Not only the regulatory framework, but also capital markets and rating agencies are placing increasingly exacting demands on insurance groups, as is evident inter alia from the following questions:

• How can we increase our profitability and create value on a sustained basis?
• How can we make optimal use of our capital?
• How can we optimize our cost of capital?
• How can we ensure that we invest in areas where we shall generate the highest risk-adjusted return over the long term?
• How can we seize strategic opportunities and at the same time remain aware of and manage the immanent risks?

Within the scope of Group management we resolve these issues by using an integrated management system, in which we devote special attention to the following four fundamental management processes that govern the interplay between the Group management and financial holding company Talanx AG and the Group’s various business segments:

• Capital management
• Performance management
• Risk management
• Mergers & acquisitions (M&A)

Capital management

We consider capital management to be one of the Group’s essential management tasks; it delivers an effective contribution to the Group objective of sustained value enhancement. In our understanding, this refers to a process structured on the basis of clear guidelines and workflows for the optimization of capital management and capital allocation within the Group. An important subfield of capital management, in our assessment, is identifying capital that exceeds the required risk capital on our defined level of certainty of a 99.5 percent Value at Risk or – in the opposite case – falls short of this level.

The next step is to rectify – or at least alleviate – the incorrect allocation of capital reflected in over- or undercapitalization by evaluating and implementing appropriate corrective actions.

In this context we consider it our stated aim to achieve the most efficient possible utilization of our capital while at the same time ensuring appropriate capital adequacy and making allowance for the effects of diversification. We view the optimization of our capital and financing structure as a further crucial aspect of capital management. Our goal in this regard is to arrive at an optimal cost of capital and the best possible capital allocation.

In the management system of the Talanx Group we differentiate between two fundamental capital concepts, namely "Company’s Capital" and "Risk-Based Capital"

Company’s capital

In our understanding, company’s capital refers to the capital that serves as a basis in our value-based management approach for determining the excess return above and beyond the cost of capital (cf. also under "xRoCC"). It represents the total capital available in a unit (company or segment), and is composed of the policyholders’ surplus and the so-called soft capital. For us, soft capital includes, for example, the loss reserve discount, a level of overreserving in property/casualty insurance that goes beyond best estimate reserving and the non-capitalized value of in-force business in life/health insurance.

Risk-based capital

Risk-based capital is the amount of capital necessary for the conduct of insurance business in order to ensure that the probability of capital erosion is kept as low as possible. The capital needed for this purpose is determined using mathematical risk models. To this extent it also constitutes the economic capital and indicates over- or undercapitalization and capital adequacy relative to the company’s capital.