Management of liquidity risks
Liquidity risk means that it may not be possible to convert investments and other assets into cash in a timely manner in order to meet our financial obligations when they fall due. For example, due to illiquidity on the markets, it may not be possible to sell holdings (or least without some delay) or to close open positions (or at least without price markdowns). Generally speaking, the Group continually generates significant liquidity positions due to the fact that premium revenues are normally taken in well in advance of claims, claims expenses and other benefits being paid out. We counter liquidity risk through regular planning of incoming and outgoing payments and by continuously matching the maturities of investments to our financial obligations. A liquid asset structure ensures that the Group is in a position to make necessary payments. With regard to payment obligations in connection with underwriting business, our planning is based on expected maturities, which reflect the run-off patterns of the reserves.
In order to monitor liquidity risks, each security type is assigned a liquidity code that indicates its degree of liquidity at fair market prices. These codes are regularly reviewed by Risk Controlling at Talanx Asset Management GmbH, checked for plausibility by taking into account market data and the assessment of portfolio management, and then modified as appropriate. The data are then included in standardised portfolio reporting given to the Chief Financial Officers of the decentralised units.
Each Group company has individual minimum limits for holding securities with high liquidity and maximum limits for holding securities with low liquidity. In particular minimum limits are derived from the timing component of technical payment obligations. For instance, because the Group’s property/casualty insurers have shorter durations for technical payment obligations, they are generally subject to higher minimum limits for holding securities with high liquidity than are life insurers, which normally have longer durations for technical payment obligations. If, risk limits are exceeded, this is brought to the attention of the Chief Financial Officers and portfolio management without delay.
The Group also optimises the availability of liquid funds by using cash pools maintained by various subsidiary companies and Talanx AG to facilitate management of Group companies’ cash inflows and outflows.
For a depiction of investments, key gross provisions (benefit reserve, loss and loss adjustment expense reserve) and reinsurers’ shares (broken down by their expected or contractual maturities), cf. the remarks on the corresponding balance sheet items in the Notes.
Property/casualty insurance: The following table shows cash inflows from premium payments, cash outflows from claims and claims expenses paid, acquisition costs and reinsurance commissions, including incurred administrative costs, as at the respective balance sheet date.
Liquidity inflows, which we depict below for non-life insurance, are positive in all respects.
|N51||CASH FLOWS AND LIQUID FUNDS FROM INSURANCE BUSINESS 1)|
|FIGURES IN EUR MILLION|
|Gross written premium, including premiums from unit-linked life and annuity insurance||15,412||14,623|
|Claims and claims expenses paid (gross)||–8,773||–8,857|
|Acquisition costs, reinsurance commissions, and administrative expenses||–3,847||–3,580|
|1) Presentation after elimination of intra-Group relations between segments|
Life/health insurance: In order to monitor liquidity risk, the Group’s life insurers regularly compare net claims and claims expenses paid during the financial year against existing assets (during the year, plan figures are used for net claims and claims expenses paid during the financial year).
In so doing, possible unforeseen increases in net claims and claims expenses through suitable supplements are considered and the liquidity of assets is monitored.
Other basic financial conditions: In addition to assets available to cover provisions and liabilities, the Group continues to maintain the following credit lines, which can be drawn down as needed:
In 2011, and by way of an addendum in 2012, Talanx AG concluded agreements on two syndicated floating-rate lines of credit with a total nominal amount of EUR 1.2 billion, with a term of five years. As at the balance sheet date, draw-downs amounted to EUR 150 million. Existing syndicated credit lines can be terminated by the lenders if there is a change of control, i.e. if a person or persons acting jointly, other than HDI Haftpflichtverband der Deutschen Industrie V. a. G., gain direct or indirect control over more than 50% of the voting rights or share capital of Talanx AG.
Facilities for letters of credit (LoC) are in place with various credit institutions. For the syndicated facility in the converted amount of EUR 726 (759) million concluded in 2011, the second extension option was used to extend the term from early 2018 to early 2019. In addition, several other bilateral credit agreements have been concluded, and existing ones have been augmented.
Letter of credit facilities on a bilateral basis are also in place with a number of credit institutions. These have various terms, running to 2022 at the latest and a total volume equivalent to EUR 2.6 (2.6) billion. For further information on letters of credit, cf. our remarks in the section “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 363 (379) million was concluded in December 2009. This is intended specifically for the US life reinsurance business.
A number of the LoC facilities include standard market clauses that give credit institutions the right to terminate in the event of material changes in the shareholding structure of our Group company Hannover Rück SE or that trigger a requirement to furnish collateral upon the occurrence of material events, e.g. a significant rating downgrade.