Report of the Supervisory Board

Report of the Supervisory Board

In the 2010 financial year the Supervisory Board performed its functions and duties at all times in accordance with statutory requirements, the Articles of Association and the Rules of Procedure. We considered at length the economic situation, risk position and strategic development of Talanx AG and its major subsidiaries. We advised the Board of Management on the direction of the company, monitored the management of business and were directly involved in decisions of fundamental importance.

In the year under review we came together for four ordinary meetings of the Supervisory Board, which were held on 26 March, 28 May, 31 August and 13 November 2010. As in the previous year, the Federal Financial Supervisory Authority (BaFin) exercised its legal powers and sent two representatives to attend one of these meetings. The Finance and Audit Committee of the Supervisory Board met four times and the Personnel Committee met on three occasions. The Mediation Committee formed in accordance with the requirements of the Co-Determination Act again had no reason to meet in 2010. The full Supervisory Board was briefed on the work of the various committees. In addition, we received quarterly written reports from the Board of Management on the course of business and the position of the company and the Group. At no point in the year under review did we consider it necessary to conduct audit measures pursuant to § 111 Para. 2 Sentence 1 German Stock Corporation Act (AktG). Insofar as transactions requiring approval arose between meetings, the Board of Management submitted these to us for a written resolution. The Chairman of the Supervisory Board also remained in constant contact with the Chairman of the Board of Management and was regularly advised of all important business transactions within the company and the Talanx Group. All in all, within the scope of our statutory responsibilities and those prescribed by the Articles of Association we assured ourselves of the lawfulness, expediency, regularity and efficiency of the actions of the Board of Management.

The Board of Management provided us with regular, timely and comprehensive information about the business and financial situation – including the risk situation and risk management –, about major capital expenditure projects and fundamental issues of corporate policy as well as about transactions that – while not subject to the approval of the Supervisory Board – nevertheless need to be reported in accordance with the requirements of the Rules of Procedure. At our meetings we considered at length the reports provided by the Board of Management and put forward suggestions and proposed improvements.

Key areas of discussion for the full Supervisory Board

The business development of the company and the individual Group segments, the reorientation of the Group and optimization of its structures as well as the planning for 2011 formed the primary focus of the reporting and were discussed in detail at our meetings. The reasons for divergences between the business experience and the relevant plans and targets in the financial year just-ended were explained to us, and we were able to satisfy ourselves accordingly with the explanations provided.

At the end of 2009, as part of the Group’s reorientation and the optimization of its structures, we approved a modified allocation of responsibilities for the Board of Management – which came into effect progressively in the course of 2010 – and adopted the necessary resolutions for implementation of the target structure.

A further focus of our deliberations was risk management within the Group. The risk reporting by the Board of Management was a matter for discussion at each meeting of the Supervisory Board. In addition, we considered a number of acquisition, disposal and cooperation projects, which the Board of Management presented to us for discussion and adoption of a resolution. Specifically, reference may be made here to the sale of the US-based Clarendon National Insurance Company and its subsidiaries, the establishment of a cooperation arrangement with Meiji Yasuda Life Insurance Company, the purchase of an insurance company in the Netherlands and the acquisition of a minority stake in an Austrian investment company. Not only that, the strategic orientation of the new division of Retail Germany as well as the globalization strategy pursued in Industrial Lines were considered by the Supervisory Board. In this connection various acquisition projects were explored in 2010, inter alia in Vietnam, Canada and Argentina; we were kept informed of the status of these deliberations and discussions.

With an eye to § 87 Para. 1 Stock Corporation Act (AktG) as amended by the Act on the Adequacy of Management Board Remuneration (VorstAG), the full Supervisory Board considered the specification of the bonuses for the members of the Board of Management and reviewed the fixed remuneration of individual members of the Board of Management; in this context it drew inter alia on horizontal and vertical remuneration aspects and concepts as a means of comparison and orientation. Considerable attention was also devoted to the reorganization of the system of remuneration for the Board of Management and the adjustment of the contracts of service with the members of the Board of Management. These revisions were approved at the meeting of the Supervisory Board held on 13 November 2010. In addition, at this meeting the Supervisory Board was informed about the structure of the remuneration systems within the Group as required by § 3 Para. 5 of the Regulation on the Supervisory Law Requirements for Remuneration Schemes in the Insurance Sector (Versicherungs-Vergütungsverordnung).

The transactions and measures subject to approval in accordance with legal requirements, the company’s Articles of Association and its Rules of Procedure were agreed with the Board of Management following examination and discussion. The Supervisory Board gave the necessary consent to the control and profit transfer agreement of Talanx AG with HDI-Gerling Gesellschaft für IT-Dienstleistungen mbH – now Talanx Systeme AG – on the basis of the written and verbal explanations provided by the Board of Management.

Work of the Committees

Along with preparations for discussion and adoption of resolutions in the full Supervisory Board, the Finance and Audit Committee of the Supervisory Board considered at length the company’s quarterly financial statements compiled on a voluntary basis. Furthermore, the Finance and Audit Committee discussed the findings of an actuarial audit of the net loss reserves for non-life insurance business within the Talanx Group as well as the profitability trend at the individual Group companies as at 31 December 2009 and considered the internal control system, the risk reports, the work of the internal auditing department and the annual report submitted by the Chief Compliance Officer.

The Personnel Committee, together with external advisers, prepared the review of the remuneration system for the Board of Management – including the major contractual elements – at a number of meetings. It presented to the full Supervisory Board a proposal for the reorganization of the remuneration system with a view to satisfying, in the first place, the supervisory standards and, subsequently, in the course of 2010 – following the entry into force of the legal bases and specifications handed down by lawmakers – the new legal requirements as well. In a written procedure the Committee – following approval of the new remuneration system by the full Supervisory Board – defined the targets for the individual members of the Board of Management in the 2011 financial year. Furthermore, recommendations were made to the full Supervisory Board with respect to upcoming reappointments and in the context of the setting of bonuses and the review of the fixed remuneration for members of the Board of Management.

Corporate Governance

The Supervisory Board again devoted special attention to the issue of Corporate Governance. In accordance with the provisions of the German Corporate Governance Code, the existing Supervisory Board remuneration consisting exclusively of fixed components was extended to include a variable component and the amount of remuneration was reviewed with an eye to its appropriateness and brought more closely into line with the level of relevant competitors.

The deductibles in the D&O cover were revised and adjusted in line with the changed legal environment.

Audit of the annual and consolidated financial statements

The annual financial statements of Talanx AG submitted by the Board of Management, the financial statements of the Talanx Group – drawn up in accordance with International Financial Reporting Standards (IFRS) – as well as the corresponding management reports and the bookkeeping system were audited by KPMG AG, Wirtschaftsprüfungsgesellschaft, Hannover. The General Meeting appointed the auditors; the Finance and Audit Committee awarded the concrete audit mandate. In addition to the usual audit tasks, the Committee placed special emphasis on the implementation of the Act on the Modernization of Accounting Law (BilMoG) as well as – in the case of the consolidated financial statements – on the measurement of the deferred acquisition costs, the determination of the fair values of investments with a special eye to the fair value hierarchy and on taxes. The audit concentrations of the Financial Reporting Enforcement Panel (FREP) were also the subject of the audit procedures carried out by the auditors.

The audits conducted by the auditors gave no grounds for objection. The unqualified audit certificates that were issued state that the accounting, annual financial statements and consolidated financial statements give a true and fair view of the net assets, financial position and results and that the management reports suitably reflect the annual and consolidated financial statements.

The financial statements and the audit reports of KPMG were distributed to all the members of the Supervisory Board in due time. They were examined in detail at a meeting of the Finance and Audit Committee on 16 May 2011 and at a meeting of the Supervisory Board on 17 May 2011. The auditor took part in the deliberations of the Finance and Audit Committee and of the full Supervisory Board regarding the annual and consolidated financial statements, reported on the conduct of the audits and was available to provide the Supervisory Board with additional information. In accordance with the final outcome of our own examination of the annual financial statements, the consolidated financial statements, the corresponding management reports and the audit reports, we concurred with the opinion of the auditors and approved the annual and consolidated financial statements drawn up by the Board of Management.

The annual financial statements are thus adopted. We approve of the statements made in the management reports regarding the further development of the company. After examination of all relevant considerations we agree with the Board of Management’s proposal for the appropriation of the disposable profit.

The report on the company’s relations with affiliated companies drawn up by the Board of Management in accordance with § 312 German Stock Corporation Act (AktG) has likewise been examined by KPMG Aktiengesellschaft, Wirtschaftsprüfungsgesellschaft, Hannover, and given the following unqualified audit certificate:

“Having audited the report in accordance with our professional duties, we confirm that

1. its factual details are correct,

2. in the case of the transactions detailed in the report, the expenditure of the company was not unreasonably high.”

We have examined the report on relations with affiliated companies; we reached the same conclusion as the auditors and have no objections to the statement reproduced in this report.

Changes on the Board of Management and Supervisory Board

With effect from 1 September 2010 Mr. Torsten Leue was appointed as a new member of the company’s Board of Management; from this date onwards he assumed responsibility for the newly formed Retail International division. In addition, the Supervisory Board decided to renew the Board mandates of Dr. Hinsch, Dr. Querner and Dr. Noth – which were due to expire in 2011 – as well as to renew the mandate of Mr. Haas, which was set to expire at the beginning of 2012.

With effect from the end of 31 January 2011 Mr. Hans-Ulrich Hanke stepped down from the company’s Supervisory Board as a representative of the employees. The Supervisory Board expressed its appreciation and recognition of his constructive and dedicated contribution. With effect from 1 February 2011 Ms. Jutta Hammer succeeded him as a member of the Supervisory Board for the remainder of the current term of office.

Word of thanks to the Board of Management and staff

The Board of Management and staff worked and acted with dedication and prudence in an environment that continued to be challenging. The Supervisory Board would like to express its special appreciation of their efforts.

Hannover, 17 May 2011

For the Supervisory Board

Wolf-Dieter Baumgartl
(Chairman)