talanx group annual report 2011 en

104
The Talanx Group Strategy Enterprise
management
Talanx Group. Annual Report 2011
Research and
development
in expenditure. The market value of the Talanx Group’s holding of
Greek government bonds on the balance sheet date of 31 December
2011 was EUR 3.3 million. The debt write-down legislation approved
by the Greek Parliament in February 2012 gave rise to the risk of
further write-downs on this issuer exposure for the Talanx Group.
Given our very modest holding at the end of the year under review,
the write-downs required in 2012 will have only a minimal influence
on the Group’s investment income. Standard & Poor’s downgraded
Italy’s rating in the year under review and assessed the outlook as
negative. At 31 December 2011 the Talanx Group held investments
(government and agency bonds) with a market value of EUR 1,297.2
million from the GIIPS countries (including Italy at EUR 634.3 million,
Spain at EUR 405.8 million, Ireland at EUR 220.4 million and
Portugal at EUR 33.5 million, excluding unit-linked investments for
the account and risk of holders of life insurance policies), which
may give rise to rating-related impairments. Thanks to support
measures at the European level (the European “rescue package”),
however, there is currently no elevated risk of default on the bonds
– especially in the case of the GIIPS countries other than Greece.
On the international markets, the banking and economic crisis and
the prospect of regulatory innovations are increasingly driving a
tendency towards more exacting capital requirements on the part
of supervisory authorities. This trend could also affect some individual
Group subsidiaries and make it necessary to boost their capital.
Against the backdrop of the financial crisis, the G-20 nations are
discussing prescribing similar equity increases for “too big to fail”
insurers as for banks. It is still unclear whether such capital add-ons
will be implemented or what form they might take for insurers.
Tensions in the Arabian and north African region have caused commodity
prices to rise. The earthquake and nuclear disaster in Japan
has directly triggered bottlenecks in the global supply of electrical
and electronic components. Any ratcheting up of the smouldering
nuclear tensions with Iran could accelerate the surge in commodity
prices (and lead to considerable distortions in investor behaviour
worldwide, hence prompting a (fresh) crisis on capital markets).
In its Investment Guidelines Talanx establishes a precisely defined
network of limits to rule out dependencies on individual debtors
that could jeopardise the Group’s survival. In the light of the
continuing impact of the banking and economic crisis on capital
markets, the previously applicable risk limits within the Talanx
Group were tightened up in key respects.
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
Markets and
general conditions
Business
development
Assets and
financial position
offering traditional guarantee products, since it would become increasingly
difficult to generate the guaranteed return – despite the
fact that 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 2011 will be calculated in the first half of 2012.
A contraction in bank lending has been observed in the market as
a symptom of the banking crisis and is associated with potential
difficulties in raising cash. The sovereign debt crisis in the euro zone
and fears of a global slowdown in economic growth have continued
to make their mark on the market environment. Further concerns
arose in the banking sector not only with regard to potential losses
on bonds and credits to the European peripheral countries (GIIPS)
but also to much stricter regulatory requirements made of risk
capital that are forcing the banks to look for considerable amounts
of fresh capital and/or to contract their balance sheets. A cut-back
in lending by the banks could also affect Talanx AG and constitute
a liquidity risk. However, for reasons associated with the business
model, the liquidity risk is of only minor significance to the Talanx
Group (compared to the banking industry), because regular premium
payments and interest income from invested assets, together
with its liquidity-conscious investment policy, provide Talanx with
an adequate supply of liquid funds. Extensive unused lines of credit
are also available, most of which were extended in the course of the
financial year. Liquidity risks may, however, arise in particular as a
consequence of illiquid capital markets and – in the life insurance
sector – due to a run of cancellations by policyholders, if this makes
it necessary to liquidate a large volume of additional investments at
short notice.
Material underwriting risks
In addition to the information provided below, the Notes contain
a detailed and quantified description of the risks associated with
insurance contracts and financial instruments.
The underwriting risks in property and casualty insurance are
considered separately from those in life insurance, because of the
considerable differences between the two sectors.
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 arises because
insurance premiums defined up front are used to pay indemnifications
at some stage in the future, although the amount of such
payments is initially unknown. The actual claims experience may
therefore diverge from the expected claims experience. This may
be attributable to two reasons: the risk of random fluctuation and
the risk of error.