talanx group annual report 2011 en

Overall assessment of
the economic situation
Capital management
Bringing transparency
to the actual
capitalisation
Non-financial
performance indicators
Capital management process
Corporate Governance Remuneration report Events of special
significance
Determining the
required capital
Optimising the
required capital
Optimising the
capital structure
Capital management is based on a process geared to optimising the steering and use of capital within the Group
that is structured according to clear guidelines and workflows.
Effective and efficient capital management is a vital component
of the Group’s holistic set of management tools. We differentiate
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 attributable to the shareholder. It is
composed of the IFRS shareholders’ equity and what is known as
“soft capital.” We count as soft capital, which includes unrealised
gains/losses on the assets and liabilities sides after taxes, e.g. the
loss reserve discount, a level of overreserving in property/casualty
insurance that goes beyond best-estimate reserving, the non-capitalised
value of in-force business in life insurance and life/health
reinsurance, and the unrealised 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 and the shareholder’s expectations of returns above
and beyond the cost of capital (cf. also the explanation of xRoCC on
pages 35 and 37).
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 confidence
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 remainder of the company’s capital minus the
risk-based capital; it thus consists of capital that is not at risk. Since
it is not required for covering business risks and insofar as it also
cannot be used to take on additional risk, it can be withdrawn with-
Risk report Forecast and
opportunities report
Implementing
capital measures
out 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 attributable to the shareholder. There are, however, restrictions
on the repatriation of excess capital; these are associated with
both regulatory/legal considerations and rating requirements.
The general goal of capital management within the Talanx Group –
an optimised risk-appropriate capital structure of the Group – is
explicitly anchored in our 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 a view to diversification.
A central task of capital management therefore lies in identifying
the capital that exceeds the required risk-based capital on the
defined confidence level or – in the opposite case – that falls short
of this level. The Value at Risk defines the estimated maximum loss
that with a specified probability will not be exceeded within a specified
holding period. In the event of over- or undercapitalisation, the
next step is to take appropriate corrective actions to rectify or at
Talanx Group. Annual Report 2011
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