Gothaer Allgemeine Versicherung AG Group Annual Report for ...

Management Report
Gross premiums written
Breakdown by region
€ million
2011 2010
Domestic 1,387.6 1,346.6
Foreign 17.4 26.9
Gross premiums written in primary business 1,404.9 1,373.5
Our business has traditionally been concentrated in Germany. Over 98 % of premium
income from primary insurance business is generated in the domestic market. The
Group's foreign business is confined largely to countries in the European Economic Area.
Investments
The investment policy of the Gothaer Allgemeine Group is primarily geared to generating
a robust and sustainable return in a competitive environment. This is ensured by the
systematic use of risk-adjusted performance management aimed at optimizing the
return/risk ratio of the investment portfolio while taking account of our risk-bearing
capacity. Another significant investment strategy constraint is presented by the tougher
capitalization rules taking shape under Solvency II. Investment strategy is embedded in
an asset liability management system and takes account of the underwriting requirements
that need to be met by investment income, liquidity and security.
In 2011, we remained systematically committed to a stable investment policy based
largely on current income. The two priorities of this strategy are to generate attractive
returns in the existing market environment and to ensure that risks are reduced overall
by being spread as broadly as possible over the different types of investment. The financial
markets were highly volatile during the course of the year and had varying impacts
on profits. From the middle of the year onwards, developments were shaped chiefly by
the sovereign debt crisis. Discussion of private sector involvement in the rescheduling
of Greece's debts resulted in additional pressure, especially for financial stocks. As a
consequence, marked fluctuations and falls in prices ensued in the capital markets during
the second half of the year. The German DAX Index ended the year with a performance
of –14.7 %. After rising from 2.9 % to 3.5 % in the months to April, the yield of German
Federal Bonds (Bunds) with a residual term of ten years remained consistently below
3.0 % from the middle of the year onwards. In September, a historic low was reached
with a yield of less than 1.7 %. While this fall in rates had positive effects on the market
value of the fixed-interest securities in the portfolio, the increase in the spreads of
government bonds issued in the so-called PIIGS (Portugal, Ireland, Italy, Greece, Spain)
made for recessive prices. Bank exposure to PIIGS coupled with discussion of higher
capital requirements under Basel III and in the wake of the European Banking Authority
(EBA) capital stress test had an intensifying procyclical effect on the banking crisis and
led to sharp falls in the market value of investments in the banking sector, especially
subordinated securities.
Gothaer Allgemeine Group Annual Report 2011 11