Derivative financial instruments and hedge accounting

(12) Derivative financial instruments and hedge accounting

Derivatives

We use derivative financial instruments to hedge against interest rate, exchange and other market price risks and to a limited extent also to optimize returns or realize intentions to buy/sell. In this context, the applicable regulatory requirements and the standards set out in the Group’s internal investment guidelines are strictly observed and first-class counterparties are always selected.

In addition, embedded derivatives in structured products and insurance contracts are – where required under the standards of IAS 39 “Financial Instruments: Recognition and Measurement” and IFRS 4 “Insurance Contracts” – separated from the underlying contracts and recognized separately at fair value.

In the context of initial measurement derivative financial instruments are recognized at the fair value attributable to them on the date of contract materialization. Subsequent measurement is then also made at the fair value applicable on the relevant balance sheet date. Regarding the valuation models used, please see the subsection entitled “Determination of fair values” in the section “Accounting policies”.

The method of recognizing gains and losses is dependent upon whether or not the derivative financial instrument is used as a hedging instrument within the meaning of hedge accounting pursuant to IAS 39 – and, if it was, on the type of hedged position/risk. In the case of derivatives which are not hedging instruments, the fluctuations in value are recognized in the statement of income within investment income. This approach also applies to separated embedded derivatives of structured financial instruments and those from insurance contracts. With respect to hedging instruments, the Group distinguishes between derivatives according to their intended use as fair value hedges and cash flow hedges (see separate subsection of this item of the Notes).

The recognition of derivative financial instruments in the balance sheet is broken down in the following table:

Balance sheet recognition of derivative financial instruments

Hedging instrument
as per IAS 39

31.12.2010

31.12.2009

Figures in EUR million

     

Balance sheet items (positive fair values)

     

Financial assets at fair value through profit or loss, financial assets held for trading (derivatives)

No

80

112

Balance sheet items (negative fair values)

     

Liabilities, other liabilities (derivatives)

No

–85

–30

 

Yes

–149

–42

Total (net)

 

–154

40

In the financial year just-ended the derivative financial instruments – excluding derivatives used as hedging instruments – produced an unrealized loss of –EUR 20 million. This contrasted with a gain of EUR 14 million in the previous year. The loss realized on positions closed in 2010 amounted to –EUR 21 million, compared to a gain of EUR 19 million in the previous year.

The fair values of our open derivative positions including the relevant nominal values as at the balance sheet date are shown below differentiated according to risk types and maturities. Positive and negative fair values are netted in the table. Open positions from derivatives therefore existed in an amount of –EUR 154 (40) million at the balance sheet date, corresponding to 0.1 (0.04)% of the balance sheet total.

expand table

reduce table

Maturities of derivative
financial instruments

Due in
one year

Due after one
through
five years

Due after five
through
ten years

Due after
ten years

Other

31.12.2010

31.12.2009

Figures in EUR million

       

Interest rate hedges

       

Fair value

1

–143

–1

14

–129

–25

Notional values

52

1,856

5

375

2,288

1,165

Currency hedges

       

Fair value

–5

–18

–11

–34

–15

Notional values

22

47

42

111

168

Equity and index hedges

       

Fair value

–6

–6

25

Notional values

1

1

474

Inflation hedges

       

Fair value

–31

–31

Notional values

2,535

2,535

Derivatives in connection with
insurance contracts 1)

       

Fair value

46

46

55

Other risks

       

Fair value

Notional values

3

Total hedges

       

Fair value

–4

–192

–17

–1

60

–154

40

Notional values

74

4,438

43

5

375

4,935

1,810


1) The financial instruments relate exclusively to derivatives in connection with reinsurance business which under IFRS 4 are to be separated from the underlying insurance contract and recognized separately at fair value. In view of the characteristics of these derivatives, a maturity disclosure/presentation of nominal values is not reasonably possible and has therefore been omitted. The derivatives are recognized at fair value.

In the year under review the Group acquired derivative financial instruments in the reinsurance sector to hedge inflation risks within the loss reserves. These transactions resulted in the recognition of negative fair values of EUR 31 million (balance sheet item: 26 “Other liabilities”).