| 3. Associated companies recognized at equity in the consolidated fi nancial statement | Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Apulia Prontoprestito S. p. A., Rome, Italy 17), 18) | 10.60 | 236,795 | 35 | ||
| Aviation Insurance Company Limited, Johannesburg, South Africa 5), 11) | 8.01 | ZAR | 6,270 | ZAR | –140 |
| C-QUADRAT Investment AG, Vienna, Austria 19) | 25.10 | 33,111 | 9,342 | ||
| Carmargue Underwriting Managers (Pty) Ltd., Parktown, South Africa 5) | 6.66 | ZAR | 9,012 | ZAR | 1,666 |
| Clarendon Transport Underwriting Managers (Pty) Ltd., Johannesburg, South Africa 5), 11) |
9.56 | ZAR | 3,880 | ZAR | 30,190 |
| Commercial & Industrial Acceptances (Pty) Ltd., Johannesburg, South Africa 5), 11) | 10.24 | ZAR | 5,147 | ZAR | 15,703 |
| Flexible Accident & Sickness Acceptances (Pty) Ltd., Johannesburg, South Africa 5) | 10.24 | ZAR | 1,811 | ZAR | 2,995 |
| Hannover Finanz GmbH, Hannover, Germany 18) | 12.56 | 69,093 | 5,617 | ||
| ITAS Vita S. p. A., Trento, Italy 18) | 17.52 | 75,355 | 5,572 | ||
| neue leben Pensionsverwaltung AG, Hamburg, Germany | 33.08 | 15,176 | 408 | ||
| Takafol South Africa (Pty) Ltd., Johannesburg, South Africa 5) | 12.55 | ZAR | 825 | ZAR | 351 |
| WeHaCo Unternehmensbeteiligungs-GmbH, Hannover, Germany 18) | 16.44 | 73,950 | 192 |
| 4. Associated companies not recognized at equity in the consolidated fi nancial statement owing to subordinate importance |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Energi Holding Inc., Peabody, USA 18) | 14.31 | USD | 4,805 | USD | –190 |
| Hannover Care AB, Stockholm, Sweden 18) | 15.07 | SEK | 570 | SEK | –2,657 |
| Hannoversch-Kölnische Handels-Beteiligungsgesellschaft mbH & Co. KG, Hannover, Germany 18) |
50.00 | 28,326 | 2,564 | ||
| PlaNet Guarantee (SAS), Saint-Ouen, France 11) | 11.84 | 1,069 | –927 | ||
| Sciemus Power MGA Limited, London, United Kingdom 18) | 12.55 | GBP | 1 | GBP | — |
| XS Direct Holding Ltd., Dublin, Ireland 18) | 12.55 | 658 | 16 |
| Result before | |||
|---|---|---|---|
| Calculated | Capital and | profi t/loss | |
| share of | reserves2) in | transfer2) in | |
| 5. Joint ventures included in the consolidated fi nancial statement pursuant to IFRS | capital1) in % | EUR thousand | EUR thousand |
| Credit Life International Services GmbH, Neuss, Germany | 50.00 | 64 | 38 |
| 6. Affi liated companies not included in the consolidated fi nancial statement pursuant to IFRS |
Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| Bureau für Versicherungswesen Robert Gerling & Co. GmbH, Cologne, Germany 3) | 100.00 | 26 | –5 | ||
| CiV Immobilien GmbH, Hilden, Germany 18) | 100.00 | 28 | 1 | ||
| Clarendon Services of New Jersey, Inc., Trenton, USA 10), 11), 21) | 50.22 | USD | — | USD | — |
| Clarenfi n (Pty) Ldt., Johannesburg, South Africa 22) | 9.56 | ZAR | — | ZAR | — |
| Desarollo de Consultores Profesionales en Seguros S. A. de CV, León, Mexico 7) | 99.47 | MXN | — | MXN | — |
| Gente Compania de Soluciones Profesionales de Mexico, S. A. de C. V., León, Mexico 12) | 100.00 | MXN | 12,840 | MXN | 2,744 |
| Gerling Norge A/S, Oslo, Norway 18) | 100.00 | NOK | 228 | NOK | 21 |
| GERLING Sustainable Development Project-GmbH, Cologne, Germany | 100.00 | 55 | –6 | ||
| Gerling-Konzern Panamericana Ltda., São Paulo, Brazil 18) | 100.00 | BRL | 629 | BRL | –67 |
| H. J. Roelofs Assuradeuren B. V., Rotterdam, Netherlands 18) | 100.00 | 718 | 8 | ||
| Hannover Life Re Consultants, Inc., Orlando, USA 18) | 50.22 | USD | 181 | USD | 37 |
| Hannover Re Consulting Services India Private Limited, Mumbai, India 20) | 50.22 | INR | 45,643 | INR | 5,643 |
| Hannover Re Services Italy S. r. L., Milan, Italy 11) | 50.04 | 313 | 91 | ||
| Hannover Re Services Japan, Tokyo, Japan | 50.22 | JPY | 90,297 | JPY | 3,690 |
| Hannover Re Services USA, Inc., Itasca, USA | 50.22 | USD | 794 | USD | 78 |
| Hannover Risk Consultants B. V., Rotterdam, Netherlands 18) | 100.00 | 349 | 7 | ||
| Hannover Rückversicherung AG Escritorio de Representação no Brasil Ltda., Rio de Janeiro, Brazil 18) |
50.22 | BRL | 35 | BRL | 107 |
| Hannover Services (Mexico) S. A. de C. V., Mexico City, Mexico 11) | 50.22 | MXN | 11,022 | MXN | 1,031 |
| Hannoversch-Kölnische Beteiligungsgesellschaft mbH, Hannover, Germany 7) | 50.00 | — | — | ||
| HDI Direkt Service GmbH, Hannover, Germany 3) | 100.00 | 51 | –319 | ||
| HDI-Gerling Beschäftigungs-und Qualifi zierungsgesellschaft mbH, Hannover, Germany 3) |
100.00 | 25 | –22 | ||
| HDI-Gerling Services S. A., Brussels, Belgium 18) | 100.00 | 143 | 31 | ||
| HDI-Gerling Sicherheitstechnik GmbH, Hannover, Germany | 100.00 | 1,875 | 1,233 | ||
| HDI-Gerling Versicherungs-Service AG, Zurich, Switzerland 18) | 100.00 | CHF | 1,346 | CHF | –61 |
| HR Hannover Re Correduria de Reaseguros S. A., Madrid, Spain 11) | 50.22 | 198 | 30 | ||
| International Mining Industry Underwriters Ltd., London, United Kingdom 11) | 50.22 | GBP | 358 | GBP | 57 |
| Kommanditgesellschaft Trans Leben Grundstücksverwaltungs-GmbH & Co., Hamburg, Germany 18) |
100.00 | 1 | –356 | ||
| LRA Superannuation Plan Pty Ltd., Sydney, Australia 22) | 50.22 | AUD | — | AUD | — |
| Mediterranean Reinsurance Services Ltd., Hong Kong, China 21) | 50.22 | USD | — | USD | — |
| Paetau Sports Versicherungsmakler GmbH, Berlin, Germany | 99.00 | 344 | 11 | ||
| Scandinavian Marine Agency AS, Oslo, Norway 18) | 52.00 | NOK | 5,196 | NOK | 1,483 |
| Shamrock Marine-Insurance Agency GmbH, Hamburg, Germany 3) | 100.00 | 25 | –5 | ||
| SSV Schadenschutzverband GmbH, Hannover, Germany 3) | 100.00 | 200 | 234 | ||
| Svedea AB, Stockholm, Sweden 23) | 37.77 | SEK | — | SEK | — |
| THS Services Versicherungsvermittlungs GmbH, Berlin, Germany | 99.00 | 13 | 15 | ||
| THV Versicherungsmakler GmbH, Berlin, Germany | 99.00 | 2,014 | 251 | ||
| VES Gesellschaft f. Mathematik, Verwaltung und EDV mbH, Gevelsberg, Germany 3) |
100.00 | 195 | –950 |
| 7. Participating interests | Calculated share of capital1) in % |
Capital and reserves2) in EUR thousand |
Result before profi t/loss transfer2) in EUR thousand |
||
|---|---|---|---|---|---|
| DFA Capital Management, Inc., Wilmington, USA 18) | 25.40 | USD | 1,177 | USD | –1,928 |
| IGEPA Gewerbepark GmbH & Co. Vermietungs KG, Munich, Germany 18) | 37.50 | –11,272 | 8,764 |
| Result before | |||
|---|---|---|---|
| Capital and | profi t/loss | ||
| 8. Participating interests of Hannover Re in large public limited companies in | reserves2) in | transfer2) in | |
| respect of which the participation exceeds 5% of the voting rights | in % | EUR thousand | EUR thousand |
| Acte Vie S. A. Compagnie d'Assurances sur la Vie et de Capitalisation, | |||
| Strasbourg, France 18) | 9.38 | 8,118 | 136 |
1) In the case of participating interests held in part indirectly, the calculated shares have been specifi ed
2) The fi gures correspond to the annual fi nancial statements of the companies according to the applicable local law or international accounting;
diverging currencies are indicated
3) A profi t/loss transfer agreement exists
8) The exemption aff orded by § 264 b Commercial Code (HGB) was utilized
9) The company prepares its own subgroup accounts
15) Also allocated to the Industrial Lines segment 16) The facilities aff orded by § 264 Para. 3 Commercial Code (HGB) were utilized
Drawn up and released for publication in Hannover, 28 March 2011
Dr. Querner Dr. Roß Wallin
Hannover, 28 March 2011
Board of Management
| Haas | Dr. Hinsch | Leue | Dr. Noth |
|---|---|---|---|
We have audited the consolidated fi nancial statements prepared by Talanx Aktiengesellschaft , Hannover, comprising the consolidated balance sheet, consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity, cash fl ow statement and notes to the consolidated fi nancial statements, together with the group management report for the business year from 1 January to 31 December 2010. The preparation of the consolidated fi nancial statements and the group management report in accordance with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to § 315a Para 1 HGB and supplementary provisions of the Articles of Incorporation are the responsibility of the parent company's management. Our responsibility is to express an opinion on the consolidated fi nancial statements and on the group management report based on our audit.
We conducted our audit of the consolidated fi nancial statements in accordance with § 317 HGB and German generally accepted standards for the audit of fi nancial statements promulgated by the Institut der Wirtschaft sprüfer (IDW). Those standards require that we plan and perform the audit such that misstatements materially aff ecting the presentation of the net assets, fi nancial position and results of operations in the consolidated fi nancial statements in accordance with the applicable fi nancial reporting framework and in the group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The eff ectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated fi nancial statements and the group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual fi nancial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and signifi cant estimates made by management, as well as evaluating the overall presentation of the consolidated fi nancial statements and group management report. We believe that our audit provides a reasonable basis for our opinion.
Our audit has not led to any reservations.
In our opinion, based on the fi ndings of our audit, the consolidated fi nancial statements comply with IFRS, as adopted by the EU, the additional requirements of German commercial law pursuant to § 315a Para. 1 HGB and the supplementary provisions of the Articles of Incorporation and give a true and fair view of the net assets, fi nancial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated fi nancial statements and as a whole provides a suitable view of the Group's position and appropriately presents the opportunities and risks of future development.
Hannover, 28 March 2011
KPMG AG Wirtschaft sprüfungsgesellschaft
Dr. Ellenbürger Husch (German Public Auditor) (German Public Auditor)
Hannover Life Re of Australasia Ltd Level 7 70 Phillip Street Sydney NSW 2000 Telephone +61 2 9251-6911 Fax +61 2 9251-6862
Hannover Rückversicherung AG Australian Branch – Chief Agency The Re Centre, Level 21 Australia Square 264 George Street Sydney NSW 2000 Telephone +61 2 9274-3000 Fax +61 2 9274-3033
■ HDI-Gerling Australia Insurance ■ HDI-Gerling Industrie Versicherung AG, Australia Branch 44 Pitt Street, Level 4 Sydney NSW 2000 Telephone +61 2 8274-4200 Fax +61 2 9247-1711
HDI-Gerling Lebensversicherung AG Galaxy 21 Praterstr. 31 1020 Vienna Telephone +43 120 709-220 Fax +43 120 709-900
HDI Versicherung AG Edelsinnstr. 7–11 1120 Vienna Telephone +43 50 905 501-0 Fax +43 50 902 502-0
■ Hannover ReTakaful B.S.C. (c) ■ Hannover Rückversicherung AG, Bahrain Branch Al Zamil Tower 17th floor Government Avenue Manama Center 305 Manama Telephone +973 17 214-766 Fax +973 17 214-667
HDI-Gerling Verzekeringen N.V./ HDI-Gerling Assurances S. A. Avenue de Tervuren 273 B1 1150 Brussels Telephone +32 2 7730-811 Fax +32 2 7730-950
Hannover Life Reassurance Bermuda Ltd. Victoria Place, 2nd floor, 31 Victoria Street Hamilton, HM 10 Telephone +1 441 2952827 Fax +1 441 2952844
Hannover Re (Bermuda) Ltd. Victoria Place, 2nd floor, 31 Victoria Street Hamilton, HM 10 Telephone +1 441 2943110 Fax +1 441 2967568
Hannover Rückversicherung AG EscritÓrio de Representação no Brasil Ltda. Praça Floriano, 19/1701 CEP 20 031 050 Rio de Janeiro Telephone +55 21 2217 9500 Fax +55 21 2217 9515
HDI Seguros S. A. Avenida Eng. Luís Carlos Berrini 901–5° andar 04571-010 São Paulo-SP Telephone +55 11 550 519-95 Fax +55 11 550 515-11
HDI Zahstrahovane AD G.S. Rakovski No 99 1000 Sofia Telephone +359 2 930-9050 Fax +359 2 987-9167
Hannover Rückversicherung AG Canadian Branch – Chief Agency 3650 Victoria Park Avenue, Suite 201 Toronto, Ontario M2H 3P7 Telephone +1 416 496-1148 Fax +1 416 496-1089
Hannover Rückversicherung AG Canadian Branch – Facultative Office 130 King St, West, Suite 2125 Toronto, Ontario M5X 1A4 Telephone +1 416 867-9712 Fax +1 416 867-9728
HDI Seguros S. A. Encomenderos 113 Las Condes/Santiago Telephone +56 2 422 9000 Fax +56 2 422 9400
Hannover Rückversicherung AG Hong Kong Branch 2008 Sun Hung Kai Centre 30 Harbour Road Wan Chai, Hong Kong Telephone +852 2519 3208 Fax +852 2588 1136
Hannover Rückversicherung AG Shanghai Branch Suite 3307, China Fortune Tower 1568 Century Boulevard Pudong 200122 Shanghai Telephone +86 21 5081-9585 Fax +86 21 5820-9396
HDI-Gerling Industrie Versicherung AG Hong Kong Branch Room 5202, Central Plaza 18, Harbour Road Wan Chai, Hong Kong Telephone +852 25 98-8338 Fax +852 25 98-8838
Hannover Rückversicherung AG Bogotá Representative Office Facultative Business Calle 98 No. 21–50 Office Number 901 Centro Empresarial 98 Bogotá Telephone +57 1 6420066-200 Fax +57 1 6420273
HDI Versicherung AG Czech Republic Branch Jugoslávská 620/29 120 00 Praha 2 Telephone +420 2 2019 0203 Fax +420 2 2019 0299
Hannover Rückversicherung AG Succursale Française 109 rue de la Boétie (Entrance 52 avenue de Champs Elysées) 75008 Paris Telephone +33 1 4561 73-00 (life) Telephone +33 1 4561 73-40 (non-life) Fax +33 1 4561 73-60
HDI-Gerling Industrie Versicherung AG France Branch Tour Opus 12 – La Défense 9 77 Esplanade du Générale de Gaulle 92914 Paris La Défense Cedex Telephone +33 1 44 0556-00 Fax +33 1 44 0556-66
■ AmpegaGerling Investment GmbH ■ Talanx Asset Management GmbH ■ Talanx Immobilien Management GmbH Charles-de-Gaulle-Platz 1 50679 Cologne Telephone +49 221 790799-0 Fax +49 221 790799-999
E+S Rückversicherung AG Karl-Wiechert-Allee 50 30625 Hannover Telephone +49 511 5604-0 Fax +49 511 5604-1188
Hannover Rückversicherung AG Karl-Wiechert-Allee 50 30625 Hannover Telephone +49 511 5604-0 Fax +49 511 5604-1188
■ HDI Direkt Versicherung AG ■ HDI-Gerling Firmen und Privat Versicherung AG ■ HDI-Gerling Industrie Versicherung AG Riethorst 2 30659 Hannover Telephone +49 511 645-0 Fax +49 511 645-4545
HDI-Gerling Lebensversicherung AG HDI-Gerling Pensionsfonds für die Wirtschaft AG HDI-Gerling Pensionskasse AG Charles-de-Gaulle-Platz 1 50679 Cologne Telephone +49 221 144-0 Fax +49 221 144-3833
HDI-Gerling Pensionsmanagement AG Charles-de-Gaulle-Platz 1 50679 Cologne Telephone +49 221 144-69200
HDI-Gerling Sicherheitstechnik GmbH Riethorst 2 30659 Hannover Telephone +49 511 645-4126 Fax +49 511 645-4545
■ Neue Leben Holding AG ■ Neue Leben Lebensversicherung AG ■ Neue Leben Unfallversicherung AG Sachsenstrasse 8 20097 Hamburg Telephone +49 40 23891-0 Fax +49 40 23891-333
PB Versicherungen Proactiv-Platz 1 40721 Hilden Telephone +49 2103 34-5100 Fax +49 2103 34-5109
Protection Reinsurance Intermediaries AG Karl-Wiechert-Allee 57 30625 Hannover Telephone +49 511 54223-0 Fax +49 511 54223-200
■ Talanx AG ■ Talanx Deutschland AG ■ Talanx Service AG ■ Talanx Systeme AG Riethorst 2 30659 Hannover Telephone +49 511 3747-0 Fax +49 511 3747-2525
Talanx International AG Riethorst 2 30659 Hannover Telephone +49 511 645-0 Fax +49 511 645-4545 TARGO Versicherungen Proactiv-Platz 1 40721 Hilden Telephone +49 2103 34-7100 Fax +49 2103 34-7109
HDI-Gerling Industrie Versicherung AG Greece Branch 11 Omirou & 1 Vissarionos Street 10672 Athens Telephone +30 210 7259-181 Fax +30 210 7259-177
HDI Versicherung AG Hungary Branch Batthyany u. 65 1015 Budapest Telephone +36 1 2482-820 Fax +36 1 2482-829
■ Magyar Posta Életbiztosító Zrt. ■ Magyar Posta Biztosító Zrt. Bégutca 3-5 1022 Budapest Telephone +36 1 4234-200 Fax +36 1 4234-210
Hannover Re Consulting Services India Private Limited 215 Atrium 'C' Wing, Unit 616, 6th floor Andheri-Kurla Rd. Andheri (East) Mumbai 400069 Telephone +91 22 613808-08 Fax +91 22 613808-10
Hannover Life Reassurance (Ireland) Limited No. 4 Custom House Plaza, IFSC Dublin 1 Telephone +353 1 612-5718 Fax +353 1 673-6917
Hannover Reinsurance (Ireland) Ltd. No. 2 Custom House Plaza, IFSC Dublin 1 Telephone +353 1 612-5700 Fax +353 1 829-1400
Hannover Re Services Italy S.r.l. Via Dogana, 1 20123 Milan Telephone +39 02 8068 1311 Fax +39 02 8068 1349
HDI Assicurazioni S.p.A. Via Abruzzi 10 b 00187 Rome Telephone +39 06 42103-1 Fax +39 06 42103-500
HDI-Gerling Industrie Versicherung AG Italy Branch Via Franco Russoli, 5 20143 Milan Telephone +39 02 83113-400 Fax +39 02 83113-202
Hannover Re Services Japan KK 7th floor, Hakuyo Building 3–10 Nibancho Chiyoda-ku Tokyo 102-0084 Telephone +81 3 5214-1101 Fax +81 3 5214-1105
HDI-Gerling Industrie Versicherung AG Japan Branch Sanbancho KS Building 7F 2 Banchi, Sanbancho Chiyoda-ku Tokyo 102-0075 Telephone +81 3 5214-1361 Fax +81 3 5214-1365
Hannover Rückversicherung AG Korea Branch Room 414, 4th floor Gwanghwamoon Officia B/D 163, Shinmunro-1ga, Jongro-gu Seoul 110-999 Telephone +82 2 3700 0600 Fax +82 2 3700 0699
Euro International Reinsurance S. A. 43, Boulevard du Prince Henri 1724 Luxembourg Telephone +35 224-1842 Fax +35 224-1853
Talanx Finanz (Luxemburg) S. A. 5, Rue Eugène Ruppert 2453 Luxembourg Telephone +35 224-1842 Fax +35 224-1853
Hannover Rückversicherung AG Malaysian Branch Suite 31-1, 31st floor Wisma UOA II No. 21 Jalan Pinang 50450 Kuala Lumpur Telephone +60 3 2687 3600 Fax +60 3 2687 3760
Hannover Services (México) S. A. de C. V. German Centre, Oficina 4-4-28 Av. Santa Fé No. 170 Col. Lomas de Santa Fé C.P. 01210 Mexico-City, D.F. Telephone +52 55 9140 0800 Fax +52 55 9140 0815
HDI-Gerling de México Seguros S. A. Av. Paseo de las Palmas N. 239–104 Col. Lomas de Chapultepec 11000 Mexico-City, D.F. Telephone +52 55 5202-7534 Fax +52 55 5202-9679
HDI Seguros S. A. de C. V. Paseo de los Insurgentes 1701 Col. Granada León, Guanajuato Telephone +52 477 7104764 Fax +52 477 7104786
HDI-Gerling Verzekeringen N. V. Westblaak 14 3012 KL Rotterdam Telephone +31 10 403-6100 Fax +31 10 403-6275
HDI-Gerling Industrie Versicherung AG Norway Branch C. J. Hambros plass 2D 0164 Oslo Telephone +47 232 136-50 Fax +47 232 136-51
HDI Asekuracja TU S. A. ul. Plocka 11/13 01-231 Warsaw Telephone +48 22 534-4000 Fax +48 22 534-4001
HDI-Gerling Życie TU S. A. ul. Hrubieszowska 2 01-209 Warsaw Telephone +48 22 537-2450 Fax +48 22 537-2001
OOO Strakhovaya Kompaniya "CiV Life" 30/1 Obrucheva street Moscow, 117485 Telephone +7 495 967 9 267 Fax +7 495 967 9 260
OOO Strakhovaya Kompaniya "HDI Strakhovanie" 30/1 Obrucheva street Moscow, 117485 Telephone +7 495 967 9 257 Fax +7 495 967 9 260
HDI Versicherung AG Slovak Republic Branch Štúrova 11 811 02 Bratislava Telephone +421 2 5 710 8611 Fax +421 2 5 710 8618
Compass Insurance Company Limited P. O. Box 37226 Birnam Park 2015 Johannesburg Telephone +27 11 7458-333 Fax +27 11 7458-444
■ Hannover Life Reassurance Africa Limited ■ Hannover Reinsurance Africa Limited ■ Hannover Reinsurance Group Africa (Pty) Ltd. P. O. Box 85321 Emmarentia 2029 Johannesburg Telephone +27 11 4816-500 Fax +27 11 4843330/32
HDI-Gerling Insurance of South Africa Ltd. P. O. Box 66 Saxonwold 2132 Johannesburg Telephone +27 11 340-0100 Fax +27 11 447-4981
HDI HANNOVER International España Cía de Seguros y Reaseguros S. A. c/Luchana, 23–6° 28010 Madrid Telephone +34 91 444-2000 Fax +34 91 444-2019
HDI HANNOVER International España Cía de Seguros y Reaseguros S. A. c/Rosellón, 216–09° 08008 Barcelona Telephone +34 93 272 10-00 Fax +34 93 238 76-70
HR Hannover Re Correduría de Reaseguros, S. A. Paseo del General Martínez Campos 46 28010 Madrid Telephone +34 91 319-0049 Fax +34 91 319-9378
Hannover Rückversicherung AG, Tyskland filial Hantverkargatan 25 P. O. Box 22085 10422 Stockholm Telephone +46 8 617 5400 Fax +46 8 617 5597 (life) Fax +46 8 617 5593 (non-life) International Insurance Company of Hannover Ltd., England filial Hantverkargatan 25 P. O. Box 22085 10422 Stockholm Telephone +46 8 617 5400 Fax +46 8 617 5592
HDI-Gerling Industrie Versicherung AG Switzerland Branch Dufourstrasse 46 8034 Zurich Telephone +41 44 265-4747 Fax +41 44 265-4748
Hannover Rückversicherung AG Taipei Representative Office Rm. 902, 9F, No. 129, Sec. 3 Misheng E. Road Taipeh Telephone +886 2 8770-7792 Fax +886 2 8770-7735
CiV Hayat Sigorta A.Ş. Saray Mah. Ö. Faik Atakan Caddesi Yılmaz Plaza No: 3 34768 Ümraniye, Istanbul Telephone +90 216 633-1700 Fax +90 216 633-1709
HDI Sigorta A. Ş. Büyükdere Caddesi C.E.M. Iş Merkezi No: 23 Kat: 7-8-9 34381 Şişli/Istanbul Telephone +90 212 368-6000 Fax +90 212 368-6010
HDI Strakhuvannya 102, Chervonoarmiyska Str. 03150 Kiev Telephone +38 44 247 4477 Fax +38 44 529 0894
■ Hannover Life Reassurance (UK) Limited ■ Hannover Services (UK) Limited Hannover House Virginia Water Surrey GU25 4AA Telephone +44 1344 845-282 Fax +44 1344 845-383
HDI-Gerling Industrie Versicherung AG United Kingdom Branch 1 Great Tower Street London EC3R 5AA Telephone +44 20 7696-8099 Fax +44 20 7696-8444
International Insurance Company of Hannover Limited 1 Arlington Square Bracknell Berkshire RG12 1WA Telephone +44 1344 397600 Fax +44 1344 397601
London office: 10 Fenchurch Street London EC3M 3BE Telephone +44 20 7015-4000 Fax +44 20 7017-4001
Hannover Life Reassurance Company of America 800 N. Magnolia Avenue Suite 1400 Orlando, FL 32803-3268 Telephone +1 407 649-8411 Fax +1 407 649-8322
Hannover Re Services USA, Inc. 500 Park Blvd., Suite 1360 Itasca, IL 60143 Telephone +1 630 250-5517 Fax +1 630 250-5527
HDI-Gerling America Insurance Company 150 North Wacker Drive, 29th floor Chicago, IL 60606 Telephone +1 312 580-1900 Fax +1 312 580-0700
Underwriting risk that a single trigger event (e.g. an earthquake or hurricane) can lead to an accumulation of claims within a > portfolio.
Costs incurred by an insurance company when insurance policies are taken out or renewed (e.g. new business commission, costs of proposal assessment or underwriting).
Mathematician who deals with questions relating to insurance, investments and retirement provision.
Costs of current administration connected with the production of insurance coverage.
Industry standard for measuring new business income in life insurance.
Supervision and management of investments according to risk and return considerations.
Company included in the consolidated financial statement not through full or proportionate consolidation but normally using the > equity method and over whose business or company policy a company included in the consolidated financial statement exerts a significant influence.
Partnership between a bank/postal service partner and an insurance company for the purpose of selling insurance products through the banking/postal service partner's branches. The linkage between insurer and bank often takes the form of a capital participation or a long-term strategic cooperation between the two partners.
Value arrived at using mathematical methods for future liabilities (present value of future liabilities minus present value of future incoming premiums), especially in life and health insurance.
Analytical model used to calculate theoretical option prices. It makes allowance for the current price of the underlying stock, the risk-free interest rate, the remaining time until option expiration, the > volatility and possible dividend payments within the remaining period.
Statement on the origin and utilization of cash and cash equivalents during the accounting period. It shows the changes in liquid funds separated into cash flows from operating, investing and financing activities.
Instrument used to transfer catastrophe risks of a (re)insurer to the capital market.
Primary insurer or reinsurer that passes on (cedes) shares of its insured risks to a reinsurer in exchange for a premium.
equalization reserve
Type of coinsurance contract where the ceding company retains a portion of the original premium at least equal to the ceded reserves. Similar to a > Modified coinsurance contract, the interest payment to the reinsurer reflects the investment return on the underlying asset portfolio.
Sum of the > loss ratio and > expense ratio plus interest income on funds withheld and contract deposits in relation to earned premiums. When calculating the adjusted combined ratio, the claims and claims expenses are adjusted so as to eliminate the effect of interest income on funds withheld and contract deposits. This ratio is used by both property/casualty insurers and nonlife reinsurers.
Remuneration paid by a primary insurer to agents, brokers and other professional intermediaries.
Statutory regulations and undertaking-specific rules governing the responsible and lawful actions of an undertaking and its employees.
In accounting practice: combining of the individual financial statements of several companies belonging to one group into a consolidated financial statement. In so doing, internal transactions within the group are eliminated.
System that serves to ensure responsible management and supervision of enterprises and is intended to foster the trust of investors, clients, employees and the general public in companies.
Also creditworthiness. Ability of a debtor to meet its payment commit ments.
Term denoting the difference between the taxes calculated on the profit reported in the commercial balance sheet and those carried in the tax balance sheet, which then evens out in subsequent months. Deferred taxes are recognized in order to offset this difference in those cases where it is evident that it will be eliminated over time.
An accounting method originating in US accounting principles for the recognition of short-term and multi-year insurance and reinsurance contracts with no significant underwriting risk transfer.
Financial products derived from underlying primary instruments such as equities, fixed-income securities and foreign exchange instruments, the fair value of which is determined inter alia on the basis of the underlying security or other reference asset. Derivatives include swaps, options and futures.
Auditing of a participating interest in the run-up to acquisition or merger. It encompasses, in particular, a systematic analysis of the strengths and weaknesses of the proposition, analysis of the risks associated with the acquisition and a well-founded valuation of the item in question.
Ratio in investment mathematics that represents the average commitment period of the cash value of a financial instrument. The duration can thus also be considered a measure of the interest rate risk associated with a financial instrument.
Proportion of written premiums attributable to the insurance protection in the financial year.
Earnings before interest and tax. > operating profit
Benchmark used to measure the performance of life insurance enter prises. It is composed of the sum total of free assets (net asset value) plus the present value of the projected stream of future after-tax profits on the in-force insurance portfolio.
Provision constituted to offset significant fluctuations in the loss experience of individual lines over a number of years.
Method of accounting used to measure equity investments (associated companies) in the consolidated financial statement.
Sum total of commissions, sales, personnel and material costs as well as regular administrative expenses.
Ratio of acquisition costs and administrative expenses (net) to net premium earned.
Level of danger inherent in a risk or portfolio of risks.
Participation on the part of the reinsurer in a particular individual risk assumed by the primary insurer.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm's length transaction.
funds held under reinsurance treaties
Collateral provided to cover insurance liabilities which an insurer retains from the liquid funds which it is to pay to a reinsurer under a reinsurance treaty. In this case, the insurer shows funds held under a reinsurance treaty, while the reinsurer shows funds held by a ceding company. Interest is payable on such funds held. Fund held by ceding companies are also referred to as an investment surrogate.
The amount that a purchaser is prepared to pay – in light of future profit expectations – above and beyond the value of all tangible and intangible assets after deduction of liabilities.
In insurance: before deduction of reinsurance.
Capital in the form of subordinated debt and surplus debenture that exhibits a hybrid character of equity and debt.
Unscheduled write-down taken if the present value of the estimated future cash flows of an asset falls below the carrying amount.
Financial instruments used to securitize risks under which the payment of interest and/or nominal value is dependent upon the occurrence and magnitude of an insured event.
Rating of BBB or better awarded to an entity on account of its low risk of default.
Public entity or private enterprise that issues securities, e.g. the federal government in the case of German Treasury Bonds or a joint-stock corporation in the case of shares.
Bank guarantee. In the United States, for example, a common way of furnishing collateral in reinsurance business.
Lines of business concerned with the insurance of persons, i.e. life, annuity, health and personal accident.
Collective term covering those types of insurance which are concerned in a broader sense with risks associated with the uncertainties of life expectancy and life planning. These include death and disability, retirement provision as well as marriage and education.
Net loss ratio shown in the balance sheet: percentage ratio of claims expenditure (net) including other technical income (net), but excluding any consolidation differences for technical items – including amortization of the shareholders' portion of the PVFP – to net premium earned. > Present value of future profits
Claim that reaches an exceptional amount compared to the average claim for the risk group in question and exceeds a defined claims amount.
Coverage of technical liabilities in foreign currencies by means of corresponding investments in the same currency in order to avoid exchange-rate risks.
Type of reinsurance treaty where the ceding company retains the assets supporting the reinsured reserves by withholding a fund, thereby creating an obligation to render payments to the reinsurer at a later date. Such payments include a proportional share of the gross premium plus a return on the assets.
Incidence rate of disease relative to a given population group.
Proportion of the total population dying within a given time interval.
In insurance: used primarily to mean after deduction of reinsurance.
Reinsurance treaty under which the reinsurer assumes the loss expenditure or sum insured in excess of a defined amount.
Sum of the result of non-underwriting business and the underwriting result before the change (allocation or withdrawal) in the (claims) equalization reserve.
Over the counter. In the case of securities: not traded on a stock exchange.
Existing reinsurance programs of primary insurers for their own protection against underwriting risks.
Life/health insurance
Total amount of shareholders' equity excluding minority interests, which is comprised of the common shares, additional paid-in capital, retained earnings and cumulative other comprehensive income, as well as the minority interests in shareholders' equity and so-called hybrid capital, as equity-replacing debt capital that encompasses the subordinated liabilities.
Agreed compensation for the risks accepted by the insurer.
Intangible asset primarily arising in particular from the purchase of life and health insurance companies or individual portfolios. The present value of expected future profits from the portfolio assumed is capitalized and amortized according to schedule. Impairments are taken on the basis of annual impairment tests.
Company which accepts risks in exchange for an insurance premium and which has a direct contractual relationship with the policyholder (private individual, company, organization).
Investment capital raised by private investors in contrast to public equity, i.e. capital raised on the stock exchange.
The present value of the earned portion of commitments from a defined benefit obligation.
All insurance lines with the exception of life insurance and health insurance: all lines in which the insured event does not trigger payment of an agreed fixed amount, but rather the incurred loss is reimbursed.
Liability item as at the balance sheet date to discharge obligations which exist but whose extent and/or due date is/are not known. Technical provisions, for example, are for claims which have already occurred but which have not yet been settled, or have only been partially settled (= provision for outstanding claims, abbreviated to: loss reserve)
Cost of acquiring an asset item including all ancillary and incidental purchasing costs; in the case of wasting assets less scheduled and/or special amortization.
Present value of future profits
Form of reinsurance under which the percentage share of the written risk and the premium is contractually agreed. The administrative expenditure for the reinsurer is very low.
Percentage (normally applied to the subject premium) of a reinsured portfolio, which under a > non-proportional reinsurance treaty produces the reinsurance premium payable to the reinsurer.
Systematic evaluation of companies by a rating agency or bank with respect to their > credit status.
Company that accepts risks or portfolio segments from a > primary insurer or another reinsurer in exchange for an agreed premium.
Contractual relationships between insurers and reinsurers are main tained over long periods of time. The treaty terms and conditions are normally modified annually in so-called renewal negotiations, and the treaties are renewed accordingly.
a) In general: business with private customers
b) AmpegaGerling: business involving investment funds that are designed essentially for private, non-institutional investors, although such funds are also open for investments of group companies.
The part of the accepted risks which an insurer/reinsurer does not reinsure, i.e. carries for > net. Net written premium in relation to gross written premium (excluding savings elements of premium under unit-linked life and annuity insurance policies).
Ceding by a reinsurer of its risks or shares in its risks to other reinsurers.
Cedant, insofar as the ceded business involves reinsurance.
The complete set of rules and measures used to monitor and protect against risks.
Fulfillment of liabilities for which reserves have been constituted.
Presentation of asset and income data broken down into business segments and regions.
Funds provided by the owners of an enterprise for its internal financing or left within the company as earned profit (realized/ unrealized). The capital providers are entitled to a share of the profit, e.g. in the form of a dividend, in return for making the shareholders' equity available. Shareholders' equity is equal to the total assets of the company less its total liabilities.
Capital components that are economically available but not yet recognized in the balance sheet: the loss reserve discount and the present value of future profits in life business that has not been capitalized, and on the company level the excess loss reserves.
Market phase with oversupply of insurance, resulting in premiums that are not commensurate with the risk; this is in contrast to > hard market.
Level of available unencumbered capital and reserves required to ensure that contracts can be fulfilled at all times.
Project of the European Commission to reform and harmonize European insurance regulations.
Form of scenario analysis used to be able to make quantitative statements about the loss potential of portfolios in the event of extreme market fluctuations.
Legally required, annually determined participation of policyholders in the surpluses generated by life insurers.
Agreement between two counterparties to swap payments at contractually defined conditions and times. Virtually any type of cash flow can be exchanged. This makes it possible to systematically hedge financial risks associated with a portfolio or to add new risks to a portfolio in order to optimize returns.
Option contract which enables the buyer to enter into an interest rate swap (> swap) on or until a specific point in time in return for payment of a once-only premium. It facilitates hedging against rising interest rates without forfeiting the opportunity to obtain funding more reasonably if interest rates fall.
Balance of income and expenditure allocated to the insurance business: balance of net premium earned and other technical income (net) as well as claims expenditure (net), acquisition costs and administrative expenses (net) and other technical expenses (net), including amortization of the shareholders' portion of the PVFP but excluding consolidation differences from debt consolidation. > Present value of future profits
Underlying instrument of a forward transaction, futures contract or option contract that serves as the basis for settlement and measure ment of the contract.
Process of examining and assessing (re)insurance risks in order to determine a commensurate premium for the risk in question. The purpose of underwriting is to diversify the underwriting risk in such a way that it is fair and equitable for the (re)insured and at the same time profitable for the (re)insurer.
Premiums written in a financial year which are to be allocated to the following period on an accrual basis.
Life insurance under which the level of benefits depends on the performance of an investment fund allocated to the policy in question.
Potential losses that with a certain probability will not be exceeded in a given period.
Measure of variability with respect to stock/bond prices, exchange rates and interest rates, and also insurance lines that can have a sharply fluctuating claims experience.
| Advancement of woman | 74 |
|---|---|
| Affiliated companies | 195, 203 |
| Agents, independent | 45, 77, 89, 91, 94, 172 |
| AmpegaGerling | 24, 54, 55, 76, 105 |
| Annual Premium Equivalent (APE) | 46 |
| Asset/liability management (ALM) | 65, 178 |
| Asset management | 54, 65 |
| B ancassurance | 96, 97, 104 |
| Benefit reserve | 63, 64, 138, 218 |
| Bonds | 5, 25, 62, 70, 71 |
| Brokers | 2, 47, 77, 96, 172 |
| Cash flow hedges | 68, 209 |
| Combined ratio | 39, 42-47, 49-51 |
| Cooperations | 24, 42, 48, 53, 96, 103 |
| Corporate Operations | 30, 54, 105, 121, 145 |
| Credit Life | 97, 157, 162 |
| Derivatives | 59, 125, 132, 172, 207-210 |
| Disposal groups | 56, 57, 62, 65, 70, 137, 164, 165 |
| Diversification | 52, 58 |
| E+S Rück | 3, 51, 104 |
| Financial/economic crisis | 36-40, 43-47, 49, 52, 61, 68, 86, 94, 96, 98 |
| Group EBIT | 41, 42, 145 |
| Group structure (chart) | 29 |
| H annover Life Re | 51, 52, 105, 258, 259 |
| Hannover Re Group | |
| Asia incl. China | |
| 53 | |
| Germany | > E+S Rück |
| North America | 50, 51 |
| United Kingdom | 52 |
| HDI Direkt | 3, 97, 103 |
| HDI V. a. G. | 28, 31, 115 |
| IFRS | 31, 86, 116-120, 127, 128 |
| Impairment test | 126, 154, 188, 191 |
| Impairments | 49, 60, 61, 122, 128-131, 241 |
| Industrial Lines | 28, 43-45, 75, 102, 103, 144 |
| Insurance-Linked Securities (ILS) | 51, 105, 159, 161 |
| Investment income (Group) | |
| 41, 42, 53, 232-235 | |
| Investments | 50, 54-60, 65, 69, 105, 203 |
| Life insurance | 4, 39, 40, 42, 45, 46, 89, 90, 94, 97, 100, 101 |
| Life and Health Reinsurance | > Hannover Life Re |
| Loss ratio | 44, 168 |
| Loss reserve | 62-64, 88, 219-222 |
| Major claims | 26, 38, 39, 50, 101, 168, 254, 255 |
| Market Consistent Embedded Value (MCEV) | 35, 87, 91, 171, 191 |
| Motor insurance | 47,76 |
| Multi-brand strategy | 2, 30, 77, 115 |
| N atural catastrophes | 38, 39, 50, 89, 160 |
| Net income (Group) | 4, 5, 26, 41, 42 |
| Neue Leben Group | 3, 45, 104 |
| New business | 38-40, 44-46, 48, 49, 52, 53, 73, 90, 100 |
| Non-Life Reinsurance | 38, 42, 49-51, 65, 101, 105, 145 |
| Operating profit | > Group EBIT |
|---|---|
| PB Versicherungen | 3,46 |
| Protection Re | 2, 30, 55, 105, 174 |
| Provision for pensions | 223-226 |
| Provision for premium refunds | 57, 63, 222 |
| Rating of Group companies of investments Reinsurance Restructuring of the Group Retail customers Retail Germany Retail International Retakaful Retention Retirement provision, individual Retirement provision, occupational Return on equity Risk capital |
24, 25, 71-73, 83 31, 57, 60, 93 28, 30, 44, 55, 60, 73, 76, 96, 160 26, 42, 48, 54, 95, 96 5, 41, 44, 54, 95, 100, 104 5, 28, 42, 45, 102-104, 145 30, 47, 102, 104, 145 51, 53 46, 48, 50, 53, 167, 170 38, 96, 100 80, 83, 96 31, 35, 68, 81, 103 31, 33, 57, 66, 67, 84 |
| Sales channels | 3, 47, 55, 77, 90, 96 |
| Securitizations | 159, 160 |
| Shareholders' equity | 5, 56, 62, 67-69, 112, 137, 214 |
| Shareholdings | 256-263 |
| Solvency II | 40, 52, 84, 94, 99-102 |
| Structured reinsurance | 105 |
| Talanx International | 47 |
| Benelux (HDI-Gerling Verzekeringen/Assurances) | 43 |
| Central and Eastern Europe | 30, 45, 47, 50, 104 |
| Italy (HDI Assicurazioni) | 48, 49 |
| Latin America (HDI Seguros) | 42, 48, 53, 101, 104, 105 |
| Spain (HDI Seguros) | 44 |
| Turkey (HDI Sigorta) | 48, 49 |
| Talanx Service AG | 18, 30, 54 |
| Talanx Systeme AG | 18, 30, 54 |
| Targo Versicherungen | 3, 25, 97 |
| Tax expenditure | 242 |
| Taxes on income | 120, 136, 142, 145, 242 |
| Technical provisions | 51, 56, 62-64, 90 |
| Training | $22, 75 - 77$ |
| Underwriting policy | 88, 89, 168 |
| Underwriting result | 42, 44-47, 49-51 |
| Unit-linked products | 42, 90, 100, 172 |
| Value-based management | 34, 35, 66, 104, 215 |
Talanx AG Riethorst 2 30659 Hannover Germany Telephone +49 511 3747-0 Fax +49 511 3747-2525 E-mail [email protected] www.talanx.com
Thomas von Mallinckrodt Telephone +49 511 3747-2020 Fax +49 511 3747-2025 E-mail [email protected]
This publication went to press on 28 March 2011 Published on 23 May 2011
This is a translation of the original German text; the German version shall be authoritative in case of any discrepancies in the translation.
Annual Report online: http://annualreport2010.talanx.com
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BM Bermuda. Hannover Life Re Bermuda, Hamilton Hannover Re Bermuda, Hamilton dwide 2006 2007 2008 2009 2010
Hannover Re (Representative Office), Rio de Janeiro HDI Seguros, São Paulo
CA Canada. Hannover Re (Branch), Toronto
CL Chile. HDI Seguros, Santiago
CO Colombia. Hannover Re (Representative Office), Bogotá
Hannover Services (México), Mexico City HDI-Gerling de México Seguros, Mexico City HDI Seguros, León
Hannover Life Re America, Orlando Hannover Re Services USA, Itasca/Chicago HDI-Gerling America Insurance Company, Chicago Europe
AT Austria. HDI-Gerling Lebensversicherung, Vienna HDI Versicherung, Vienna
BE Belgium. HDI-Gerling Assurances/Verzekeringen, Brussels
BG Bulgaria. HDI Zahstrahovane, Sofia
CH Switzerland. HDI-Gerling Industrie (Branch), Zurich
CZ Czech Republic. HDI Versicherung (Branch), Prague
AmpegaGerling, Cologne E+S Rück, Hannover Hannover Re, Hannover HDI Direkt, Hannover HDI-Gerling, Hannover/Cologne Neue Leben, Hamburg PB Versicherungen, Hilden Protection Re, Hannover Talanx, Hannover Targo Versicherungen, Hilden
ES Spain. HDI Seguros, Madrid/Barcelona HR Hannover Re, Madrid
FR France. Hannover Re (Branch), Paris HDI-Gerling Industrie (Branch), Paris
GR Greece. HDI-Gerling Industrie (Branch), Athens
HDI Versicherung (Branch), Budapest Magyar Posta Biztosító, Budapest Magyar Posta Életbiztosító, Budapest
Hannover Life Re (Ireland), Dublin Hannover Re (Ireland), Dublin HDI Reinsurance, Dublin
Hannover Re Services Italy, Milan HDI Assicurazioni, Rome HDI-Gerling Industrie (Branch), Milan
Euro International Re, Luxembourg Hannover Finance, Luxembourg Talanx Finanz, Luxembourg
NL Netherlands. HDI-Gerling Verzekeringen, Rotterdam
NO Norway. HDI-Gerling Industrie (Branch), Oslo
PL Poland. HDI Asekuracja, Warsaw HDI-Gerling Życie, Warsaw
Hannover Re (Branch), Stockholm International Insurance Company of Hannover (Branch), Stockholm
SK Slovak Republic. HDI Versicherung (Branch), Bratislava
TR Turkey. CiV Hayat Sigorta, Istanbul HDI Sigorta, Istanbul
UA Ukraine. HDI Strakhuvannya, Kiev
Hannover Life Re UK, Virginia Water Hannover Services UK, Virginia Water HDI-Gerling Industrie (Branch), London International Insurance Company of Hannover, Bracknell/London
Compass Insurance Company, Johannesburg Hannover Life Re Africa, Johannesburg Hannover Re Africa, Johannesburg HDI-Gerling Insurance South Africa, Johannesburg
AU Australia. Hannover Life Re Australasia, Sydney Hannover Rück (Branch), Sydney HDI-Gerling Australia Insurance Company, Sydney HDI-Gerling Industrie (Branch), Sydney
BH Bahrain. Hannover ReTakaful, Manama Hannover Re (Branch), Manama
Hannover Re (Hong Kong Branch) Hannover Re (Shanghai Branch) HDI-Gerling Industrie (Branch), Hong Kong
Hannover Re Consulting Services, Mumbai Magma HDI General Insurance, Kolkata*
Hannover Re Services Japan, Tokyo HDI-Gerling Industrie (Niederlassung), Tokyo
KR Korea. Hannover Re (Branch), Seoul
MY Malaysia. Hannover Re (Branch), Kuala Lumpur
RU Russia. CiV Life, Moscow HDI Strakhovanie, Moscow
Hannover Re (Representative Office), Taipei
Talanx AG Riethorst 2 30659 Hannover Germany Telephone +49 511 3747-0 Fax +49 511 3747-2525 E-mail [email protected] www.talanx.com
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