Major discretionary decisions and estimates

The preparation of the consolidated financial statement to some extent necessitates discretionary decisions and estimates – in relation to the future – which affect the disclosure, recognition and measurement of some items in the balance sheet and statement of income as well as the information on contingent claims and liabilities as at the balance sheet date. The estimates and assumptions, which entail a significant risk in the form of a material adjustment of the book values of assets and contingent claims and liabilities within the next financial year, are discussed below or set out in the accounting policies or directly in the notes on individual items.

Impairment test of goodwill: In accordance with the subsection entitled “Goodwill”, the Group tests for impairment of goodwill. Insofar as the recoverable amount is based on calculations of the value in use, appropriate assumptions are used as a basis (see item 1 of the Notes “Goodwill”).

Fair value of derivative and other financial instruments: Fair values and impairments for financial instruments not traded on an active market (e.g. derivatives in connection with Modified Coinsurance/Coinsurance Funds Withheld treaties) are determined using appropriate measurement methods. In this regard please see our remarks on the determination of fair values as well as the applicability criteria for determination of the need to take impairments on certain financial instruments in the subsection entitled “Investments including income and expenses”.

Technical provisions: The loss and loss adjustment expense reserves, the amount and maturity of which are uncertain, are recognized according to “best estimate” principles in the amount that will probably be utilized. The actual amounts payable may prove to be higher or lower; any resulting run-off profits or losses are recognized in income. In the area of life insurance and life/health reinsurance the determination of provisions and assets is crucially dependent on actuarial projections of the business. In this context key input parameters are either predetermined by the tariff (e.g. costs included in the calculation, amount of premium, actuarial interest rate) or estimated (e.g. mortality, morbidity or lapse rates). These assumptions are heavily dependent, inter alia, on country-specific parameters, sales channel, quality of underwriting and type of reinsurance. For the purposes of US GAAP accounting these assumptions are reviewed as at each balance sheet date and subsequently adjusted in line with the actual projection. The resulting effects are reflected inter alia as true-up adjustments in the balance sheet items “Other intangible assets”, “Deferred acquisition costs”, “Provision for premium refunds” (provision for deferred premium refunds) and, as appropriate, the “Benefit reserve” (funding of maturity bonuses).

Deferred acquisition costs: The actuarial bases for amortization of the deferred acquisition costs are continuously reviewed and, as necessary, adjusted. Impairment tests are carried out through regular checks on, inter alia, profit developments, lapse assumptions and default probabilities.

Present value of future profits (PVFP) on acquired insurance portfolios: The PVFP is the present value of the expected future net cash flows from existing life insurance contracts at the time of acquisition and is determined using actuarial methods. Uncertainties may arise, inter alia, with regard to the expected amount of these net cash flows.

Realizability of deferred tax assets: Estimates are made in particular with respect to the utilization of tax loss carry-forwards, first and foremost in connection with deferred tax liabilities recognized in the balance sheet and expected future earnings.

Provisions for pensions and similar obligations: The present value of pension obligations is influenced by numerous factors based on actuarial assumptions. The assumptions used to calculate the net expenses (and income) for pensions include the discount rate. Further key assumptions used to establish the pension liabilities are provided in item 22 “Provisions for pensions and other post-employment benefit obligations” of these Notes.

The actual amounts may diverge from the estimated amounts.