The capital structure and composition of the liabilities of the Talanx Group are shaped by its primary insurance and rein-surance business. The technical provisions, which in accor-dance 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.
Capital structure over a multi-year period
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 eff ects
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 cur-rency 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 rel-evant national currencies are presented as explained in the Notes under “Accounting policies – Currency translation” on
pages 142 et seq.
Development of major items
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) mil-lion.
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 mil-lion 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 pre-vious 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
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
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 consolida-tion 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 fol-lows among the segments:
Benefit reserve
Loss and loss adjustment expense reserve
2010 2009 2010 2009
Figures in EUR million
Industrial Lines — — 7,746 7,388
Retail Germany 32,311 30,899 2,695 2,772
Retail International 1,752 1,527 1,130 936
Non-Life Reinsurance — — 14,577 14,163
Life/Health Reinsurance 8,403 7,328 2,390 1,991
Corporate Operations — — — 6
Total 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 bil-lion) 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 insur-ance segments. In relation to Non-Life Reinsurinsur-ance a modest decrease from 73% to 72% was observed.
Disposal groups
We recognized the planned sale of the US subgroup Claren-don 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.
Off -balance sheet transactions
Contingent liabilities exist as described on page 251 of the Notes.
Asset/liability management
The structure of our technical provisions and other liabilities essentially establishes the basis for the Talanx Group’s invest-ment strategy. The focus here is on asset/liability manage-ment: changes in the value of investments should as far as possible off set changes in the technical liabilities and require-ments 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, wher-ever 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 man-agement 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 divi-sion (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-denomi-nated 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 sub-group 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 struc-ture 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.).