Notes. General information

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1 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 131 Notes General information Based in Hannover/Germany, Talanx AG heads Germany s third-largest and Europe s eleventhlargest insurance group (based on gross premium income 2010) as a financial and management holding company. It does not, however, itself transact insurance business. The Group, which is active in more than 150 countries worldwide through cooperation arrangements, offers high-quality insurance services in non-life and life insurance as well as reinsurance and also conducts business in the asset management sector. The Group operates as a multi-brand provider in the divisions of Industrial Lines, Retail Germany, Retail International, Non-Life Reinsurance and Life/Health Reinsurance as well as Corporate Operations. Its brands include HDI and HDI-Gerling, offering insurance solutions for retail and commercial customers as well as industrial clients, Hannover Re one of the world s leading reinsurers, the bancassurance specialists neue leben, PB and TARGO Versicherungen as well as the investment fund provider and asset manager AmpegaGerling. At the end of 2011 the companies belonging to the Talanx Group employed a total global workforce* of 17,061 (16,874). Talanx AG is a wholly-owned subsidiary of HDI Haftpflichtverband der Deutschen Industrie Versiche rungsverein auf Gegenseitigkeit (ultimate parent company), Hannover (HDI V. a. G.) and the parent company for all Group companies belonging to HDI V. a. G. It is entered in the commercial register of Hannover County Court under the number HR Hannover B with the address Riethorst 2, Hannover. In accordance with 341 et seq. of the German Commercial Code (HGB), HDI V. a. G. is obliged to prepare consolidated annual accounts that include the annual financial statements of Talanx AG and its subsidiaries. * Full-time equivalents as at 31 December

2 132 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups General accounting principles and application of International Financial Reporting Standards (IFRS) As the parent company of the Talanx Group, Talanx AG has drawn up a consolidated financial statement pursuant to 290 of the German Commercial Code (HGB). The consolidated financial statement was prepared voluntarily on the basis of 315 a Para. 3 of the German Commercial Code (HGB) pursuant to Article 4 of Regulation (EC) No. 1606/2002 in accordance with International Financial Reporting Standards (IFRS) in the form adopted for use in the European Union. The standards and rules specified in 315 a Para. 1 of the German Commercial Code (HGB) were observed in full. Since 2002 the standards adopted by the International Accounting Standards Board (IASB) have been referred to as IFRS (International Financial Reporting Standards); the standards approved in earlier years still bear the name IAS (International Accounting Standards). Standards are cited in our Notes accordingly; in cases where the Notes do not make explicit reference to a particular standard, the term IFRS is used. Insurance-specific transactions for which IFRS do not contain any separate standards are recognised in compliance with IFRS 4 Insurance Contracts according to the pertinent provisions of United States Generally Accepted Accounting Principles (US GAAP). The consolidated financial statement reflects all IFRS in force as at 31 December 2011 as well as all interpretations issued by the IFRS Interpretations Committee (IFRSIC, formerly known as the International Financial Reporting Interpretations Committee (IFRIC)) and the previous Standing Interpretations Committee (SIC), application of which was mandatory for the 2011 financial year and which were adopted by the EU. In addition, the German Accounting Standards (DRS) adopted by the German Accounting Standards Committee (DRSC) have been observed insofar as they do not conflict with currently applicable IFRS standards. The consolidated financial statement was drawn up in euros (EUR). The amounts shown have been rounded to EUR millions (EUR million), unless figures are required in EUR thousands (EUR thousand) for reasons of transparency. This may give rise to rounding differences in the tables presented in this report. Figures indicated in brackets refer to the previous year. Newly applicable standards/interpretations and changes in standards Among the major new features of the amended IAS 24 Related Party Disclosures, which was ratified by the EU on 20 July 2010, is the requirement for disclosures of so-called commitments pertaining e.g. to guarantees, undertakings and other obligations that are dependent upon whether (or not) a particular event occurs in the future. The definition of a related entity or a related person is also clarified. The Group applied the amended IAS 24 for the first time at the start of the financial year without significant implications. The collective standard for amending various IFRSs ( Improvements to IFRSs ) was published in May 2010 as part of the IASB annual improvement process and features numerous minor IFRS changes. The amendments are, for the most part, applicable to financial years beginning on or after 1 January 2011 and became European law in February Insofar as they were of any practical relevance to the Group, the adoption of these amendments had no material influence on the Group s assets, financial position or net income in the reporting period.

3 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 133 The other new standards, interpretations and amendments applicable as from 1 January 2011 and listed below did not have any effect on the Group either: In December 2009 the EU adopted the amendments to IAS 32 Financial Instruments: Presentation Classification of Rights Issues in European law. IAS 32 was amended such that subscription rights as well as options and warrants for a fixed number of treasury shares against a fixed amount of any currency are to be classified as equity instruments as long as these are issued pro rata to all an entity s existing shareholders of the same class. IAS 19 Prepayments of a Minimum Funding Requirement (Amendments to IFRIC 14): The amendments are of relevance if a pension plan provides for minimum funding requirements and the entity makes an early payment of contributions to cover those requirements. In November 2009 the IFRIC published IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments. The interpretation addresses accounting by the debtor if renegotiated contractual conditions of a financial liability enable it to extinguish all or part of a financial liability through the issue of its own equity instruments (debt for equity swaps). The equity instruments are to be measured at fair value upon issuance. Differences between the fair value of the equity instrument and the carrying amount of the extinguished liability are recognised in profit or loss. Standards, interpretation and changes to published standards, application of which was not yet mandatory in 2011 and which were not applied early by the Group In November 2009 the IASB published a new standard on the classification and measurement of financial instruments. IFRS 9 Financial Instruments is the first step in a three-phase project intended to replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 introduces new provisions for classifying and measuring financial assets. This standard was expanded in October 2010 to include rules governing the accounting of financial liabilities and derecognition of financial instruments, the latter having been imported 1:1 from IAS 39. The Group has still to analyse the full implications of IFRS 9. It is already becoming clear, however, that the revised rules will have an influence, inter alia, on the accounting of financial assets within the Group. In addition, on 16 December 2011 the IASB published further amendments to IFRS 9 and IFRS 7 Financial Instruments: Disclosures under the heading Mandatory effective date and transition disclosures. Accordingly, the mandatory effective date of IFRS 9 has been deferred to financial years beginning on or after 1 January Also in this context, the IASB incorporated in IFRS 7 detailed disclosures related to transition to IFRS 9. The standard or its amendments have still to be ratified by the EU. On 7 October 2010 the IASB published amendments to IFRS 7 which are applicable to financial years beginning on or after 1 July The amendments concern disclosure requirements in connection with the transfer of financial assets. A transfer of financial assets exists, for example, where receivables are sold or in the case of asset-backed securities (ABS) transactions. The amendments were ratified by the EU on 22 November We are currently reviewing the implications for the consolidated financial statement.

4 134 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups In December 2010 the IASB published amendments to IFRS 1 First-time Adoption of International Financial Reporting Standards concerning the abolition of fixed transition dates and the effects of severe hyperinflation. These amendments have still to be ratified by the EU. Reference to 1 January 2004 as the fixed date of transition was replaced by a more general wording. In addition, this standard for the first time provides guidance for cases in which an entity was unable to comply with IFRSs for a period prior to the date of transition because its functional currency was subject to severe hyperinflation. The amendment is applicable to financial years beginning on 1 July We do not expect the application of these amendments to have any effect on the consolidated financial statement. In December 2010 the IASB published amendments to IAS 12 Income Taxes, which still have to be adopted by the EU. These new rules include clarification of the treatment of temporary tax differences in connection with measurement using the fair value model of IAS 40 Investment Property. The amendment enters into force for reporting years beginning on or after 1 January We do not expect the application of these amendments to have any effect on the consolidated financial statement. On 12 May 2011 the IASB published three new and two revised standards governing consolidation, the accounting of investments in associated companies and joint ventures and the related disclosures in the notes. IFRS 10 Consolidated Financial Statements replaces the regulations previously contained in IAS 27 Consolidated and Separate Financial Statements and SIC 12 Consolidation Special-purpose Entities ; it defines the principle of control as the universal basis for establishing the existence of a parent-subsidiary relationship. We are currently examining the implications of the new IFRS 10 for the consolidated financial statement. In the future, the revised IAS 27 will contain only provisions on the accounting requirements for interests in subsidiaries, associated entities and joint ventures disclosed in the parent company s separate financial statement. Apart from several minor changes, the wording of the previous standard was retained. IFRS 11 Joint Arrangements addresses the accounting requirements in cases where an entity shares management control over a joint venture or joint operation. The new standard replaces the pertinent regulations in IAS 31 Interests in Joint Ventures and SIC 13 Jointly Controlled Entities Non-Monetary Contributions by Venturers. According to IFRS 11, proportionate consolidation of the assets of a joint venture is no longer admissible, and the equity method must be applied in future. As things currently stand, the amendment affects us with regard to one case only (Credit Life International Services GmbH). The revised IAS 28 Investments in Associates will be expanded to include rules governing accounting for investments in joint ventures. The equity method must be applied as standard in future. The disclosure obligations in connection with the consolidation and accounting of interests in associated entities and joint ventures will in future be collated in IFRS 12 Disclosure of Interests in Other Entities. To some extent, the duties of disclosure in the new standard extend far beyond what was previously the case, the aim being to provide users of financial statements with a clearer picture of the nature of the company s interests in other entities and the effects on the assets, financial position and net income.

5 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 135 The provisions of IFRS 10, 11 and 12, and the amended IAS 27 and 28 are applicable to financial years beginning on or after 1 January All these standards have yet to be ratified by the EU. We are currently reviewing the implications of these amendments for the consolidated financial statement. 12 May 2011 also saw the IASB publish its new IFRS 13 Fair Value Measurement which standardises the definition of fair value and sets down a framework of applicable methods for measuring fair value. Fair value is defined as the price that would be received to sell an asset, the measurement of this price being based as far as possible on observable market parameters. In addition, the quality of the fair-value measurement is to be described by way of comprehensive explanatory and quantitative disclosures. We are currently examining the implications of the new IFRS 13, but do not expect them to result in significant changes to our accounting practices. IFRS 13 is applicable to financial years beginning on or after 1 January 2013 and has yet to be ratified by the EU. In June 2011 the IASB published amendments to IAS 1 Presentation of Financial Statements and to IAS 19 Employee Benefits. IAS 1 stipulates that in future, items in the Statement of Other Comprehensive Income must be disclosed separately according to whether or not they can be carried in the income statement through profit and loss. If certain items in Other Comprehensive Income are presented before tax, corresponding tax entries must be disclosed separately for each group featured in the Statement of Other Comprehensive Income. The amendments to IAS 1 are applicable to financial years beginning on or after 1 July The key amendment to IAS 19 is the abolishment of the option available to companies to recognise future actuarial gains and losses either immediately (with no impact on profit and loss) under Other Comprehensive Income in their equity capital, or on a deferred basis using the corridor method. Future actuarial gains and losses must now be accounted for fully under Other Comprehensive Income in the equity capital, the corridor method no longer being admissible. Moreover, calculation of the net interest income from so-called plan assets will be determined based on the discount rate rather than on the expected rate of return. The stated objective of the amended standard is also to introduce far-reaching disclosure obligations. As the Group currently uses the corridor method, implications are to be expected and these are currently being examined. Initial application of the amended IAS 19 is intended for financial years beginning on or after 1 January The amendments to IAS 1 and IAS 19 have yet to be ratified by the EU. The IASB has adapted the provisions governing the presentation of financial assets and liabilities and published changes on 16 December 2011 in the form of amendments to IAS 32 and IFRS 7. The presentation requirements set down in IAS 32 were retained more or less in their entirety and were merely fleshed out by additional guidelines on application. The amendment is applicable retrospectively to financial years beginning on or after 1 January IFRS 7 contains new disclosure requirements with regard to specific netting arrangements. These requirements must be observed regardless of whether the netting arrangement actually resulted in offsetting of the relevant financial assets and liabilities. The amendment is applicable retrospectively to financial years beginning on or after 1 January We are currently reviewing the implications of these two amendments for the consolidated financial statement.

6 136 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups Accounting policies The annual financial statements of the subsidiaries and special purpose entities included in the Group are governed by uniform accounting policies, the application of which is based on the principle of consistency. In the following we will describe the accounting policies applied, any amendments made to accounting policies in 2011 as well as major discretionary decisions and estimates. Newly applicable accounting standards in the 2011 financial year are described in the section General accounting principles and application of IFRS, while the consolidation principles are discussed in the section Consolidation (pages 168 et. seq.). Changes in accounting policies and accounting errors In the 2011 financial year we retrospectively adjusted the prior-year figures with respect to the following circumstances in accordance with the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors : a) In the second quarter of 2011, we made a retrospective correction in the Retail International segment, which concerned the recognition of deferred tax liabilities for taxable temporary differences in respect of goodwill. The differences related to an earlier company acquisition and were not attributable to the first-time recognition of goodwill. In the opening balance sheet as at 1 January 2010, deferred tax liabilities increased by EUR 7 million, while retained earnings decreased by the same amount. As a result of this adjustment, reserves fell by EUR 4 million, with EUR 3 million of that amount relating to Group net income and EUR 1 million to Other reserves (contra items: Taxes on income and Deferred tax liabilities ). b) With effect from 30 September 2011, the Group introduced uniform methods of recognising insurance-related intangible assets in respect of insurance companies acquired in previous years (PVFP) in the Retail Germany segment. As a result, the PVFP in favour of policyholders (balance sheet item: Other intangible assets ) was offset in the amount of the provision for deferred premium refunds (balance sheet item: Provision for premium refunds ) as measured and recognised upon initial consolidation. The amendment of this accounting policy, along with the associated adjustment of the amortisation patterns, was applied retrospectively. The amendment had no effect on either Group net income or shareholders equity in any of the preceding reporting periods. As at 31 December 2010, the balance sheet items Other intangible assets and Provision for premium refunds were reduced by a total of EUR 268 million compared with the amounts previously recognised. In the opening balance sheet as at 1 January 2010, each of these balance sheet items was reduced by EUR 321 million. c) In the fourth quarter of 2011, the Group harmonised the recognition of technical provisions in the balance sheet. In accordance with the applicable US GAAP standards (FASB ASC ; formerly FAS 97), unearned revenue liabilities for life insurance contracts classified according to the universal life model are recognised in the benefit reserve (previously recognised in the unearned premium reserve). The change in the method of recognition had no implications for Group net income or shareholders equity in any of the previous reporting periods. The unearned premium reserve was consequently reduced by EUR 1,144 million as at 31 December 2010, while the benefit reserve rose by the same amount. This modification resulted in a shift of EUR 78 million in the consolidated between net premium earned and claims and claim expenses (net). In the opening balance sheet as at 1 January 2010, this reclassification amounted to EUR 1,223 million in both cases.

7 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 137 d) At 31 December 2011, we retrospectively corrected the recognition of certain items of real estate held in a special fund as investment property. In accordance with IAS 40 Investment Property, these assets are measured at amortised cost and thus correctly posted under the balance sheet item Investment property (previously: Available-for-sale investments ; variable-yield securities, investment funds). At no time did this change in the recognition of investments have any effect on shareholders equity or income/expenses. On the contrary, the increase of EUR 235 million in investment property as at the previous year s balance sheet date, was balanced out by an identical decline in available-for-sale financial instruments. As at 1 January 2010, the amount of investment property recognised in the balance sheet rose by EUR 229 million, while the amount recognised for financial instruments was EUR 229 million lower. These adjustments also had the following implications for items in the opening balance sheet as at 1 January 2010 and for the comparable period as at 31 December 2010 respectively: Consolidated balance sheet as at 1 January 2010 As reported at Changes due to adjustments in accordance with IAS Re a) Re b) Re c) Re d) A. b. Other intangible assets 2, ,833 B. a. Investment property B. e.ii. Financial assets available for sale 26, ,248 A. b. Reserves 4, ,295 C. a. Unearned premium reserve 5,026 1,223 3,803 C. b. Benefit reserve 39,754 1,223 40,977 C. d. Provision for premium refunds 1, G. Deferred tax liabilities 1, ,516 Consolidated balance sheet as at 31 December 2010 As reported at Changes due to adjustments in accordance with IAS Re a) Re b) Re c) Re d) A. b. Other intangible assets 1, ,583 B. a. Investment property ,095 B. e.ii. Financial assets available for sale 30, ,400 A. b. Reserves 4, ,685 C. a. Unearned premium reserve 5,411 1,144 4,267 C. b. Benefit reserve 42,466 1,144 43,610 C. d. Provision for premium refunds 1, G. Deferred tax liabilities 1, ,444

8 138 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups The effects on the consolidated for the 2010 financial year are as follows: Changes due to Consolidated As reported at adjustments in accordance with IAS Re a) Re c) 4. Change in gross unearned premium Change in ceded unearned premium Claims and claim expenses (gross) 17, ,718 Reinsurers share 1, , Taxes on income Year-end result of which Group net income Changes in estimates during the reporting period In an effort to achieve valuations that are more in line with fair value, the Group adjusted the calculation logic used for model-based market valuations and for the impaired portion of fair value measurement changes in the event of prolonged decreases in the value of collateralised debt obligations, collateralised loan obligations and high-yield funds. This represents a change in an accounting estimate that in accordance with IAS 8 is to be performed prospectively in the year under review without adjustment of the comparative figures for previous years. If the parameters and methods used prior to 31 December 2010 had been applied in the period under review, impairments would have been EUR 300 thousand higher and write-ups EUR 5 million higher. The fair values of the instruments named would have been a total of EUR 1 million higher. The effect of this adjustment to the calculation logic on the figures of future reporting periods could be determined only with a disproportionately high degree of effort. In the fourth quarter of 2011 we raised the policyholders share in both investment income and the risk result and simultaneously lowered the shareholders share in conventional and unit-linked life insurance policies at certain insurance companies (in the Retail Germany segment). As a consequence, the planned earnings before tax for the financial years 2011 through 2013 will decrease. Gradual increases in the following financial years should enable us to achieve our previous levels of allocation to surplus participation by The corresponding carrying amounts ( Insurancerelated intangible assets (PVFP) and Provision for premium refunds ) were determined by means of an accounting estimate without adjustment of the earlier years figures. On the basis of these estimates, additional expenditure in the amount of EUR 21 million was posted owing to the amended breakdown of the amounts amortised for PVFPs (consolidated item: Other technical expenses ). The balance sheet item increased by EUR 21 million at the expense of shareholders equity and the tax portion. The increase in deferred premium refunds (item: Provision for premium refunds ) which resulted from amendments to the allocation levels and changes in IFRS revaluation estimates amounts to EUR 5 million. The effect of this adjustment on the presentation of future reporting periods was not calculated owing to the disproportionately high degree of effort involved.

9 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 139 Changes in the presentation of the consolidated balance sheet and consolidated The hybrid capital recognised under Subordinated liabilities is measured at amortised cost in accordance with the effective interest rate method. Income/expense components arising out of the amortisation of transaction costs incurred at issue and of premiums and discounts were previously recognised under other income/expenses, while the nominal interest rate was recognised under Financing costs. In order to conform more closely with the spirit of the effective interest rate method, we will uniformly recognise all these expenses as financing costs in future. The changed presentation of the prior-period figures in accordance with IAS 1 Presentation of Financial Statements thus led to an improvement of EUR 4 million in other income/expenses at the expense of financing costs. In 2011 we modified the presentation of illiquid reinstatement premiums in primary insurance business. As from the fourth quarter, the reinstatement premiums previously booked under the reinsurers portions of the other technical provisions were recognised under illiquid reinsurance premiums written. All in all, this approach results in a more appropriate form of presentation since, in economic terms, reinstatement premiums are nothing more than reinsurance premiums even though their amount and the time of their payment are still uncertain. In 2011 this reclassification resulted in a reduction of EUR 107 million in premium earned and an improvement in the other technical result. After a cost-benefit analysis, it was decided not to adjust the figures of prior years. The expenditure for administration of third-party investment portfolios is posted, like the associated income, in the Other income/expenses (item: Sundry expenses, previously Expenditures on investments). The previous year s figure was adapted accordingly (EUR 47 million). Major discretionary decisions and estimates Preparation of the consolidated financial statements to a certain extent entails taking discretionary decisions and making estimates and assumptions that have implications for the assets and liabilities recognised, the consolidated as well as contingent claims and liabilities. As a rule, these decisions and assumptions are subject to ongoing review and are based in part on historical experience as well as on other factors, including expectations in respect of future events that currently appear reasonable. The processes in place both at Group level and at the level of the subsidiaries are geared toward calculating the values in question as reliably as possible, taking all relevant information into account. It is further ensured that the standards laid down by the Group are applied in a consistent and appropriate manner. Estimates and assumptions entailing a significant risk in the form of a material adjustment, within the next financial year, to the carrying amounts of individual balance sheet items are discussed below. In addition, further details can be found in the accounting policies or directly in the notes on individual items.

10 140 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups Technical provisions: As at 31 December 2011, the Group recognised loss and loss adjustment expense reserves in the amount of EUR 31,420 million and benefit reserves in the amount of EUR 45,739 million. The loss and loss adjustment expense reserves, the amount and maturity of which are uncertain, are recognised according to best estimate principles in the amount that will probably be utilised. The actual amounts payable may prove to be higher or lower; any resulting run-off profits or losses are recognised in income. In the area of life insurance and life/health reinsurance, the determination of provisions and assets is crucially dependent on actuarial projections of the business. In this context key input parameters are either predetermined by the metrics of the insurance plan (e.g. costs included in the calculation, amount of premium, actuarial interest rate) or estimated (e.g. mortality, morbidity or lapse rates). These assumptions are heavily dependent, for instance, on country-specific parameters, sales channel, quality of underwriting and type of reinsurance. For the purposes of US GAAP accounting these assumptions are reviewed as at each balance sheet date and subsequently adjusted in line with the actual projection. The resulting effects are reflected, for instance, in true-up adjustments in the balance sheet items Other intangible assets, Insurance-related intangible assets (PVFP), Deferred acquisition costs, Provision for premium refunds (provision for deferred premium refunds) and, where applicable, the Benefit reserve (funding of maturity bonuses). Fair value or impairments of financial instruments: Financial instruments with a fair value of EUR 37,203 million were recognised at the balance sheet date. Fair values and impairments for financial instruments, especially for those not traded on an active market (e.g. derivatives in connection with Modified Coinsurance/Coinsurance Funds Withheld treaties), are determined using appropriate measurement methods. In this regard, please see our remarks on the determination of fair values as well as the applicability criteria for determination of the need to take impairments on certain financial instruments in the subsection entitled Investments including income and expenses. The allocation of financial instruments to the various levels of the fair value hierarchy is described under item 11 of the Notes Fair value hierarchy. To the extent that significant measurement parameters are not based on observable market data (level 3), estimates and assumptions play a major role in determining the fair value of these instruments. Impairment test of goodwill (carrying amount as at 31 December 2011: EUR 690 million): The Group tests for impairment of goodwill in the manner described in the subsection entitled Goodwill. Insofar as the recoverable amount is based on calculations of the value in use, appropriate assumptions such as sustainably achievable results and growth rates are used as a basis (cf. item 1 of the Notes Goodwill, pages 209 et seq.). Deferred acquisition costs: At the balance sheet date, the Group recognised acquisition costs in the amount of EUR 4,013 million. The actuarial bases for amortisation of the deferred acquisition costs are continuously reviewed and adjusted where necessary. Impairment tests are carried out through regular checks on, for example, profit developments, lapse assumptions and default probabilities. Present value of future profits (PVFP) on acquired insurance portfolios: The PVFP (EUR 1,333 million as at 31 December 2011) is the present value of the expected future net cash flows from existing life insurance contracts at the time of acquisition, and is determined using actuarial methods. Uncertainties may arise with regard to the expected amount of these net cash flows.

11 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 141 Realisability of deferred tax assets: Estimates are made in particular with respect to the utilisation of tax loss carry-forwards, first and foremost in connection with deferred tax liabilities recognised in the balance sheet and expected future earnings. The Group s deferred tax assets amounted to EUR 320 million at the balance sheet date. Provisions for pensions and similar obligations: At the balance sheet date, the Group posted pension obligations under defined-benefit plans net of plan assets of EUR 1,343 million. The present value of pension obligations is influenced by numerous factors based on actuarial assumptions. The assumptions used to calculate the net expenses (and income) for pensions include discount rates, inflation rates and expected returns on plan assets. These parameters take into account the individual circumstances of the units concerned and are determined with the aid of actuaries. Further key assumptions used to establish the pension liabilities are provided in item 22 Provisions for pensions and other post-employment benefit obligations of these Notes. Provisions for restructuring (31 December 2011: EUR 87 million): The provisions for restructuring recognised in the consolidated financial statements, which are based on official restructuring measures of which the affected employees have been informed, include assumptions in respect of the amount of the severance payments due and the implications for onerous contracts. The actual amounts may diverge from the estimated amounts. Summary of major accounting policies Recognition of insurance contracts In March 2004 the IASB published IFRS 4 Insurance Contracts, the first standard governing the accounting of insurance contracts, and thus divided the Insurance Contracts project into two phases. IFRS 4 represents the outcome of Phase 1 and serves as a transitional arrangement until the IASB redefines the measurement of insurance contracts after completion of Phase 2. The exposure draft (ED/2010/8) Insurance Contracts has now been published. It is still to be decided whether the proposed amendments to the exposure draft which are due to appear in the third or fourth quarter of 2012 will be published in the form of a re-exposure (i.e. republication of an amended draft) or merely as a review draft (i.e. a provisional draft of the final amendment). IFRS 4 (Phase 1) which also applies to reinsurance contracts requires that all contracts written by insurance companies be classified either as insurance contracts or investment contracts. An insurance contract exists if one party (the insurer) assumes a significant insurance risk from another party (the policyholder) by agreeing to pay the policyholder compensation if a defined uncertain future event detrimentally impacts the policyholder. For the purposes of recognising insurance contracts within the meaning of IFRS 4, insurance companies are permitted to retain their previously used accounting practice for insurance contracts for the duration of the currently applicable project stage (Phase 1). In line with this, technical items are recognised in the consolidated financial statements in accordance with US GAAP (in essence with the FASB ASC standard 944 et seq.). Contracts void of technical risk are treated as investment contracts in accordance with IFRS 4. If investment contracts contain a clause with discretionary surplus distribution, they are also recognised in accordance with US GAAP provided IFRS 4 contains no special provisions to the contrary. Investment contracts that do not have discretionary surplus distribution are treated as financial instruments pursuant to IAS 39.

12 142 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups Assets Intangible assets Intangible assets with the exception of goodwill and insurance-related intangible assets are recognised at amortised acquisition/production cost less scheduled straight-line depreciation and, as appropriate, impairment losses. The other intangible assets also consist of acquired and selfdeveloped software as well as insurance-related intangible assets. Goodwill is the positive difference between the cost of acquiring a company and the fair value of the Group s shares in that company s net assets. In accordance with IFRS 3 Business Combinations, negative differences from initial consolidation are to be recognised immediately in income after renewed testing. Goodwill is tested for impairment at least once a year and recognised in the balance sheet at its initial acquisition cost less cumulative impairments. Neither scheduled amortisation nor reversals are permitted. For the purposes of the impairment test in accordance with IAS et seq. Impairment of Assets, the goodwill must be allocated to the cash-generating units (CGUs) (cf. item 1 of the Notes Goodwill, pages 209 et seq.). The goodwill is allocated to the CGU that is expected to derive benefit from the acquisition that gave rise to the goodwill. A CGU cannot be larger than a business segment. In order to determine a possible impairment, the recoverable amount defined as the higher of the value in use or the fair value less costs to sell of a CGU is established and compared with the carrying amounts of this CGU in the Group including goodwill. If the carrying amounts exceed the recoverable amount, a goodwill impairment is recognised in the (item: Goodwill impairments ). Insurance-related intangible assets: The present value of future profits (PVFP) on acquired insurance portfolios refers to the present value of the expected future net cash flows from life insurance contracts existing at the time of acquisition. It consists of a shareholders and tax portion, for which deferred taxes are established, and a policyholders portion. The insurance portfolios are amortised in line with the realisation of the surpluses on which the calculation is based. Item 2 of the Notes Other intangible assets, page 213 et seq., shows a breakdown by insurance term of the underlying insurance contracts acquired. Impairment and the measurement parameters used are tested at least once a year; where necessary, the amortisation patterns are adjusted or an impairment loss is recognised. Only the amortisation of the shareholders portion results in a charge to future earnings. The PVFP in favour of policyholders is recognised by life insurance companies that are obliged to enable their policyholders to participate in all results through the establishment of a provision for deferred premium refunds.

13 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 143 The other intangible assets also comprise acquired and self-developed software. Intangible assets acquired for a consideration are recognised at amortised cost; self-developed software is carried at production cost less straight-line depreciation. Depreciation is carried out over the asset s estimated useful life, generally three to ten years. All other intangible assets are tested for impairment as at the balance sheet date and written down if necessary. These depreciation and impairment expenses are allocated to the functional units; insofar as allocation to functional units is not possible, they are recognised under other expenses. Write-ups on these assets are recognised in other income. Investments including income and expenses With respect to real estate, a distinction is made between investment property and own-use real estate based on the following criteria: investment and own-use real estate for mixed-use properties is classified separately if the portions used by third parties and for own use could be sold separately. If this is not the case, properties are classified as investment property only if less than 10% is used by Group companies. Investment property is measured at acquisition or production costs less scheduled depreciation and impairment. Scheduled depreciation is taken on a straight-line basis over the expected useful life, at most 50 years. An impairment expense is taken if the market value (recoverable amount) determined using recognised valuation methods is less than the carrying amount. In the case of the directly held portfolio, a qualified external opinion is drawn up for each property at every fifth balance sheet date on the basis of the discounted cash flow method (calculation of the discounted cash flows from rents etc. generated by each property). Internal assessments, which are also based on the discounted cash flow method, are drawn up for each property at the intervening balance sheet dates in order to review their value. Expert opinions are obtained at shorter intervals if special facts or circumstances exist that may affect the value. An external fair value opinion is obtained for specialised real estate funds every 12 months the key date is the date of first appraisal. For properties that are not rented out, the fair value is established using the discounted cash flow method taking into account the forecast vacancy rate. Maintenance costs and repairs are expensed in investment income; value-enhancing expenditures which are subsequent acquisition and/or production costs are capitalised using the equity method and can extend the useful life in individual cases. Investments in associated companies encompass solely those associated companies valued using the equity method on the basis of the proportionate shareholders equity attributable to the Group. The portion of an associated company s year-end result relating to the Group is included in the net investment income. The shareholders equity and year-end result are taken from the associated company s latest available annual financial statement. In this context, allowance is made for specific extraordinary circumstances in the appropriate reporting period if they are material to the associated company s assets, financial position or net income.

14 144 Financial statements Notes General information Accounting principles and policies Segment reporting Consolidation, business combinations Non-current assets held for sale and disposal groups In accordance with IAS 39 Financial Instruments: Recognition and Measurement, financial assets/ liabilities, including derivative financial instruments, are recognised/derecognised in the directly held portfolio upon acquisition/sale as at the settlement date. When added to the portfolio, financial assets are allocated to one of the four categories loans and receivables, financial instruments held to maturity, financial instruments available for sale and financial instruments at fair value through profit or loss. Financial liabilities are classified either as financial instruments at fair value through profit or loss or at amortised cost. Depending on how the instruments are categorised, the trans action costs directly connected with their acquisition may be recognised. Subsequent measure ment of financial instruments depends on the above categorisation and is carried out either at amortised cost or at fair value. The amortised costs are determined from the historical costs after allow ance for amounts repayable, premiums or discounts amortised within the statement of income using the effective interest rate method, and any unscheduled impairment. Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm s length transaction, or for which a liability could be settled. Financial instruments due on demand are recognised at their nominal value. Such instruments include cash in hand and funds held by ceding companies. The item Investments in affiliated companies and participating interests includes not only investments in subsidiaries that are not consolidated because of their subordinate importance for the presentation of the assets, financial position and net income of the Group, but also other participating interests. Associated companies not measured at equity on account of their subordinate importance are also carried in this item of the balance sheet. Investments in listed companies are recognised at fair value on the balance sheet date; other investments are recognised at cost, less impairments where applicable. Loans and receivables are non-derivative financial instruments with fixed or determinable payments that are not listed on an active market and are not intended to be sold at short notice. They consist primarily of fixed-income securities in the form of borrower s note loans, registered debentures and mortgage loans. They are carried at amortised cost using the effective interest rate method. The individual receivables are tested for impairment as at the balance sheet date. Unscheduled depreciation is recognised if the loan or receivable is no longer expected to be repaid in full or at all (see also our explanatory remarks in the Impairment section in this chapter). Reversals are recognised in earnings via the. The upper limit of the write-up is the amortised cost that would have arisen at the measurement date without impairment. Financial assets held to maturity comprise financial assets that entail fixed or determinable payments and have a defined due date but which are not loans or receivables. The Group has the intention and ability to hold the securities recognised here until maturity. The procedure for measuring and testing impairment is the same as for loans and receivables.

15 Nature of risks sheet assets sheet liabilities Notes on the List of shareholdings 145 Financial assets classified as available for sale include fixed-income or variable-yield financial assets that the Group does not immediately intend to sell and that cannot be allocated to any other category. These securities are carried at fair value. Premiums and discounts are spread over the maturity period so as to achieve a constant effective interest rate. Unrealised gains and losses arising out of changes in fair value are recognised under other income/expenses in equity (other reserves) after allowance for accrued interest, deferred taxes and amounts at life insurers due to policyholders upon realisation (provision for deferred premium refunds). Financial assets recognised at fair value through profit or loss consist of the trading portfolio and those financial assets categorised upon acquisition as measured at fair value through profit or loss. The trading portfolios (financial instruments held for trading) contain all fixed-income and variable-yield securities that the Group acquired for trading purposes and with the aim of generating short-term gains. In addition, all derivative financial instruments with positive fair values including embedded derivatives in hybrid financial instruments that must be separated as well as derivatives connected with insurance contracts that do not satisfy the requirements for recognition as a hedging relationship (as per IAS 39 Hedge Accounting ) are carried here. Derivatives with negative fair values are recognised under other liabilities. We use derivative financial instruments to a carefully judged extent in order to hedge parts of our portfolio against interest rate and market price risks, to optimise returns or to realise our intentions to buy/sell. Financial assets recognised at fair value through profit or loss consist principally of unsecured debt instruments issued by corporate issuers. This item also includes structured products recognised by applying the fair value option of IAS 39. Structured financial instruments whose fair value can be reliably established are recognised here. If these instruments were recognised under categories Loans and receivables, Financial assets held to maturity or Financial instruments available for sale, they would have to be broken down into their constituent parts (underlying plus one or more embedded derivatives) and recognised separately. The Group utilises the fair value option solely for selected parts of the investment portfolio. All securities measured at fair value through profit or loss are carried at fair value on the balance sheet date. If market prices are not available as fair values, the carrying values are established using recognised measurement methods. Like realised gains and losses, all unrealised gains and losses from this valuation are recognised in net investment income. Derivative financial instruments designated as hedging instruments pursuant to IAS 39 (Hedge Accounting) are carried at fair value upon initial measurement. The method used to recognise gains and losses upon subsequent valuation is dependent upon the type of hedged risk. The Group designates some derivatives as hedges on the fair value of particular assets (fair value hedges) and others as hedges against specific risks of fluctuating cash flows associated with a liability recognised in the balance sheet or a transaction that is expected and highly likely to materialise in the future (cash flow hedges); further information is provided in item 12 of the Notes Derivative financial instruments and hedge accounting, pages 231 et seq. These hedging instruments are carried under other assets or other liabilities.