talanx group annual report 2011 en

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36 The Talanx Group Strategy Enterprise management Talanx Group. Annual Report 2011 Research and development The cost of capital reflects the expectations of lenders/investors as regards interest on the capital they have provided; this must be deducted from the NOPAT to arrive at the IVC and hence at the true value created in the context of value-based management. It consists of the costs associated with the allocated risk-based capital and the cost of excess capital. The risk-based capital is the capital a company or unit needs to adequately cover its risks with a defined level of security. It thus reflects the amount of capital required to protect the entity against financial insolvency. While the risk-based capital is divided between the profit centres in accordance with their actual risks on the basis of a 99.97 percent value at risk, the excess capital is obtained as the difference between the risk-based capital and the company’s capital. The cost of the risk-based capital is calculated from a risk-free basic interest rate, a risk premium reflecting the current market situation, and friction costs. By contrast, calculation of the cost of excess capital takes only the risk-free interest rate and the friction costs into account, since the capital itself is not at risk. Definition of capital cost factors The risk-free basic interest is an interest rate that contains no allowance for the risk of losing the capital invested but may well contain market-related risks (e.g. the risk of interest rates changing in the future). In the context of risk-based capital, we use the three-year average of ten-year swap rates as the risk-free interest rate. The risk premium is the consideration an investor expects for investing in a vehicle that involves some kind of risk (e.g. company stocks). As the risk premium cannot be defined individually for each investor, it is calculated on the basis of the average excess return generated by a selected share index compared to that from a risk-free investment. We use an index with a broad geographic and sectoral spread, as this makes it possible to eliminate systematic risks from our portfolio through diversification. Friction costs are opportunity costs incurred by a shareholder through investing his capital not directly in the capital market but rather indirectly via a company in which the capital is tied down and no longer freely fungible. This generic term encompasses elements such as double taxation, the risk of insolvency and agency costs. Markets and general conditions Business development Assets and financial position The following table shows the capital cost rates underlying the value-based management of our non-life business; they are based on a one-year ruin probability at a security (measured in terms of value at risk) of 99.5% − this corresponds to the regulatory capital requirement – and the Talanx Group’s own, higher benchmark with a value at risk of 99.97%, which is also in line with our target rating of AA from Standard & Poor’s. Cost of equity for non-life business VaR 99.97 % Security level Capital cost rates Risk-free interest (EUR) 1) 3.5% Risk premium 3.0% Friction cost 1.5% 1) Basis: three-year average of ten-year swap rates at 31 December 2008, 2009, 2010 Raising the security level to 99.97% increases the risk-based capital, whereas the excess capital is reduced; the risk premium and the friction cost decrease in the same measure. On the basis of our current procedure for calculating the cost of capital, maintaining the risk-based capital at a security level of 99.97% generates opportunity costs to the investor that are 450 basis points above the risk-free interest rate. Above this rate of return, value is created. The return on equity of at least 750 basis points above “risk-free” targeted for the Group as a whole in our strategy thus already includes a not inconsiderable aspiration to intrinsic value creation. In the year under review, we further refined and balanced our value-based management methods for non-life business with the aim of improved operationalisation. In line with the principle of correlating results with their respective sources, the IVC of each operative unit is now broken down into separate "pots" for results from insurance operations, investment and capital-management. This breakdown also permits an accurate allocation of results in the context of a market-compliant and competitive remuneration system from the perspective of sustainable value-based corporate development.
Overall assessment of the economic situation MCEV earnings Non-financial performance indicators Roll forward Corporate Governance Remuneration report Events of special Risk report Forecast and significance opportunities report IVC life Value creation in life business (i.e. life/health insurance and reinsurance) is measured in terms of the change in the Market Consistent Embedded Value (MCEV), which is expressed in the MCEV earnings. The MCEV is defined as the going-concern value, which consists of two components: the discounted present value of future earnings until final run-off of the in-force portfolio plus the fair value of equity with allowance made for capital commitment costs. In other words, the MCEV is the sum of the earning capacity value of the in-force portfolio and the net asset value or company’s capital. We chose the MCEV as the basis for value-based management of our life insurance business because it represents the going-concern value inherent in the insurance portfolio already in force from the standpoint of the shareholder. It thus lends itself ideally to determining the intrinsic value creation within life insurance companies with their typically long-running products. The life IVC is then determined as the difference between the MCEV earnings and the roll forward, the latter corresponding to the expected cost of capital after allowance for exposure to capital market risks. In order to measure and compare the returns delivered by business units or divisions of different sizes, the IVC is taken in relation to the capital available to each. 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. Research and development As a holding company, Talanx AG does not conduct any productrelated research and development of its own. However, we continuously work to refine the methods and processes that are necessary in order to fulfill our business purpose, especially in the area of risk management. In the various divisions we analyse trends such as demographics or climate change and develop products tailored to specific markets and clients. Talanx Group. Annual Report 2011 37
Page 1 and 2: Group Annual Report 2011 Straightfo
Page 3 and 4: .� ,� �.� �,� Non-Life
Page 5 and 6: OuR VISION Talanx is the leading gl
Page 7 and 8: Our brands HDI-Gerling focuses part
Page 9 and 10: By contrast with the technical acco
Page 11 and 12: Dr. Heinz-Peter Roß Torsten Leue D
Page 13 and 14: Supervisory Board Committees Compos
Page 15 and 16: A further focus of our deliberation
Page 17 and 18: The annual financial statements are
Page 19 and 20: You can stand and work better on a
Page 21 and 22: Re-launch with a modern and efficie
Page 23 and 24: Forward together with a goal-orient
Page 25 and 26: under its own power and through acq
Page 27 and 28: Our targets: ambitious, but achieva
Page 29 and 30: Our premium volume has risen steadi
Page 31 and 32: Our target: to be fit for the futur
Page 33 and 34: Group management report. Detailed i
Page 35 and 36: Overall assessment of the economic
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Nature of risks Notes on the consol
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Our Locations Argentina L’UNION d
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Italy Hannover Re Services Italy S.
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Glossary. A-C Accumulation risk Und
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L-P Lapse rate for life insurance p
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Index of key terms Acquisitions Cen
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ie Ireland. Hannover Life Re (Irela
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