talanx group annual report 2011 en

Overall assessment of
the economic situation
Non-financial
performance indicators
Corporate Governance Remuneration report Events of special
significance
Real estate risks may result from unfavourable changes in the value
of real estate held either directly or through fund units. They may
be caused by a deterioration in the qualities of a particular 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 at 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 affecting existing
assets, to prepare for 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 efficient and risk-free use of forward purchases, derivative
financial 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 statutory provisions governing the use of derivative financial
instruments and structured products are kept up to date and constantly
monitored within the system of limits. Derivative positions
and transactions are specified in detail in the reporting.
We reduce potential market price risks through a variety of riskcontrolling
mechanisms. One important measure for monitoring
and steering market price risks is constant analysis of the value at
risk (VaR), which is evolving more and more from an 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 potential 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 Talanx
Asset Management GmbH simulate possible market changes that
can result in significant price and interest rate losses for the bulk
of our securities. In addition, market price risks are identified using
enterprise-specific stress tests and those required by regulators with
the corresponding prescribed stress test parameters.
Credit risks
Default or credit risks refer to a potential deterioration in the financial
situation of debtors resulting in their becoming unable to make
contractually agreed payments in full as they fall due, or to declines
in the value of financial instruments due to impaired creditworthiness
of the issuer. The credit ratings assigned by agencies such as
S&P and Moody’s are a key pointer for the investment decisions
taken by Portfolio Management. In the absence of ratings for
individual issues, an in-house rating is determined. This is done by
Risk report Forecast and
opportunities report
applying mark-ups and mark-downs to the issuer’s rating or to the
ratings for other instruments from the same issuer. In addition to
the default probabilities associated with the respective rating class,
further criteria for risk measurement and management are the type
or product, the expected recovery ratio and the remaining term to
maturity. As a further risk indicator, the “credit value at risk” is determined,
defined as the unanticipated loss given a holding period
of one year and a target confidence level of 99.97%.
Risks of counterparty default are controlled by applying various
limits at the portfolio, rating class, issuer and issue levels. Any violation
of these limits triggers defined referral measures. The Talanx
Group also uses OTC on a minor scale, which may involve a counterparty
risk. The risk of financial default by the issuers concerned is
reduced by netting and by means of collateral security agreements.
Liquidity risks
We understand liquidity risks as the risk of being unable to convert
investments and other assets into cash when they are needed to
meet our financial obligations as they fall due. For example, it may
not be possible to sell holdings (at least not without delay) or to
close open positions (without accepting price markdowns) due to
the illiquidity of the markets. As a rule, the Group continuously
generates significant liquidity positions because premium income
normally accrues well before claims payments and other benefits
need to be rendered. We counteract liquidity risks through regular
liquidity planning and by continuously matching the maturities of
our investments to our financial obligations. A liquid asset structure
ensures that the Group is able to make the necessary payments at
all times. Planning for insurance-related payment obligations is
based, for example, on the expected due dates, making allowance
for the run-off pattern of the reserves.
As an aid to monitoring 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 modified. The data are then included in
the standardised portfolio reporting provided to the Chief Financial
Officers. Compliance with the defined minimum and maximum
limits for liquidity is monitored. Overstepping of any risk limits is
immediately reported to the Chief Financial Officers and Portfolio
Management.
The Group also optimises the availability of liquid funds using cash
pools within the various Group companies, which facilitate management
of their cash inflows and outflows.
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