Business Performance
Economic conditions
In 2021, the German economy recovered from the slump that it had experienced in 2020 as a result of the COVID-19 pandemic. Adjusted for inflation, gross domestic product (GDP) rose by a substantial 2.9 percent year on year, compared with a sharp fall of 4.6 percent in the crisis year of 2020.
However, economic output did not bounce back to pre-crisis levels. Firstly, this was because cases of COVID-19 remained high, necessitating infection control measures. Other service providers – including those working in sport, culture and entertainment, and the creative industries – were hit particularly hard by the pandemic. Secondly, growing supply disruptions and shortages of materials acted as a brake on macroe-conomic activity.
The ongoing pandemic meant that consumer spending on a price-adjusted basis stagnated at its low prior-year level. Government spending, by contrast, was stepped up markedly. This was partly due to the procurement of COVID-19 vaccines and the operation of test and vaccination centers. Construction investment increased at a slower rate than before owing to shortages of workers and materials. Spending on capital equipment went up. There was also a rise in exports and imports, which had contracted significantly in the crisis year of 2020.
Consumer prices rose rapidly in 2021. They climbed by an average of 3.1 percent year on year, the biggest in-crease since 1993. Inflation had stood at just 0.5 percent in 2020.
Unemployment fell slightly, reflecting the advancing recovery. The average number of people out of work in 2021 fell by almost 82,000 year on year to around 2.6 million. As a result, the unemployment rate edged down from 5.9 percent to 5.7 percent. However, the number of people in work was essentially unchanged compared with 2020, remaining at around 44.9 million people throughout the year despite the noticeable rebound once the economy began to open up again in early summer.
The European Central Bank (ECB) maintained its course of expansionary monetary policy in 2021. Until part way through December, it stood by its pandemic emergency purchase program (PEPP), which had a total envelope of €1,850 billion for the purchase of securities, and its asset purchase program (APP) with net purchases of €20 billion per month. It committed to reinvesting maturing securities under the APP until at least the end of 2023. Key interest rates were left at their low levels of 0.0 percent for main refinancing operations, 0.25 percent for the marginal lending facility, and minus 0.5 percent for the de-posit facility. The ECB also retained its longer-term refinancing options, which are designed to stimulate lending by banks.
In December, the ECB announced that it would stop making purchases under PEPP in March 2022 but would continue to invest maturing paper until at least the end of 2024. It also said that purchases under APP would in-crease in parallel in the first half of 2022, returning to the level of €20 billion per month in the second half of the year. At the same time, the ECB stressed the continued need for flexible monetary policy and did not move away from its low-interest-rate approach.
Volksbanken Raiffeisenbanken Cooperative Financial Network
Business situation
Despite the persistently difficult market conditions resulting from the effects of the COVID-19 pandemic and the extremely low level of interest rates, the Volksbanken Raiffeisenbanken Cooperative Financial Network reported a profit before taxes of €10,522 million in 2021 (2020: €7,216 million).
The cooperative banks’ lending to retail and corporate customers increased by 6.9 percent in 2021 and thus grew at a faster pace than in the previous year (2020: 6.2 percent). The cooperative banks’ market share in the retail and corporate customer segment increased by 0.3 percentage points year on year to 17.9 percent.
The Cooperative Financial Network’s deposit-taking business saw customer deposits grow by a further 5.0 percent to €984,926 million (December 31, 2020: €937,876 million). These deposits played a crucial part in funding the Cooperative Financial Network’s lending business.
Equity increased again, by 6.4 percent, to €129,543 million at the end of the reporting year (December 31, 2020: €121,747 million). The Cooperative Financial Network’s capital resources provide it with a risk buffer and, at the same time, the foundations on which it can expand its lending business with retail and corporate customers.
The Cooperative Financial Network received a rating of A+ (2020: AA–) from credit rating agency Standard & Poor’s, while the rating from Fitch Ratings was unchanged at AA–.
In 2021, the number of members of the Cooperative Financial Network fell slightly year on year, predominantly due to demographic change. As at the end of the financial year, the cooperative banks had 18.2 million members (individuals and companies) in total, compared with 18.4 million at the end of 2020.
Financial performance
Net interest income amounted to €18,232 million in the year under review (2020: €18,272 million). This figure was primarily influenced by the low-interest-rate policy of the ECB and the resulting deterioration of margins. However, the decrease was partially offset by growth in lending. Net interest income in 2021 was therefore in line with expectations. The cooperative banks’ net interest income, the biggest source of income for the Cooperative Financial Network, amounted to €15,681 million in 2021 (2020: €15,368 million).
The ECB made additional liquidity available under the TLTRO III program in order to support lending to households and companies. In accordance with the rules of the TLTRO III program, the interest rate depends on the net lending volume in the specified comparative periods. The marketoriented basic interest rate in 2021 was minus 0.5 percent. In addition, a 0.5 percentage point lower interest rate is achievable if the net lending volume of the eligible loans (loans to the non-financial sector in the eurozone, excluding consumer home finance) was positive and thus higher than the required reference volume. In the reporting year, participation in the ECB’s TLTRO III program gave rise to bonus interest in the “Central Institution and Major Corporate Customers” segment and in the “Real Estate Finance” segment of €201 million, based on a volume of €36,660 million. The TLTRO III volume in the “Retail Customers and SMEs” segment stood at €42,168 million as at December 31, 2021. Assuming that the cooperative banks achieve the required net lending with eligible loans, this volume will give rise to bonus interest of €211 million. This will result in total bonus interest for the Cooperative Financial Network of €412 million.
Net fee and commission income improved by €1,236 million to €8,675 million in 2021 (2020: €7,439 million) and was therefore comfortably above the forecast figure. The main sources of income continued to be payments processing (including card processing) and securities brokerage business with entities in the Cooperative Financial Network. Making a contribution of €6,340 million, the cooperative banks accounted for the bulk of net fee and commission income (2020: €5,885 million). There was also a sharp rise due to the volume-related net income contribution resulting from an increase in the average assets under management and due to net income from performance-based management fees in the Union Investment Group.
As expected, the Cooperative Financial Network’s gains and losses on trading activities fell sharply to a net gain of €339 million (2020: net gain of €868 million). Gains and losses on trading activities are largely influenced by the DZ BANK Group. The change in this key performance indicator was attributable to various factors, notably the fair value gains and losses on own issues.
The net loss under gains and losses on investments came to €152 million (2020: net gain of €7 million). This significant deterioration had been anticipated and was largely attributable to realized gains and losses on sales of securities during the year and to measurement effects at the cooperative banks. The net loss was partly offset by, in particular, the positive trend in the DZ BANK Group resulting from income from the sale of direct long-term equity investments.
Loss allowances for the year under review had been expected to be on a par with 2020 but ultimately ended up with a net reversal of €337 million (2020: net addition of €2,327 million). This reflected the economic recovery – with company insolvencies remaining at a low level – and income from the reversal of loss allowances for individual exposures. In 2020, a significant addition to loss allowances had been required because of the COVID-19 pandemic.
Other gains and losses on valuation of financial instruments improved from a net loss of €62 million to a net gain of €190 million, primarily due to a positive change in the valuation of guarantee commitments in the Union Investment Group and IFRS-related valuation effects in the DZ BANK Group. Gains and losses from fair value hedge accounting amounted to a net gain of €20 million (2020: €41 million), gains and losses on derivatives used for purposes other than trading amounted to a net gain of €58 million (2020: net loss of €173 million), and gains and losses on financial instruments designated as at fair value through profit or loss amounted to a net gain of €111 million (2020: €70 million).
Net income from insurance business, which is exclusively attributable to the R+V Group, comprises premiums earned, gains and losses on investments held by insurance companies and other insurance company gains and losses, insurance benefit payments, and insurance business operating expenses. As expected, net income from insurance business rose sharply in 2021 to reach €1,293 million (2020: €722 million).
Financial performance
| 2021 € million | 2020 € million | Change (percent) | |
|---|---|---|---|
| Net interest income | 18,232 | 18,2721 | –0.2 |
| Net fee and commission income | 8,675 | 7,439 | 16.6 |
| Gains and losses on trading activities | 339 | 8681 | –60.9 |
| Gains and losses on investments | –152 | 7 | > 100.0 |
| Loss allowances | 337 | –2,327 | > 100.0 |
| Other gains and losses on valuation of financial instruments | 190 | –621 | > 100.0 |
| Net income from insurance business | 1,293 | 722 | 79.1 |
| Administrative expenses | –18,577 | –18,036 | 3.0 |
| Other net operating income | 186 | 333 | –44.1 |
| Profit before taxes | 10,522 | 7,216 | 45.8 |
| Income taxes | –3,017 | –2,1881 | 37.9 |
| Net profit | 7,505 | 5,027 | 49.3 |
1 Amount restated.
Income statement – breakdown of the change in profit before taxes by line item
€ million
This year-on-year rise was due to the increase in premiums earned to €18,994 million (2020: €18,741 million) and the improvement – reflecting the performance of the capital markets – in gains and losses on investments held by insurance companies and other insurance company gains and losses to a net gain of €5,233 million (2020: net gain of €2,007 million). Some of these increases were offset by a rise in insurance benefit payments to €20,356 million (2020: €17,561 million). The non-life insurance business saw an accumulation of natural disaster claims owing to storms (notably Storm Bernd), resulting in claims incurred of €418 million as at the reporting date. In the inward reinsurance business, major claims of €75 million arose in 2021 in connection with the Texas Freeze winter storm in the United States. An amount of €100 million (net, after claims covered by reinsurers) was recognized for Storm Bernd, and €63 million for the storms in June 2021. Hurricane Ida was the source of net claims amounting to €38 million and the tornado outbreak in December 2021 gave rise to net claims of €30 million. In addition, insurance business operating expenses incurred in the course of ordinary business activities increased to €2,578 million (2020: €2,465 million).
Administrative expenses held steady at €18,577 million in the year under review, which was a little higher than the prior-year figure of €18,036 million. The bulk of the administrative expenses were attributable to staff expenses, which came to €10,402 million (2020: €10,092 million), and other administrative expenses, which amounted to €8,175 million (2020: €7,944 million). The latter comprised not only general and administrative expenses but also depreciation/amortization and impairment losses. In 2020, the expectation had been that staff expenses would fall slightly and general and administrative expenses would remain largely unchanged. The rise in staff expenses was attributable to appointments to new and vacant positions and average pay rises, although there was a mitigating effect from people leaving – mainly due to retirement.
Income taxes amounted to €3,017 million (2020: €2,188 million), with most of this amount (€3,084 million; 2020: €2,606 million) attributable to current income taxes.
The consolidated net profit after taxes rose to €7,505 million in 2021 (2020: €5,027 million).
The Cooperative Financial Network’s cost/income ratio came to 64.6 percent in 2021 (2020: 65.4 percent).
Financial position
The consolidated total assets of the Volksbanken Raiffeisenbanken Cooperative Financial Network rose by €90,560 million to €1,566,451 million as at December 31, 2021 (December 31, 2020: €1,475,891 million). The volume of business increased from €1,995,551 million as at December 31, 2020 to €2,170,546 million at the end of the reporting year. Trust activities amounted to a volume of €3,830 million (December 31, 2020: €3,670 million). Of the total assets before consolidation, 62.3 percent was attributable to the cooperative banks (December 31, 2020: 62.2 percent) and 34.7 percent to the DZ BANK Group (December 31, 2020: 34.8 percent). As had also been the case at the end of 2020, the remaining 3.0 percent was attributable to Münchener Hypothekenbank, the BVR protection scheme, and BVR Institutssicherung GmbH.
On the assets side of the balance sheet, loans and advances to banks declined by €3,887 million to €15,843 million (December 31, 2020: €19,730 million), whereas cash and cash equivalents jumped to €156,973 million (December 31, 2020: €120,961 million) and loans and advances to customers by €53,452 million to €944,028 million (December 31, 2020: €890,576 million). As in previous years, this upward trend was mainly driven by increased lending by the cooperative banks.
Financial assets held for trading surged by €4,856 million to €47,442 million at the end of 2021 (December 31, 2020: €42,586 million). This increase was predominantly due to a rise in receivables to €18,294 million (December 31, 2020: €8,310 million), a rise in bonds and other fixed-income securities to €10,815 million (December 31, 2020: €10,261 million), and a rise in shares and other variable-yield securities to €1,772 million (December 31, 2020: €1,460 million). By contrast, derivatives (positive fair values) declined to €16,188 million (December 31, 2020: €22,246 million).
Investments fell to €248,390 million as at December 31, 2021 (December 31, 2020: €255,374 million). The principal reason for this was the decrease in bonds and other fixed-income securities to €163,582 million (December 31, 2020: €179,256 million), whereas shares and other variable-yield securities increased to €79,710 million (December 31, 2020: €71,694 million).
Investments held by insurance companies went up from €120,580 million as at December 31, 2020 to €127,793 million at the end of 2021. Mortgage loans increased to €13,005 million (December 31, 2020: €10,882 million) and variable-yield securities to €13,742 million (December 31, 2020: €11,639 million). Assets related to unit-linked contracts rose to €18,730 million (December 31, 2020: €14,820 million). However, registered bonds declined to €7,795 million (December 31, 2020: €8,551 million). Derivatives (positive fair values) decreased to €199 million (December 31, 2020: €553 million) and fixed-income securities to €60,951 million (December 31, 2020: €61,160 million). Promissory notes and loans increased to €7,072 million (December 31, 2020: €6,873 million).
On the equity and liabilities side of the balance sheet, deposits from banks swelled to €193,809 million (December 31, 2020: €160,924 million). This growth reflects the expansion of support loan business in connection with the COVID-19 pandemic. The Volksbanken Raiffeisenbanken Cooperative Financial Network’s participation in the TLTRO III program, which had been launched by the ECB in 2020, amounted to a total volume of €78,828 million as at December 31, 2021.
Deposits from customers grew from €937,876 million as at December 31, 2020 to €984,926 million as at the end of the reporting year. This can be explained by the rise in customer deposits as a result of the ECB’s policy of low and zero interest rates. Debt certificates issued including bonds advanced to €63,521 million (December 31, 2020: €58,365 million), mainly because other debt certificates issued increased to €13,223 million (December 31, 2020: €9,878 million) and bonds issued rose to €50,298 million (December 31, 2020: €48,487 million).
Financial liabilities held for trading stood at €40,045 million as at December 31, 2021 (December 31, 2020: €46,802 million). This reduction was attributable, in particular, to derivatives (negative fair values) amounting to €15,402 million (December 31, 2020: €20,144 million) and liabilities of €804 million (December 31, 2020: €3,790 million). By contrast, short positions rose to €1,548 million (December 31, 2020: €603 million).
Equity increased by €7,796 million to €129,543 million as at December 31, 2021 (December 31, 2020: €121,747 million), primarily because of the level of profit earned in 2021. The cooperative banks accounted for 84.4 percent of equity while the other entities in the Cooperative Financial Network accounted for 15.6 percent. This equity allocation highlights the local corporate responsibility and great significance of the cooperative banks for the Cooperative Financial Network.
Capital adequacy and regulatory ratios
The disclosures relating to own funds and capital requirements are based on the outcome of the extended aggregated calculation in accordance with article 49 (3) of the Capital Requirements Regulation (CRR) in conjunction with article 113 (7) CRR.
By far the greatest proportion of the consolidated own funds is held by the cooperative banks. The growth in own funds therefore arises primarily from the profits generated, and in most cases retained, by the cooperative banks and network institutions. Rights issues by the network institutions are for the most part subscribed internally and consolidated within the Cooperative Financial Network.
Due to the exclusion of internal exposures within the network in accordance with article 113 (7) CRR, risk-weighted exposure amounts are generally not consolidated. Consolidation measures primarily include directly and indirectly held own funds instruments within the Cooperative Financial Network and therefore particularly affect equity investments of cooperative banks and subordinate receivables due to them from the network institutions, especially from DZ BANK AG. The amounts are consolidated in the relevant own funds categories.
The impact of consolidation on the level of the risk-weighted exposure amounts is therefore negligible, whereas own funds decrease. The method by which the consolidation is carried out results in a total capital ratio for the Cooperative Financial Network that is lower than the corresponding ratio for the sum of all cooperative banks.
The Cooperative Financial Network’s Tier 1 capital ratio was virtually unchanged at 15.2 percent as at December 31, 2021 (December 31, 2020: 15.3 percent). The regulatory total capital ratio went down year on year owing to phase-out rules and subordinated bonds that had become due, standing at 15.8 percent as at the end of 2021 (December 31, 2020: 16.3 percent). In absolute terms, the Cooperative Financial Network’s own funds increased by €4.3 billion to €119.7 billion. This rise was largely attributable to the retention of profits by the cooperative banks.
As at December 31, 2021, risk-weighted assets amounted to €757.7 billion, which was up by €50.9 billion year on year (see table on page 21). This increase was predominantly due to the growth of loans and advances in customer-related business. In total, credit risk exposures made up 90.9 percent of risk-weighted assets (December 31, 2020: 90.6 percent). The banks in the Cooperative Financial Network primarily use the Standardized Approach to credit risk to determine their regulatory capital requirements. Some institutions also apply internal ratings-based (IRB) approaches, including the DZ BANK Group, Münchener Hypothekenbank eG, and Deutsche Apotheker- und Ärztebank eG.
The leverage ratio was unchanged at 8.0 percent as at December 31, 2021. Once again, this ratio underlines the sound and conservatively calculated capital adequacy of the Cooperative Financial Network.
Breakdown of risk-weighted assets
| Dec. 31, 2021 (€ million) | Dec. 31, 2020 (€ million) | Change (percent) | |
|---|---|---|---|
| Credit risk | |||
| of which Standardized Approach to credit risk | |||
| corporates | 186,026 | 174,109 | 6.8 |
| retail business | 151,832 | 141,663 | 7.2 |
| secured by mortgages on immovable property | 95,763 | 90,288 | 6.1 |
| Total under the Standardized Approach to credit risk | 567,398 | 520,320 | 9.0 |
| of which IRB approaches | |||
| corporates | 49,944 | 50,158 | –0.4 |
| retail business | 26,805 | 25,881 | 3.6 |
| equity investments | 29,382 | 27,857 | 5.5 |
| Total under IRB approaches | 117,468 | 115,464 | 1.7 |
| Total credit risk | 689,052 | 640,221 | 7.6 |
| Total market risk | 14,501 | 13,123 | 10.5 |
| Total operational risk | 50,894 | 50,537 | 0.7 |
| Total other exposures (including CVAs*) | 3,272 | 2,941 | 11.3 |
| Total | 757,719 | 706,821 | 7.2 |
* Total risk exposure based on the credit value adjustment (CVA)
Operating segments of the Volksbanken Raiffeisenbanken Cooperative Financial Network
Retail Customers and SMEs operating segment
The net interest income generated by the “Retail Customers and SMEs” operating segment amounted to €16,249 million in the reporting year (2020: €15,939 million). This increase was achieved despite the ECB’s low-interest-rate policy and the resulting squeezing of margins and was due, in particular, to the growth of lending at the cooperative banks and a further rise in the average volume of consumer finance at TeamBank.
Net fee and commission income advanced from €7,609 million in 2020 to €8,843 million in the year under review. In 2021, this line item was again positively influenced by income from payments processing (including cards processing) and from the securities and funds business. The volume-related income contribution generated by the Union Investment Group as a result of the average assets under management of €421.3 billion (December 31, 2020: €365.1 billion) was another key factor in the increase in net fee and commission income in the “Retail Customers and SMEs” operating segment. Net income from performance-based management fees totaled €381 million (2020: €32 million). This increase was largely the result of a higher number of high-volume funds fulfilling the conditions for the transfer of a performance-related management fee in 2021. Income from real estate fund transaction fees came to €90 million in the reporting year (2020: €55 million). DZ PRIVATBANK’s contributions to income from private banking and the fund services business were also up year on year. As at December 31, 2021, high-net-worth individuals’ assets under management, which comprise the volume of securities, derivatives, and deposits of customers in the private banking business, amounted to €23.2 billion (December 31, 2020: €20.0 billion). The value of funds under management amounted to €182.1 billion as at December 31, 2021 (December 31, 2020: €139.5 billion).
Gains and losses on trading activities in the “Retail Customers and SMEs” operating segment came to a net gain of €218 million (2020: net gain of €211 million). This line item is derived from trading in financial instruments, gains and losses on trading in foreign exchange, foreign notes and coins, and precious metals business, and gains and losses on commodities trading.
The net loss under gains and losses on investments came to €427 million in the year under review (2020: net loss of €162 million). The change in the gains and losses was attributable to realized gains and losses on sales of securities during the year and to measurement effects at the cooperative banks.
Loss allowances amounted to a net reversal of €137 million (2020: net addition of €1,659 million). This was due to the economic recovery during the reporting year – with company insolvencies remaining at a low level – and the strong regional and sectoral diversification of the lending business. In 2020, loss allowances had been mainly affected by the need for additions as a result of the COVID-19 pandemic.
The Cooperative Financial Network’s administrative expenses are subject to constant cost management. In the “Retail Customers and SMEs” operating segment, they amounted to €16,369 million in the reporting year (2020: €15,758 million). They included the effects of the first-time consolidation of the ZBI Group in the Union Investment Group and continued investment in digitalization. Staff expenses increased to €9,129 million in 2021 (2020: €8,811 million). The biggest influences on staff expenses were appointments to new and vacant positions and average pay rises, although there was a mitigating effect from people leaving – mainly due to retirement. Other administrative expenses advanced to €7,240 million (2020: €6,947 million), notably because of IT costs as a result of capital investment, public relations and marketing activities, consultancy costs, and the bank levy.
The profit before taxes of the “Retail Customers and SMEs” operating segment amounted to €8,833 million in the reporting year (2020: €6,253 million). The cost/income ratio was 65.3 percent (2020: 66.6 percent).
Central Institution and Major Corporate Customers
The net interest income of the “Central Institution and Major Corporate Customers” operating segment rose to €1,385 million in the year under review (2020: €1,227 million).
In the Corporate Banking business line, net interest income went up owing to the rise in the average lending volume, higher commitment fees for loans, and the recognition of bonus interest as a result of participating in the TLTRO III program. Net interest income from structured finance was higher than in the previous year. This increase was predominantly driven by international trade finance, especially export finance.
The year-on-year increase in net interest income from the investment promotion business resulted from substantial portfolio growth in recent years in response to high demand for development and support loans in all development lending segments. In the Capital Markets business line, the fall in net interest income attributable to business with institutional customers and the treasury portfolios resulted largely from the positive impact of the specific funding structure in 2020, which no longer applied in 2021.
Net fee and commission income in the “Central Institution and Major Corporate Customers” operating segment came to €530 million and was therefore slightly higher than in the previous year (2020: €521 million).
The principal sources of income were service fees in the Corporate Banking business line (in particular, from lending business including guarantees and international business), in the Capital Markets business line (mainly from securities issuance and brokerage business, agents’ fees, transactions on futures and options exchanges, financial services, and the provision of information), and in the Transaction Banking business line (primarily from payments processing including credit card processing, safe custody, and gains/losses from the currency service business).
Gains and losses on trading activities in the “Central Institution and Major Corporate Customers” operating segment came to a net gain of €133 million in 2021, down from a net gain of €646 million in the previous year.
Gains and losses on trading activities essentially relate to the business activities of the Capital Markets business line at DZ BANK. This item also includes income from money market business entered into for trading purposes and all derivatives transactions.
Gains and losses on trading activities in the Capital Markets business line amounted to a net gain of €616 million, up from a net gain of €521 million in 2020. In the customer business, which is mainly attributable to the cooperative banks, a year-on-year increase of 72 percent was achieved in own issues of structured products, with particularly strong growth for investment certificates. Flow business (direct sales of structured products without a subscription period) was also up by 14 percent as a result of significant market movement in 2021. As anticipated, the institutional customer business did not reach the previous year’s record level, which had been caused by exceptional factors (outbreak of the COVID-19 pandemic). In 2021, income remained at a very high level in the various customer groups but was down compared with the previous year. From an asset class perspective, a particularly significant proportion of the income was generated from the trading volume of bank bonds and interest-rate derivatives. The trading volume of interest-rate derivatives and in individual bond segments, such as government bonds and supranational, subsovereign, and agency (SSA) bonds, went up year on year. Interest-rate and currency management activities in corporate banking also saw higher trading volumes. Spot exchange trading was one of the main areas of volume growth, although income remained at the prior-year level.
Gains and losses on trading activities reflected the gains and losses from IFRS-related effects with an adverse change of €546 million. In both 2020 and 2021, the key factors behind this figure were the fair value gains and losses relating to own issues in the subcategories ‘financial assets and liabilities measured at fair value through profit or loss’ (fair value PL) and ‘financial assets and liabilities designated as at fair value through profit or loss’ (fair value option). In the prior year, a net gain had arisen for these issues under fair value gains and losses, primarily due to the widening of mark-ups in the bond market in the context of the COVID-19 pandemic. However, this item had the opposite effect on the income statement in 2021 due to the calmer conditions in the bond markets. In 2021, the fair value gains and losses on issues in the aforementioned categories amounted to a net loss of €257 million (2020: net gain of €149 million). Within this amount, a net gain of €34 million arose from other gains and losses on valuation of financial instruments. Reserves increased in the category of financial instruments measured at amortized cost. There was also an adverse impact from derivative hedging transactions that are related to group finance and are therefore not permitted to be included in hedge accounting. In subsequent years, this adverse impact on earnings will be eliminated due to the pull-to-par effect. To a lesser extent, ineffectiveness in hedge accounting also took its toll on earnings. This expense was matched by income in the same amount recognized under other gains and losses on valuation of financial instruments.
Gains and losses on investments improved markedly from a net gain of €53 million in 2020 to a net gain of €225 million in the reporting year. This was predominantly due to income from the sale of securities, although some of the gains were offset by expenses arising from the unwinding of hedges in the context of portfolio fair value hedge accounting.
In 2021, loss allowances in the “Central Institution and Major Corporate Customers” segment amounted to a net reversal of €241 million (2020: net addition of €517 million), which was mainly attributable to the progress made with scaling back the portfolio at DVB Bank and reversals in connection with individual exposures as a consequence of the better economic environment in some shipping sectors. The elevated expense for loss allowances in 2020 had been primarily due to the COVID-19 pandemic.
Other gains and losses on valuation of financial instruments came to a net gain of €102 million in 2021 (2020: net loss of €74 million). While there was an improvement in the credit-risk-related measurement effects relating to financial assets designated as at fair value through profit or loss (fair value option) and derivatives used for purposes other than trading, the gain/loss from ineffectiveness in hedge accounting declined.
Administrative expenses amounted to €1,851 million in 2021 (2020: €1,866 million).
Due to the factors described above, profit before taxes in the “Central Institution and Major Corporate Customers” operating segment rose to €717 million in the year under review (2020: €109 million). The cost/income ratio was 79.5 percent in 2021 (2020: 74.9 percent).
Real Estate Finance
The net interest income of the “Real Estate Finance” operating segment of the Cooperative Financial Network amounted to €1,717 million in 2021 (2020: €1,552 million). The main reason for this increase was the portfolio growth generated from new business. In the previous year, net interest income had been impacted by an additional charge arising from a special addition to provisions relating to building society operations of €115 million at Bausparkasse Schwäbisch Hall. Net interest income arising on investments declined once again because capital market rates for investments remained low.
The net expense traditionally reported in the “Real Estate Finance” operating segment under net fee and commission income amounted to €100 million in 2021 (2020: €112 million).
Gains and losses on investments in the “Real Estate Finance” operating segment improved to a net gain of €73 million (2020: net gain of €67 million).
Loss allowances in the “Real Estate Finance” operating segment saw a net addition of €43 million in the reporting year (2020: net addition of €108 million). The prior-year loss allowance requirement had largely been attributable to additions in connection with the COVID-19 pandemic.
Other gains and losses on valuation of financial instruments in the “Real Estate Finance” operating segment deteriorated year on year, amounting to a net gain of €56 million in 2021 (2020: net gain of €115 million). This decrease was mainly due to the movement of credit spreads. A narrowing of credit spreads on bonds from eurozone periphery countries was evident in both 2021 and 2020, although this had resulted in a significantly more positive valuation effect in 2020.
Administrative expenses held steady at €894 million in 2021 (2020: €891 million).
Profit before taxes in the “Real Estate Finance” operating segment amounted to €865 million in the year under review (2020: €684 million). The cost/income ratio of the “Real Estate Finance” operating segment improved to 49.6 percent (2020: 52.9 percent).
Insurance
Premiums earned rose to €18,994 million (2020: €18,741 million), reflecting the integral position held by the R+V subgroup within the Cooperative Financial Network.
Premium income earned in the life insurance and health insurance business grew by a total of €89 million to €9,400 million (2020: €9,311 million).
Premiums earned from the life insurance business fell by €10 million to €8,635 million. The new guarantees and occupational pension businesses performed well, but activities contracted in traditional product business, unit-linked life insurance, and credit insurance. In the health insurance business, net premiums earned rose by €100 million to €766 million, with notably strong growth in private supplementary health insurance and full health insurance product groups, but a fall in premiums for international health insurance.
In the non-life insurance business, premium income earned grew by €217 million to €6,564 million, with most of this growth being generated from retail customer business, motor vehicle insurance, and corporate customer business.
Premiums earned from the inward reinsurance business fell by €54 million to €3,029 million. Europe remained the largest market for inward reinsurance. Growth was generated from the motor vehicle, fire, and property classes of insurance, and from other products. However, the positive effects were outweighed by a contraction in the loan/deposit product group.
Gains and losses on investments held by insurance companies and other insurance company gains and losses improved to a net gain of €5,280 million (2020: net gain of €2,072 million). This figure includes the fair value-based gains and losses on investments held by insurance companies in respect of insurance products constituting unit-linked life insurance for the account and at the risk of employees, employers, and holders of life insurance policies (unit-linked contracts). The gains and losses on investments held by insurance companies attributable to unit-linked contract products generally have no impact on profit/loss before taxes, because this line item is matched by an insurance liability addition or reversal of the same amount. The net gain on investments held by insurance companies, excluding unit-linked contracts, amounted to €2,985 million in 2021 (2020: €2,137 million).
The level of long-term interest rates was higher than in 2020. The movement of spreads on interest-bearing securities had a positive impact on this item. Spreads had widened in 2020 but held steady in the reporting year, although some widening was evident again at the end of 2021. A weighted spread calculated in accordance with R+V’s portfolio structure stood at 66.7 points as at December 31, 2021 (December 31, 2020: 50.3 points; December 31, 2019: 53.5 points).
During 2021, equity markets relevant to R+V performed better than in 2020. For example, the EURO STOXX 50, a share index comprising 50 large listed companies in the eurozone, saw a rise of 745 points from the start of 2021, closing the year on 4,298 points. This index had fallen by 192 points in 2020. In the reporting year, movements in exchange rates between the euro and various currencies were generally more favorable than in the previous year. For example, the US dollar/euro exchange rate on December 31, 2021 was 0.879 compared with 0.817 as at December 31, 2020. For comparison with the previous twelve months, the corresponding rate as at December 31, 2019 had been 0.891.
Overall, these trends in 2021 essentially resulted in a €2,109 million positive change in unrealized gains and losses to a net gain of €2,616 million (2020: net gain of €507 million), a €38 million increase in the contribution to earnings from the derecognition of investments to a gain of €70 million (2020: gain of €32 million), an improvement of €1,513 million in the foreign exchange gains and losses to a net gain of €761 million (2020: net loss of €752 million), and an €89 million improvement in the balance of depreciation, amortization, impairment losses, and reversals of impairment losses to a net expense of €76 million (2020: net expense of €165 million). In addition, net income under current income and expense fell by €36 million to €2,096 million (2020: €2,132 million). Other insurance gains and losses and non-insurance gains and losses deteriorated by €505 million to a net loss of €187 million (2020: net gain of €318 million).
Owing to the inclusion of provisions for premium refunds (particularly in the life insurance and health insurance business) and claims by policyholders in the fund-linked life insurance business, the change in the level of gains and losses on investments held by insurance companies also affected the ‘insurance benefit payments’ line item presented below.
Insurance benefit payments amounted to €20,356 million, which equated to a rise of €2,795 million compared with the corresponding figure of €17,561 million in the prior year.
The decrease in insurance benefit payments reflected both the trend in net premiums earned and the policyholder participation in gains and losses on investments held by insurance companies.
At the companies offering personal insurance, the changes in insurance benefit payments were in line with the change in premium income and in gains and losses on investments held by insurance companies and other insurance company gains and losses. For example, a large part of the net gain of €2,846 million under gains and losses on investments held by insurance companies from unit-linked life insurance was also reflected in insurance benefit payments. An amount of €730 million (2020: €739 million) was added to the supplementary change-in-discount-rate reserve.
The overall claims rate was above the level of the prior year; as were the rates for major claims, basic claims, and natural disaster claims. An accumulation of natural disaster claims occurred in 2021 owing to storms in the early summer (notably Storm Bernd), resulting in claims incurred of €418 million as at the reporting date. There was again a mitigating impact from motor vehicle insurance as a result of the COVID-19 pandemic.
In the inward reinsurance business, the net claims ratio was down by 9.7 percentage points compared with the prior year at 73.5 percent (2020: 83.2 percent). The ratios for major and basic claims were below those in 2020, but the ratio for medium claims went up. As a result, the overall claims rate was below the level of the prior year. In 2020, the COVID-19 pandemic had given rise to a provision of €323 million, with a corresponding impact on earnings. As at the reporting date, claims of €138 million had been received from ceding insurers, an increase of €42 million compared with the figure of €96 million at the end of 2020. The Texas Freeze winter storm in the US gave rise to major claims of €75 million. An amount of €100 million (net, after claims covered by reinsurers) was recognized for Storm Bernd, and €63 million for the storms in June 2021. Hurricane Ida was the source of net claims amounting to €38 million and the tornado outbreak in December 2021 gave rise to net claims of €30 million.
Insurance business operating expenses incurred in the course of ordinary business activities went up by €137 million to €3,183 million (2020: €3,046 million). The largest portion of the change was attributable to the non-life division, which saw an increase of €59 million or 4.0 percent. Expenses also rose in the inward reinsurance business, by €41 million or 5.4 percent. In addition, the life/health division accounted for an increase of €36 million, which equated to a 4.4 percent rise.
The factors described above meant that profit before taxes improved by €557 million to €772 million (2020: €215 million).