Our primary insurer ERGO is picking up pace. It is consistently and successfully pursuing its five-year Strategy Programme launched in 2016, as a consequence of which ERGO has strengthened its competitive position, and was once again able to exceed its result target in 2018.
Clement B. Booth Member of the Board of Directors of Hyperion Insurance Group, United Kingdom Member since 27 April 2016
Investmentaktiengesellschaft für langfristige Investoren TGV, Bonn (Chair) Möller & Förster GmbH & Co. KG, Hamburg (Chair of Advisory Council)6
Group 025 Group structure 025 Our brands 028 Remuneration report 029
Risk report 066 Risk governance and risk management system 066 Significant risks 066 Solvency ratio under Solvency II 073 Other risks 073 Summary 074
The new remuneration system for the Board of Management, which was introduced in 2018, was voted on by the Annual General Meeting on 25 April 2018 and approved by the majority. It meets the relevant company and supervisory law requirements, including those of the German Corporate Governance Code.
The Supervisory Board set a target corridor of 0–200% with the following linear scaling: Lowest TSR in peer group = 0% achievement of objective Highest TSR in peer group = 200% achievement of objective
According to the employment contracts for members of the Board of Management appointed for the first time after 1 January 2017, all unpaid variable remuneration components are forfeited in the event of termination of a Board member’s contract by the Company for good cause or in the event of relinquishment by a Board member of their appointment to the Board of Management without good cause.
Surviving spouses and registered civil partners normally receive a pension amounting to 60% of the defined benefit or insured occupational pension; single orphans receive 20% and double orphans 40%. The total amount may not exceed the occupational pension of the Board member. If the Board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
Munich Re Group Annual Report 2018 1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2018 annual bonus. The amounts shown for the annual bonus are based on estimates, i.e. the relevant provisions and the additional/reduced expenditure for the 2017 annual performance. The amounts shown for the 2017 annual performance comprise the respective provision for 2017 and the relevant additional/reduced expenditure for 2016. The actual bonus payments for 2017 can be seen in the remuneration tables “Remuneration paid in accordance with the German Corporate Governance Code” on page 42 ff.
Hermann Pohlchristoph Board member (joined: 27 April 2017) Overall performance evaluation
Other Total 2,179,733 1,497,528 3,224,488 2,380,997 Pension expenses 542,425 528,066 790,059 842,831 Total remuneration 2,722,158 2,025,594 4,014,547 3,223,828
− We clearly assign responsibilities and specify the levers for adding value for both management and staff.
Munich Re’s value orientation is also reflected in the aftertax return on risk-adjusted capital (RORAC). RORAC is a mixture of accounting ratios and economic indicators. It relates the performance indicator customary in the capital markets (IFRS consolidated result) – which we adjust to eliminate the risk-free return after tax on additional available economic equity – to the necessary capital requirement.
Business performance of the Group and overview of investment performance 1 The RoE is calculated on the basis of the consolidated result, including the result attributable to non-controlling interests. We use the figures as at 31 December 2017 (€28.2bn), 31 March 2018 (€27.2bn), 30 June 2018 (€26.9bn), 30 September 2018 (€27.1bn) and 31 December 2018 (€26,5bn) to calculate the average equity for the reporting year.
At €49,064m, gross premiums written by Munich Re were at the same level as in the previous year (€49,115m). A decline in premium income in the life and health reinsurance segment, which was attributable to the expiry or restructuring of large-volume capital-relief treaties, was largely compensated for by robust growth in some areas of property-casualty reinsurance.
Information on events after the balance sheet date can be found on page 169.
The fair value of our investment portfolio remained largely unchanged as against the previous year. Increasing risk spreads on fixed-interest securities, the reduction in our share portfolio through disposals and negative market development had a negative impact on value. This was compensated for by the development of exchange rates, the increase in the fair value of property due to updated fair value assumptions and higher deposits retained on assumed reinsurance.
The investment result was down €340m on the previous year, largely due to higher write-downs of shares because of falling equity markets.
1 Total premium income includes not only gross premiums written, but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the applicable statutory accounting guidelines.
The technical result was slightly higher than in the previous year. The investment result saw a decline to €94m (114m), owing in particular to lower gains on disposals. Altogether, the operating result remained almost stable year on year.
The technical result in the ERGO Property-casualty Germany segment was up on the previous year. Overall, major-loss expenditure from natural catastrophes in the past financial year remained within normal bounds. Beyond this, claims experience was favourable in our core business. At the beginning of the reporting year, natural catastrophe losses, particularly those from Winter Storm Friederike, had exceeded expectations.
Inflows from investing activities were determined by the change from the acquisition and sale of investments for unit-linked life insurance contracts totalling €485m, which contrasted with outflows of €889m for obtaining control of consolidated subsidiaries.
Property-casualty underwriting risk The property-casualty risk category encompasses the underwriting risks in the property, motor, third-party liability, personal accident, marine, aviation and space, and credit classes of insurance, together with special lines also allocated to property-casualty. Additional information on risks in property-casualty insurance can be found in the Notes to the consolidated financial statements on page 161 ff.
We use appropriate limit and early-warning systems in our asset-liability management to manage market risks. Derivatives such as equity futures, options and interestrate swaps – which are used mainly for hedging purposes – also play a role in our management of the risks. The impact of options is taken into account in the calculation of solvency capital requirements. Information on derivative financial instruments can be found in the Notes to the consolidated financial statements on page 134 f.
Property risk As a consequence of increases in market values of our property portfolio, there has been a significant increase in property risk.
As part of the normal course of business, Munich Re companies are involved in court, regulatory and arbitration proceedings in various countries. The outcome of pending or impending proceedings is neither certain nor predictable. However, we believe that none of these proceedings will have a significant negative effect on the financial position of Munich Re. In a ruling in December 2018, the German Federal Court of Justice endorsed the industry’s existing practice with regard to trustee independence in private health insurance – an issue that had been the subject of much debate in the industry.
In accordance with the prescribed processes, our Board committees explicitly defined the risk appetite for significant risk categories in the year under review, and quantified it with key figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout the Group. During the whole of 2018, risk exposures were regularly quantified and compared with the risk appetite. We assess Munich Re’s risk situation to be manageable and under control.
Kingdom, it is still not possible to rule out a disorderly outcome (hard Brexit) with corresponding consequences for individual EU countries. A number of Munich Re insurance and reinsurance units conduct business in the United Kingdom, and the country’s departure from the EU will have implications for that business. We have set up a Group-wide project to ensure that our local structure is adapted to the direct effects of Brexit. These preparation measures will enable Munich Re to continue to write business in the UK, regardless of the outcome of the Brexit negotiations. In addition, there may be indirect effects on our business – for instance, owing to negative economic development, falling exchange rates or rising inflation. However, also because there may be contrary effects, what this may mean for Munich Re is not currently foreseeable. Taking into account the various possible Brexit scenarios, as things stand at present we do not expect any significant negative direct or indirect effects overall on Munich Re’s assets, liabilities, financial position or results. In Germany, government action with implications for private health insurance cannot be ruled out, especially if political parties advocating a “citizens’ insurance scheme” influence the policies of a future German Federal Government. At the present time, however, it is not possible to predict what these implications might be.
The currently still solid economic growth in many parts of the world should have a positive impact on the demand for insurance cover, and trigger higher premium volume in most classes of insurance. The reporting-year reinsurance renewals brought about a gradual improvement in rates. In addition, a less expansionary monetary policy could also lead to a normalisation of the bond markets. Although this would entail price losses, it would be favourable to our insurance business and bring higher returns in the long run. At the same time, the pressure on our cedants from the still prevailing low-interest-rate environment opens up diverse business opportunities for our reinsurance activities, although this is currently also giving rise to challenges for our investment. We are closely monitoring the potential consequences of political movements increasingly critical of globalisation. We have also made operational preparations for the potential implications of Brexit, with the aim of minimising the risks involved.
For the 2018 financial year, we had forecast a consolidated result of €2.1–2.5bn at the start of the year. The figure achieved – €2.3bn – was right in the middle of our anticipated profit guidance range – despite volatile capital markets and high losses from natural catastrophes in the fourth quarter. The return on equity (ROE) amounted to 8.4%.
At the beginning of the year, we had forecast a result in the range of €250–300m for the ERGO field of business. Thanks to the good result for the first nine months, we were able to raise our forecast to over €350m in the third quarter. With a very pleasing consolidated result of €412m, ERGO significantly exceeded the revised forecast. Apart from very good operational performance, particularly in the ERGO International segment, the good result for the year was also attributable to various one-off effects that partly offset each other.
Premium volume in motor reinsurance increased significantly in the reporting year. This was mainly driven by a new large-volume reinsurance quota share treaty in Australia and business expansion in various other markets. But the technical result was lower than in the previous year, primarily on account of reduced reserve releases for claims from prior accident years.
In third-party liability reinsurance, premium income increased in the reporting year mainly on account of new business. A significant decrease in major-loss expenditure caused the underwriting result before claims equalisation
Yields on ten-year US government bonds increased during the course of the year to over 3.2%. The rise was driven by strong economic growth, higher inflation and monetary tightening. Towards the end of the year, however, yields fell again due to increasing risk aversion on global capital markets.
As things stand at present, we expect to achieve an adequate German GAAP (HGB) result in 2019, although it is likely to be lower than in the reporting year.
Notes to the consolidated balance sheet – Equity and liabilities 141 18 Fair value hierarchy of liabilities 142 19 Subordinated liabilities 144 20 Unearned premiums 144 21 Provision for future policy benefits 145 22 Provision for outstanding claims 145 23 Other technical provisions 148 24 Gross technical provisions for unit-linked life insurance 148 25 Other provisions 149 26 Bonds and notes issued 153 27 Deposits retained on ceded business 153 28 Other liabilities 153 29 Liabilities from financing activities 154
IV. Other securities 1. Available for sale (7) 139,272 143,845 –4,572 –3.2 2. At fair value through profit or loss (8) 2,616 1,979 636 32.1
Statement of recognised income and expense for the 2018 financial year €m 2018 Prev. year Consolidated result 2,275 392 Currency translation
Unrealised gains and losses on investments Gains (losses) recognised in equity –1,602 970 Recognised in the consolidated income statement –527 –610
Particularly in primary insurance and reinsurance, the use of estimates for measuring technical provisions is of substantial significance, given that measurement is invariably based on models and the development of future cash flows from insurance contracts cannot be conclusively predicted. But judgements and estimates play a significant role in the case of other items as well.
In the second quarter, the previous-year figures for intangible assets in the property-casualty reinsurance and life and health reinsurance segments were adjusted by €235m in the segment balance sheet. This figure relates to an acquired insurance portfolio that was transferred within the Group in 2016 to a company disclosed in the property-casualty reinsurance segment. As responsibility for managing the business affected rested and continues to rest with the life and health reinsurance segment, the portfolio is now disclosed in this segment and the previous year’s figures have been adjusted accordingly.
IFRS 17 will involve fundamental changes to the accounting for insurance contracts and related processes. As the required changes will involve a considerable amount of work, we started to analyse them in great detail at an early stage. An implementation project was set up shortly after the publication of the new requirements in which all important areas of our reinsurance and primary insurance group have been involved from the outset. We thus ensure at an early stage that all special aspects of the individual insurance lines of business are taken into account.
Sponsored unconsolidated structured entities Munich Re provides structuring and consultancy services for clients within the context of the foundation and structuring of third-party securitisation vehicles. As at 31 December 2018, Munich Re did not have any interests in these structured entities.
Recognition of financial instruments Financial assets are accounted for at the trade date.
Net investment result The net investment result comprises regular income, income from write-ups, gains and losses on the disposal of investments, other income, write-downs of investments, management expenses, interest charges and other expenses. Regular income and expenses from investments not measured at fair value through profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are spread over the period of maturity, with impact on profit or loss.
Deferred tax assets and liabilities are disclosed on a net basis, provided that they refer to the same taxable entity and tax office. The offsetting is made to the extent possible with respect to the underlying tax receivables and liabilities.
B. Investments I. Land and buildings, including buildings on third-party land 433 309 2,150 1,532 2,937 2,961 221 200 111 119 5,851 5,121 II. Investments in affiliated companies, associates and joint ventures 44 44 1,433 1,225 441 331 75 72 517 544 2,509 2,216 Thereof: Associates and joint ventures accounted for using the equity method 28 28 1,371 1,164 387 282 9 24 502 513 2,296 2,010
Adjusted net expenses for claims and benefits –12,132 –13,474 –2,033 –2,053 –2,047 –2,060 1 Information on the combined ratio is provided in the management report under “Important tools of corporate management”. 2 Property-casualty business and short-term health business (excluding health insurance conducted like life insurance). 3 No adjustment for property-casualty reinsurance.
Allocation of investments (including insurance-related investments) to levels of the fair value hierarchy €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 177 177 Investments in associates and joint ventures measured at fair value 0 0 36 36 Other securities available for sale
Of the amounts held on deposit with banks, €3,216m (3,122m) is due within one year. With these deposits, the fair values largely correspond to the carrying amounts. Assets pledged as security and other restrictions on title amount to €13m (12m) for deposits with banks.
In the fourth quarter of 2018, ERGO Lebensversicherung AG agreed to sell the shopping mall Gänsemarkt-Passage, Hamburg, which is used as an investment property, to SIGNA Real Estate Group. At the balance sheet date, we recognised this investment property as held for sale. Its disposal is planned for the second quarter of 2019. Furthermore, as at 31 December 2018, we recognised as held for sale four properties held by VICTORIA Lebensversicherung Aktiengesellschaft, Düsseldorf, and a further property held by several ERGO insurance companies. All of these properties had previously been held for investment purposes by the respective companies. As part of the classification of one of these properties as held for sale we reversed an impairment loss of €2m that had been recognised in previous years, with impact on the income statement.
Scheduled changes in the provision for future policy benefits contain the changes deriving from prospective calculation as a result of premium payments, claims and the unwinding of discount in the 2018 financial year.
The annuity claims provision involves periodic payments for occupational and other disability cases and is usually due long term. A major part of this provision is established in the life and health reinsurance and ERGO Life and Health Germany segments for future annuity payments; a small part refers to provisions for annuities in personal accident, liability and workers’ compensation insurance. The biometric actuarial assumptions are selected using appropriate actuarial principles.
% 31.12.2018 Prev. year Quoted market price in an active market Fixed-interest securities 41 40 Non-fixed-interest securities 22 23
Sensitivity analysis €m 31.12.2018 Prev. year Increase in actuarial discount rate by 50 BP –531 –534 Decrease in actuarial discount rate by 50 BP 593 627 Increase in salary/entitlement trends by 10 BP 23 22 Decrease in salary/entitlement trends by 10 BP –20 –22 Increase in pension trends by 10 BP 60 61 Decrease in pension trends by 10 BP –61 –59 Increase in medical cost trend rate
In addition to expenses of €439m (399m) for services rendered, other operating expenses chiefly include interest expenses of €87m (102m), other write-downs of €78m (29m), and other tax of €119m (127m). They also contain expenses of €16m (13m) for owner-occupied property, some of which is also leased out.
Munich Re Group Annual Report 2018 40 Disclosures on risks from propertycasualty insurance business
The development of our claims reserves and the corresponding run-off results are shown in the Notes to the consolidated balance sheet – Equity and liabilities (22) Provision for outstanding claims.
HSB Fund I LP, Dover, Delaware11 100.0000 HSB Group Inc., Dover, Delaware 100.0000 HSB International (India) Private Limited, Gujarat 100.0000 HSB Japan K.K., Minato-KU, Tokyo 100.0000 HSB Secure Services Inc., Hartford, Connecticut 100.0000 HSB Solomon Associates Canada Ltd., Saint John, New Brunswick 100.0000 HSB Solomon Associates LLC, Dover, Delaware 100.0000 HSB Specialty Insurance Company, Hartford, Connecticut 100.0000 HSB Technical Consulting & Service (Shanghai) Co. Ltd., Shanghai 100.0000 Ibero Property Portugal – Investimentos Imobiliarios S.A., Lisbon 100.0000 Ibero Property Trust S.A., Madrid 100.0000 IDEENKAPITAL Financial Engineering GmbH, Düsseldorf 100.0000 IDEENKAPITAL Financial Service GmbH i. L., Düsseldorf 100.0000 IDEENKAPITAL GmbH, Düsseldorf 100.0000 IDEENKAPITAL Media Finance GmbH, Düsseldorf 50.1000 IDEENKAPITAL Metropolen Europa GmbH & Co. KG, Düsseldorf 72.3477 iii, Munich4 100.0000 IK Einkauf Objekt Eins GmbH & Co. KG, Düsseldorf 100.0000 IK Einkauf Objektmanagement GmbH, Düsseldorf 100.0000 IK Einkaufsmärkte Deutschland GmbH & Co. KG, Düsseldorf 52.0387 IK Premium Fonds GmbH & Co. KG, Düsseldorf 100.0000 IK Premium Fonds zwei GmbH & Co. KG, Düsseldorf 100.0000 IKFE Properties I AG, Zurich 63.5708 Imofloresmira – Investimentos Imobiliarios S.A., Lisbon 100.0000 ITERGO Informationstechnologie GmbH, Düsseldorf 100.0000 JSC “ERV Travel Insurance”, Moscow 100.0000 K & P Pflegezentrum Uelzen IMMAC Renditefonds GmbH & Co. KG, Düsseldorf 84.8445 KA Köln.Assekuranz Agentur GmbH, Cologne 100.0000 Kapdom-Invest GmbH, Moscow 100.0000 KS SPV 23 Limited, London 100.0000 LEGIAL AG, Munich 100.0000 Lietuva Demetra GmbH, Munich 100.0000 Lloyds Modern Corporation, Dallas, Texas 100.0000 Longial GmbH, Düsseldorf 100.0000 Lynt Farm Solar Limited, London 100.0000 MAGAZ FOTOVOLTAICA S.L.U., Alcobendas 100.0000 Mandaat B.V., Druten 100.0000 Marina Salud S.A., Alicante 65.0000 Marina Sp.z.o.o., Sopot 100.0000 MEAG Anglo Celtic Fund, Munich4 100.0000 MEAG ATLAS, Munich4 100.0000 MEAG Benedict, Munich4 100.0000 MEAG Cash Management GmbH, Munich 100.0000 MEAG EDK Quantum, Munich4 100.0000 MEAG EDL CurryGov, Munich4 100.0000 MEAG EDS AGIL, Munich4 100.0000 MEAG ERGO Belgium Equities, Munich4 100.0000 MEAG ESUS 1, Munich4 100.0000 MEAG EUR Global 1, Munich4 100.0000