Nature of risks associated with insurance contracts and financial instruments

Default risks

The risks of counterparty default requiring monitoring consist of counterparty credit risks and issuer’s risks. Along with the lists of counterparties and issuers specified by the Board of Management, monitoring of the limits defined per rating category constitutes a vital precondition for investment decisions. We pay close attention to the good credit status of counterparties and debtors in order to avoid default risks. Key indicators here are the ratings assigned by external agencies such as S&P or Moody’s. New investments are restricted to investment grade securities in order to limit the credit risk.

The maximum default risk exposure on the balance sheet date, exclusive of collateral or other agreements that serve to minimize the default risk, was as follows:

31.12.2010

Measured at amortized cost

Measured at
fair value

Total

Figures in EUR million

     

Investments in affiliated companies and participating interests

74

74

Loans and receivables

32,343

32,343

Financial assets held to maturity

2,999

2,999

Financial assets available for sale

30,635

30,635

Financial assets at fair value through profit or loss

     

Financial assets classified at fair value through profit or loss

989

989

Financial assets held for trading

232

232

Other invested assets

114

4,071

4,185

31.12.2009

Measured at amortized cost

Measured at
fair value

Total

Figures in EUR million

     

Investments in affiliated companies and participating interests

61

61

Loans and receivables

31,548

31,548

Financial assets held to maturity

2,858

2,858

Financial assets available for sale

26,477

26,477

Financial assets at fair value through profit or loss

     

Financial assets classified at fair value through profit or loss

861

861

Financial assets held for trading

238

238

Other invested assets

119

4,014

4,133

Investments are serviced regularly by the debtors. Collateral exists above all with respect to covered bonds and asset-backed securities as well as mortgage loans secured by a charge over property.

With the exception of the mortgage loans, the portfolio did not contain any overdue, unadjusted assets as at the balance sheet date since overdue securities are written down immediately. The mortgage loans show arrears totaling EUR 24 (22) million; this figure includes receivables overdue by more than 12 months of EUR 5 million. Since these receivables are adequately secured by charges over property, no value adjustment was taken. Under the contractual provisions, realization is possible only in the event of a failure to properly perform. The reader is referred to item 29 of the Notes, with regard to the impairments taken on investments in the year under review.

The fixed-income investments and loans (excluding other invested assets) are divided into the following debtor groups and corresponding ratings:

31.12.2010

Measured at amortized cost

Measured at
fair value

Total

Figures in EUR million

     

EU member states

1,329

4,670

5,999

Foreign governments

398

3,173

3,571

Semi-governmental entities 1)

9,563

5,369

14,932

Corporations

7,771

10,126

17,897

Covered bonds/asset-backed securities

14,499

5,054

19,553

Mortgage loans

1,239

1,239

Investment fund units

666

666

Other

543

314

857


1) In the year under review this includes securities in amounts of EUR 2,305 million (measured at amortized cost) and EUR 3,039 million (measured at fair value) which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.

31.12.2009

Measured at amortized cost

Measured at
fair value

Total

Figures in EUR million

     

EU member states

1,193

3,866

5,059

Foreign governments

368

2,763

3,131

Semi-governmental entities 1)

9,338

5,423

14,761

Corporations

8,351

7,862

16,213

Covered bonds/asset-backed securities

13,156

4,129

17,285

Mortgage loans

1,383

1,383

Investment fund units

745

745

Other

619

336

955


1) In the year under review this includes securities in amounts of EUR 2,674 million (measured at amortized cost) and EUR 3,850 million (measured at fair value) which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.

More than 96 (95)% of the covered bonds/asset-backed securities were German covered bonds (Pfandbriefe) as at the balance sheet date.

The rating structure of the fixed-income investments (excluding other invested assets, policy loans and mortgage loans) were as follows:

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Rating

Government bonds

Securities issued
by semi-governmental entities 1)

Corporate bonds

Covered bonds/
asset-backed securities

Other

 

%

EUR million

%

EUR million

%

EUR million

%

EUR million

%

EUR million

AAA

74

7,077

36

5,308

2

321

79

15,526

23

310

AA

5

519

58

8,721

25

4,556

17

3,273

2

27

A

11

1,097

5

806

54

9,611

1

260

15

192

BBB

7

646

1

90

17

2,971

1

136

29

383

<BBB

2

165

1

182

2

311

20

260

None

1

66

7

1

256

47

11

151

Total

100

9,570

100

14,932

100

17,897

100

19,553

100

1,323


1) The securities issued by semi-governmental entities include securities in an amount of EUR 5,344 (6,524) million which are guaranteed by the Federal Republic of Germany, other EU states or German federal states.

At the end of the reporting period 98 (98)% of our investments in fixed-income securities were issued by obligors with an investment grade rating (AAA to BBB), while 91 (92)% were rated A or better. Borrower’s note loans and registered debentures are assigned an internal rating upon acquisition that is derived where possible from the issuer’s rating.

Loans secured by a charge over property with a total volume of EUR 1,239 (1,383) million were granted to private individuals who do not have a rating. Policy loans, other assets-side financial instruments and equity papers are also unrated.

The other financial instruments on the assets side encompass primarily receivables not connected with investments or the insurance business. They have predominantly short-term maturities. Since the portfolio of accounts receivable is comprised of a relatively large number of debtors, we consider the default risk on these financial instruments to be slight.