Nature of risks associated with insurance contracts and financial instruments

Management of liquidity risks

The liquidity risk refers to the risk of being unable to convert investments and other assets into cash in a timely manner in order to meet our financial obligations when they become due. Due to illiquidity of the markets, it may not be possible to sell holdings (or to do so only after delays) or to close open positions (or to do so only with price markdowns). We counter the liquidity risk through regular liquidity planning and by matching the durations of investments with financial obligations. A liquid asset structure ensures that at all times the Group is in a position to make the necessary payments. With regard to payment obligations in connection with underwriting business, we are guided inter alia by the expected maturities that reflect the run-off patterns of the reserves.

In order to monitor liquidity risks each category of security is assigned a liquidity code that indicates how quickly a security can be sold. These codes are regularly reviewed by Portfolio Management. The plausibility of changes is checked in Risk Controlling and the codes are modified as appropriate. The data is then included in the standardized portfolio reporting to the Chief Financial Officers. Defined minimum and maximum limits for liquidity are observed. Oversteps of risk limits are brought to the attention of the Chief Financial Officers and Portfolio Management without delay.

For a presentation of the investments and the gross provisions as well as the reinsurers’ shares thereof (broken down by their expected or contractual maturities), please see the notes on the corresponding balance sheet items.

The following table shows the cash flows of the major net technical provisions (benefit reserve, loss and loss adjustment expense reserve) and the financial liabilities which are relevant to the management of liquidity risks. The technical provisions are broken down into the expected maturities, the liabilities into the contractual maturities:

expand table

reduce table

2010

Carrying
amount

3 months
to 1 year

1 through
5 years

5 through
10 years

10 through 20 years

More than
20 years

No
maturity

Figures in EUR million

       

Technical provisions 1)

77,778

12,277

19,434

13,099

12,289

7,161

6,744

Financial liabilities

       

Subordinated liabilities

2,791

138

508

746

500

899

Notes payable and loans

747

747

Other liabilities 2)

4,858

495

211

13

3

12

2

thereof: liabilities from derivatives, excluding hedging instruments 3)

85

9

59

12

2

1

2

thereof: negative fair values from hedging instruments 3)

149

149

Total

86,174

12,910

22,900

13,112

13,038

7,673

7,645



2009 4)

Carrying
amount

3 months
to 1 year

1 through
5 years

5 through
10 years

10 through
20 years

More than
20 years

No
maturity

Figures in EUR million

       

Technical provisions 1)

73,531

11,134

18,599

12,210

11,893

6,932

6,242

Financial liabilities

       

Subordinated liabilities

2,003

524

746

138

595

Notes payable and loans

675

2

673

Other liabilities 2)

4,561

54

386

6

2

2

304

thereof: liabilities from derivatives, excluding hedging instruments 3)

30

3

16

6

5

thereof: negative fair values from hedging instruments 3)

42

8

34

Total

80,770

11,190

19,658

12,740

12,641

7,072

7,141


1) Under the technical provisions only the benefit reserves and loss reserves are split according to maturities. The provision for premium refunds encompasses the claims of policyholders under commercial law, to the extent that they have not already been finally allocated and paid to individual policyholders. Essentially, therefore, unambiguous allocation to the individual insurance contracts and maturities is not possible. The unearned premium reserve consists of the portion of gross written premium allocable to subsequent financial year(s) as income for a particular period after the balance sheet date. The unearned premium reserve does not involve future liquidity-affecting cash flows
2) Under the other liabilities the liabilities to policyholders and intermediaries as well as the reinsurance payable are not broken down by maturities, since these liabilities are directly connected with insurance contracts and hence cannot be considered in isolation from them
3) The undiscounted cash flows with respect to such derivatives are not presented for reasons of materiality. Instead, the fair values of the derivative financial instruments are stated
4) Adjusted on the basis of IAS 8

The funds held under reinsurance treaties represent collateral withheld for technical provisions ceded to reinsurers and retrocessionaires and to this extent do not trigger any cash flows. The changes in funds held under reinsurance treaties are normally determined by changes in the corresponding ceded technical provisions. Such funds held under reinsurance treaties therefore have no contractually fixed maturity; they are liquidated in step with the run-off of the corresponding provisions.

In addition to the assets made available to cover provisions and liabilities, the Group has at its disposal the following lines of credit that can be drawn upon as required:

The Talanx Group has concluded a firm agreement with a broad consortium of banks regarding an available floating-rate line of credit that may be drawn upon as necessary. As at the balance sheet date we had used a tranche amounting to altogether EUR 550 million. The nominal amount of the line of credit was EUR 1.5 billion as at the balance sheet date.

In addition, facilities exist with various financial institutions for letters of credit, including two unsecured syndicated guarantee facilities from 2005 and 2006. Following the contractual maturity of the first half of the line from 2005 in January 2010, it amounted to an equivalent of EUR 0.8 (1.4) billion as at the balance sheet date. The second half of this line matures in January 2012. The line from 2006, the amount of which as at the balance sheet date was equivalent to EUR 1.5 (1.4) billion, matures in January 2013.

Letter of credit facilities with various terms and a total volume equivalent to EUR 1.3 (1.1) billion also exist on a bilateral basis with financial institutions. For further information on the furnished letters of credit please see our remarks in the section of the Notes entitled “Other information”, subsection “Contingent liabilities and other financial commitments”.

A long-term unsecured line of credit with a total volume equivalent to at most EUR 566 (523) million was concluded in December 2009. It is intended specifically for US life reinsurance business.

A number of LOC facilities include standard market clauses that allow the banks rights of cancellation in the event of material changes in the shareholding structure of our Group company Hannover Re or trigger a requirement to furnish collateral upon materialization of major events, for example if its rating is significantly downgraded.