ANNUAL REPORT 2013

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 December 2013 and 2012 (Expressed in United States Dollars) 4. RISK DISCLOSURES (continued) D. Liquidity risk (continued) The maturity dates of the Company’s fixed interest portfolio are as follows: 2013 2012 US$’000 US$’000 Less than one year $ 114,322 $ 134,438 Between one and two years 227,985 155,732 Between two and three years 209,194 170,996 Between three and four years 213,577 134,883 Between four and five years 116,914 188,506 Over five years 58,772 22,105 Asset backed and mortgage backed securities 340,739 350,882 Total fixed interest securities $ 1,281,503 $ 1,157,542 The maturity profile of the financial liabilities of the Company is as follows: Years until liability becomes due Less than one One to three Three to five Over five Total As at 31 December 2013 US$’000 US$’000 US$’000 US$’000 US$’000 Outstanding losses and loss expenses $ 192,663 $ 198,628 $ 80,885 $ 111,515 $ 583,691 Liability for collateral held on behalf of counterparties 22,878 — — — 22,878 Reinsurance balances payable 18,222 — — — 18,222 Fair value of derivative liabilities 10,665 — — — 10,665 Accounts payable and accrued expenses 17,171 697 150 — 18,018 Provision for income tax 349 — — — 349 Total $ 261,948 $ 199,325 $ 81,035 $ 111,515 $ 653,823 Years until liability becomes due Less than one One to three Three to five Over five Total As at 31 December 2012 US$’000 US$’000 US$’000 US$’000 US$’000 Outstanding losses and loss expenses $ 184,182 $ 174,645 $ 87,034 $ 91,520 $ 537,381 Liability for collateral held on behalf of counterparties 21,772 — — — 21,772 Reinsurance balances payable 71,291 — — — 71,291 Fair value of derivative liabilities 4,432 — — — 4,432 Accounts payable and accrued expenses 14,426 288 328 — 15,042 Provision for income tax 3,554 — — — 3,554 Total $ 299,657 $ 174,933 $ 87,362 $ 91,520 $ 653,472 While the estimation of the ultimate liability for outstanding losses and loss expenses is complex and incorporates a significant amount of judgment, the timing of payment of outstanding losses and loss expenses is also uncertain and cannot be predicted as simply as for other financial liabilities. Actuarial and statistical techniques, past experience and management’s judgment have been used to determine a likely settlement pattern. 46 PUTTING THE PIECES TOGETHER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 December 2013 and 2012 (Expressed in United States Dollars) E. Operational risk Operational risk refers to the risk of financial or other loss, or potential damage to the Company’s reputation resulting from inadequate or failed internal processes, people and systems or from external events. The following are some of the examples of operational risks facing the Company: • Legal and compliance risk; • Information technology risk; • Loss of key officers or employees; • System failure and business disruption; • Execution errors; • Employment practice liability; and • Internal and external fraud. Through the scenario analysis process, TMR AG has also made efforts to identify and assess the financial impact of various operational risks. These risks are managed through internal control and monitoring tools such as the risk register. TMR AG has a low appetite for operational risk. Unlike underwriting and investment risks, operational risk has no upside and only downside and therefore should be avoided if feasible and cost-effective. Operational risk is difficult to quantify but can be controlled through appropriate corporate governance and internal control measures. The Company has developed a number of policies and procedures aimed to control or mitigate the negative impact that may potentially result from operational risk events. F. Strategic risk Strategic risk is the risk to earnings or capital arising from adverse business decisions or improper implementation of those decisions or inability to act in response to business opportunities or to adapt to changes in its operating environment. The following are examples of strategic risks facing the Company: • Industry overcapacity that results in prolonged soft market conditions; • Flawed response plans to market price cycles, including maintaining premium volume and market share during market declines and improper performance incentives for underwriters and others; • Planning processes (e.g. plan loss ratio setting, target premium volume) that are not fully integrated with internal financial indicators and external benchmarks or are based on forecasts that are inherently optimistic; • Expansion into new lines or territories with inadequate underwriting expertise, pricing systems, price monitoring capabilities, understanding of regulatory requirements, claims handling staff; and • Failure of large information technology and infrastructure projects to achieve the specified goals. Strategic risks can be split into two components, one being the risk emanating from making business decisions (active) such as the last two risks in the list above, and the other emanating from a lack of response to industry challenges (passive) such as the first three risks in the list above. Strategic risk is especially important for TMR AG because it has aimed to improve and optimise the risk profile of its business by growing those lines of business which help to diversify its current concentration in catastrophe exposures. Therefore it has strong interest in growing its current book of business profitably and developing new lines of business or markets. Although there is inherent risk in strategic expansion into new lines and geographical areas, there are also many benefits. In setting TMR AG’s appetite for this risk, both the risk and the benefits are taken into consideration. TOKIO MILLENNIUM RE | ANNUAL REPORT 2013 47
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ANNUAL REPORT 2013

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