Overview of Munich Re Munich Re’s global presence Front cover flap Key figures Inside front cover flap Quarterly figures Inside back cover flap Our brands Back cover flap Important dates Back cover
An overview of the ratings from the leading rating agencies can be found on page 99
Our business as an insurer and reinsurer is the professional handling of risk. We create value by using our extensive risk knowledge and sophisticated underwriting tech­ niques to make risks from many different areas of private and economic life manage­ able – for our clients and for us.
The Board of Management is responsible for managing the Company, setting objec­ tives and determining strategy. In doing so, it is obliged to safeguard Company inter­ ests and endeavour to achieve a long­term increase in the Company’s value. The Board of Management is responsible for effecting adequate risk management and risk control in the Company. It must ensure compliance with statutory requirements and internal company directives. In mid­2012, we strengthened the Company’s compliance func­ tion, establishing a separate unit that reports directly to the Chairman of the Board of Management.
Special and Financial Risks (SFR) is in charge of the classes of credit, aviation and space, agriculture, enterprise and contingency risks, and of alternative markets business. Insurance risk securitisation and risk transfer to the capital markets are handled by our Risk Trading Unit. In addition, the division attends to our own reinsurance requirements (retrocession).
Munich Reinsurance Company of Canada, Toronto N.M.U. Group Limited, London The Roanoke Companies Inc., Schaumburg, Illinois Temple Insurance Company, Toronto The Boiler Inspection and Insurance Company of Canada, Toronto The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, Hartford, Connecticut The Hartford Steam Boiler Inspection and Insurance Company, Hartford, Connecticut The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware The Midland Company, Cincinnati, Ohio Watkins Syndicate Hong Kong Limited, Hong Kong Watkins Syndicate Middle East Limited, Dubai Watkins Syndicate Singapore Pte. Limited, Singapore 1 A detailed list of shareholdings can be found on page 276 ff. in the notes to the consolidated financial statements. 2 Only subsidiaries and branches outside Germany with equity capital generally exceeding €5m are listed by name. 3 Units that also transact business in Munich Health and are therefore allocated proportionately to reinsurance.
Munich Re’s objective is to analyse risks from every conceivable angle and to assess and diversify them, creating lasting value for shareholders, clients, and staff with high profits in relation to the risks assumed. A guiding principle of our entrepreneurial thinking and activity is to increase Munich Re’s share price on a sustained basis. This is the aim of our active capital management and the consistent application of value-based management systems.
In selecting suitable targets, contrasting aspects have to be considered and weighed. On the one hand, undue complexity should be avoided in order to ensure transparency for investors, staff, and the public. On the other hand, the challenge lies in reflecting the often complex economic realities as closely as possible and enshrining added value as the Group’s overriding guiding principle. The background is multifaceted, and the parallel use of different performance indicators unavoidable.
Prof. Dr. oec. Dr. jur. Ann-Kristin Achleitner Member since 3 January 2013 Scientific Director of the Center for Entrepreneurial and Financial Studies (CEFS) at the Technical University of Munich
(property-casualty indicator reinsurance) Individual contribution 30%–65% to corporate success Divisional objectives Value-based economic performance indicators: − Property-casualty reinsurance Value added3 and Munich Health − Life reinsurance Value added by new business 4
Board members appointed as from 1 April 2012 are entitled to an occupational pension on retiring from active service with the Company after reaching the age of 62 or, at the latest, at the end of the calendar year in which they turn 67.
Pension adjustment In the case of Board members appointed before 2009, occupational pensions and pensions for surviving dependants are reviewed for adjustment if salaries payable under pay-scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay-scale categories) since the pensions were last fixed or more than three years have passed since that date. The adjustment made will at least be in line with the increase in the cost of living in the meantime according to the consumer price index for Germany. This arrangement also applies to Board members newly appointed in the period from 2009 to 31 March 2012 who received a pension commitment from the Company for the first time before 1 January 1999. For Board members appointed as from 2009 who did not receive a pension commitment from the Company before 1 January 1999, and for Board members appointed as from 1 April 2012, occupational pension and benefits for surviving dependants are adjusted by 1% annually from the date when the pension or benefit starts being drawn, in accordance with Section 16 para. 3 item 1 of the German Employers’ Retirement Benefits Act. Vested benefits are not adjusted.
5 Entitled to vested benefits under the German Employers’ Retirement Benefits Act in the event of premature termination of employment, and to improved vested benefits in the event of regular termination of employment.
— Global economic growth curbed by recession in the eurozone and cooling in China
Until 2011, the segment balance sheet and segment income statement had reflected the situation prior to the elimination of intra-Group business (including a separate column for consolidation). From 2012, the segments are shown after the elimination of intra-Group business, with the previous year’s figures adjusted accordingly.
In the year under review, our effective tax rate was 21.2% (–345.0%). In addition to the gratifying development of the results recorded by subsidiaries in countries with lower tax rates, tax-free income from investments also contributed to the low effective tax rate in 2012, as did the positive results of our US subsidiaries. These could be offset against loss carry-forwards from prior years, for which no deferred tax assets had previously been recognised. As a result, the profits of our US subsidiaries were earned without taxation. A comparison of the effective tax rate for the year under review with that of the pre vious year is of limited value, as the rate for the previous year was strongly affected by the low result.
The decrease in premium income adjusted for changes in exchange rates was largely attributable to the termination of large-volume treaties in China. By contrast, organic growth in motor business as a consequence of our cooperation with a strategic partner and expansion of our worldwide agricultural portfolio had a favourable effect on premium income.
At €515m, man-made major losses were at the same level as in the previous year (€510m), accounting for 3.1 (3.3) percentage points in relation to net earned premiums. Large-scale losses derived from the accident involving cruise ship Costa Concordia, which ran aground off the Italian island of Giglio on 13 January 2012 and an explosion in a German industrial park in March. Based on current estimates, claims costs for each of these two loss events will be in the mid to high double-digit million euro range.
The largest loss events affecting the Europe and Latin America Division were the two earthquakes in Italy. Compared with the previous year, in which there had been only moderate burdens from major losses, the combined ratio rose to 92.7% (90.4%).
ERGO Insurance Group signed a joint venture agreement with Avantha Group in India on 1 November 2012. The new company, which will be based in Mumbai and go by the name of Avantha ERGO Life Insurance Company, will offer life insurance products for private clients. Operations are scheduled to commence in 2014, subject to approval by the competent authorities. ERGO will initially have a 26% stake in the joint venture.
The combined ratio in German business was 98.0% (95.5%) in 2012. Improvements in motor insurance contrasted with significant frost damage losses from the late cold spell in February and a number of random major losses in summer. As a result of the new fully consolidated segment view, the relief from intra-Group reinsurance in the segment is no longer visible. In addition, we took the precaution of increasing the provisions for individual lines of business within the range of actuarial estimates.
In reinsurance, the combined ratio improved to 99.2 (99.4)%, thanks to the more favourable claims experience of business in force and the acquisition of profitable new business.
In the 2012 financial year, we cut back our holdings of southern European and Irish government bonds by €0.8bn to €5.0bn and made the bulk of our European bond investments in the issues of supranational institutions such as the EFSF and the EU. We no longer have any government bonds from Portugal or Greece in our portfolio. Only around 3% of our government bonds are now from Italy, with a further 1% from both Ireland and Spain. These bonds are held almost entirely by our primary insurers.
1 Return in % p.a. on the average market value of the investment portfolio at the quarterly reporting dates. 2 3.3% excluding the earnings from economic risk transfer to the capital market that are posted in the investment result.
Our subordinated bonds are recognised in part as own funds by the German Federal Financial Supervisory Authority (BaFin). When this is considered in calculating the strategic debt, the latter is reduced to €1,737m and the debt leverage amounts to only 6.0%.
Significant agreements which take effect, alter or terminate upon a change of control following a takeover bid, and resultant implications Based on our underwriting guidelines, our reinsurance agreements generally include a clause that grants both parties to the agreement a right of extraordinary cancellation in the event that “the other party merges with another company or its ownership and control undergoes a material change”. Such or similar clauses are typical of the industry. Munich Reinsurance Company’s Long-Term Incentive Plan provides for special exercise options in the event of a change of control. This plan is for members of the Board of Management, senior management and top executives in Munich Re’s international organisation, which is explained in detail in the remuneration report.
Munich Re’s global healthcare insurance and reinsurance expertise is combined under the Munich Health brand. Munich Health devises integrated solutions precisely tailored to clients’ needs in order to tap the strongly growing business potential in each market.
With its emphasis on meeting consumer requirements as fully as possible, ERGO also attaches great importance to clients’ opinions in the development of products. A newly launched accident protection policy, for instance, was specifically based on clients’ wishes and expectations. The assistance services of the individual product alternatives are tailored to insureds’ living situations and the degree of injury suffered, with an ongoing advisory service provided after the accident. The new terms and conditions are clearly worded and easy to understand. Extensive studies on clients’ expectations regarding security, flexibility and return have also been used in developing the new life insurance product generation that ERGO will launch in 2013.
In this business field, we utilise the strategic pooling of experience and expertise in health reinsurance, international health primary insurance and risk management services to design new and innovative solutions. For the analysis of health risks, Munich Health provides its reinsurance clients with programmes and tools for standardised medical risk assessment. To enhance the efficiency of internal processes, Munich Health offers new automation options and test algorithms, e.g. in the transmission of claims notification and claims processing data. These help to detect billing errors and fraud at an early stage, thus reducing medical and operating costs.
Taking a long-term perspective is also a feature of our investment in staff development. Here we have expanded our range of tools for strategic workforce planning in reinsurance to include our international locations, thus obtaining a well-rounded picture of future qualification and development requirements. Our declared objective is to gear qualifications more strongly to strategic orientation factors, such as markets, products and clients.
— Supplementary criteria, to limit losses that can arise out of individual risk types or accumulations, such as natural hazards, terrorism and pandemics, and to limit market and credit risks that could endanger Munich Re’s ongoing viability were they to materialise.
We compare our internal risk model with the current status of Solvency II and take part in the Quantitative Impact Studies and stress tests (European Insurance Stress Test).
Risk limitation is derived from the risk strategy. Taking the defined risk appetite as a basis, limits, rules and any risk-reducing measures required are approved and implemented. We also have a comprehensive early-warning system that draws our attention to any potential shortages of capacity. If a business unit identifies attractive business that exceeds its risk limits, the risk management departments responsible and IRM analyse its potential impact on the Group portfolio and the risk appetite of the Group as a whole. Taking these results and the expected earnings from the business into consideration, we devise a solution that enables us to take the risk onto our books if appropriate.
We manage market risks by means of suitable limit and early-warning systems, and through our asset-liability management. To hedge market risks, we also use derivative financial instruments. Applying stress tests, sensitivity and duration analyses, we simulate market fluctuations and devise strategies for counteracting them where necessary.
Operational risks are quantified annually by means of expert estimates prepared for scenario analyses.
Property-casualty The underwriting risk capital for property-casualty is made up as follows: Losses with a potential cost exceeding €10m at Group level are classified as large losses. Accumulation losses are losses affecting more than one risk (or more than one line of business). We classify all other losses as basic losses. For basic losses, we calculate the risk of subsequent reserving being required for existing risks within a year (reserve risk) and the risk of under-rating (premium risk). To achieve this, we use analytical methods that are based on standard reserving procedures, but take into account the one-year time horizon. In the case of the basic losses, the annual readjustment of the models resulted in an increase in the economic risk capital requirement, due primarily to a recalibration of the interdependencies between the segments.
Interest-rate risks In reinsurance, the interest-rate risk on fixed-interest investments in units of modified duration (interest-rate sensitivity) was 6.7, whereas the modified duration of liabilities was 4.1. The sensitivity of available financial resources to a parallel increase of one basis point in all interest-rate curves (DV01) amounted to –€13.3m. Were such a parallel shift in the interest-rate curves to occur, the available financial resources would change by that amount.
Regulatory developments The progress made in the Solvency II project in 2012 has clarified the future super visory requirements somewhat, though some uncertainties remain, particularly concerning the dates for the transition from Solvency I to Solvency II. Considerable progress has been made on the first pillar, with the exception of the key issue of underwriting liabilities. In particular for life primary insurance, the still open questions have far-reaching implications for capitalisation under Solvency II. The risk that our life primary insurers may not meet the capital requirements cannot yet be entirely excluded. The draft implementing measures produced by the Solvency II Expert Group (SEG) have shed
Besides this, we see opportunities in specialty property-casualty business. As the largest single market, the USA provides further potential for organic growth from enhancing our product range and expanding our client portfolio through strategic alliances.
The global health market in which Munich Health operates remains a strongly expanding sector, both in healthcare itself and in insurance. The main reasons for this include worldwide population growth and increasing life expectancy, combined with the rising prosperity of broad sectors of the population, particularly in developing and emerging countries. These trends are being accelerated by advances in medicine. For a global health insurer, two significant opportunities for growth present themselves in this regard: in the industrial countries, the pressure to reform historically evolved health and social security systems is rising. Private-sector solutions are gaining in attractiveness. At the same time, the developing and emerging countries are facing the challenge of swiftly establishing healthcare systems that provide large sections of the population with access to adequate healthcare. We expect Munich Health, with its global set-up and combination of primary insurance and reinsurance know-how under one roof, to benefit from this development.
(RORAC) after tax over the cycle — Consolidated result target of close to €3bn for 2013
The consolidated result target was significantly exceeded thanks to a better-thanenvisaged technical result in reinsurance and a higher investment result. The investment result benefited from increased gains on disposal, because the prices of the fixed-interest financial instruments sold were higher than expected owing to lower interest-rate levels.
For this reason, the return on investment surpassed the target figure, reaching 3.9%, although regular income from investments declined.
Global economic growth is again likely to be only moderate in 2013. The consolidation of public finances and high unemployment will probably result in slower economic momentum in many industrialised countries. In the eurozone, we expect at most a slight recovery on an annual basis; for the USA we predict only modest growth. In the emerging economies, particularly China, India and Brazil, growth should be stronger than in 2012. Inflation rates will consequently be moderate in most industrialised countries and will only reach a somewhat higher level in a few emerging countries.
In life primary insurance, our total premium income is likely to be below the previous year’s level at just over €7bn, with gross premiums written totalling somewhat more than €5.5bn. It should be borne in mind in this regard that developments in German and international business strongly depend on single-premium business with its volatile premium income. It remains to be seen whether clients understand that the re ductions in policyholder bonuses are necessary in the interests of financial soundness and sustainability. Besides this, our assumption is that our new products will be well received.
Notes 31.12.2012 Prev. year Change €m €m €m €m €m % A. Intangible assets i. goodwill (1) 3,376 3,511 –135 –3.8 ii. other intangible assets (2) 1,518 1,581 –63 –4.0
All standards or changes in standards that have not yet entered into force will be applied by Munich Re for the first time as from the mandatory effective date for entities domiciled in the European Union.
A purchase price of €26.2m was paid for Magaz and the photovoltaic plant. No contin­ gent purchase price adjustments were agreed. The purchase price comprises €4.6m for the acquisition of the acquired company’s assets and a cash capital increase of €21.6m at Magaz for the acquisition of the photovoltaic plant. The goodwill of €5.2m arithmetically resulting from the transaction was written off in full after we carried out an impairment test.
Investments in associates are valued by the equity method at the Group’s proportion­ ate share of their net assets. The associate’s earnings attributable to the Group are included in the investment result. As a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate are used; in the case of the annual financial statements of significant associates, appropriate adjust­ ments are made to conform them to Munich Re’s accounting policies, in accordance with IAS 28.27; exceptional transactions of material importance for a true and fair pic­ ture of the associate’s financial position are recognised in the same financial year. Investments in associates that are not material for assessing the Group’s financial pos­ ition are generally accounted for at fair value. To determine the fair value, we use the share prices at the balance sheet date if the investments are quoted on a stock exchange; for unquoted investments, the fair value is measured using the discounted earnings or net asset value method. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
The allocation reflects which of the fair values derive from transactions in the market and where valuation is based on models because market transactions are lacking.
The provision for future policy benefits in long­term underwriting business is posted for the actuarially calculated value of obligations arising from policyholders’ guaran­ teed entitlements. As well as life insurance, this concerns portions of health and per­ sonal accident insurance, insofar as the business is conducted like life insurance. Measurement is usually based on the prospective method, by determining the differ­ ence between the present values of future benefits and future premiums. The actuarial assumptions used for their calculation include, in particular, assumptions relating to mortality, disablement and morbidity, as well as assumptions regarding interest­rate development, lapses and costs. These are estimated on a realistic basis at the time the insurance contracts are concluded and they include adequate provision for adverse deviation to make allowance for the risks of change, error and random fluctuations.
B. Gross technical provisions I. Unearned premiums 37 45 5,776 6,070 15 8 99 97 1,755 1,728 452 443 – – 8,134 8,391 Thereof: Held for sale – – – 24 – – – – – – – – – – – 24 II. Provision for future policy benefits 13,352 13,682 32 – 69,508 69,334 25,544 24,216 425 409 908 836 – – 109,769 108,477 III. Provision for outstanding claims 5,652 5,087 39,097 40,670 1,648 1,581 917 944 5,483 5,034 954 1,076 – – 53,751 54,392 Thereof: Held for sale – – – 16 – – – – – – – – – – – 16
Munich €m Reinsurance Primary insurance Health Total ERGO Munich Re Insurance Goodwill from the acquisition of America Other Group Other Other Prev. year Prev. year Prev. year Prev. year Prev. year Prev. year Gross carrying amount at 31 Dec. previous year 1,028 427 1,754 554 113 3,876 Accumulated impairment losses at 31 Dec. previous year – 22 – 361 40 423 Carrying amount at 31 Dec. previous year 1,028 405 1,754 193 73 3,453
In Munich Health’s case, the intangible assets from the acquisition of Sterling Life Insurance Company and the Windsor Health Group, Inc. were completely written off. The fair values less the costs to sell were determined using valuation procedures that had been applied when the purchase prices were allocated. When updated with the latest market and planning figures, the calculation led to the complete write-off of the intangible assets, owing to the deterioration of the medium-term earnings situation of the US subsidiary Windsor Health Group. The impairment loss of €50m was recognised in the Munich Health segment.
Write-ups derive chiefly from German real estate, whose increase in value was triggered by the growth phase in the German market.
Property pledged as security and other restrictions on title amount to €724m (742m). Expenditures recognised in the carrying amount for assets in the course of construction total €31m (37m) at the balance sheet date, and contractual commitments to acquire property amount to €35m (18m).
A list of all our shareholdings can be found in the section “List of shareholdings as at 31 December 2012 in accordance with Section 313 para. 2 of the German Commercial Code”.
The rating categories are based on those of the leading international rating agencies. In deviation from the purely economic view, the carrying amount of the loans represents the maximum exposure to credit risk at the balance sheet date, in accordance with IFRS 7. Virtually no credit risk exists in respect of the mortgage loans or the loans and advance payments on insurance policies.
Assets pledged as security and other restrictions on title amount to €78m (–).
Reclassification –17 – – –17 Carrying amount at 31 Dec. financial year 2,391 273 21 2,685 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 1,026 689 34 1,749 Gross carrying amount at 31 Dec. financial year 3,417 962 55 4,434
The run-off triangles are prepared on a currency-adjusted basis. To this end, all figures are translated from the respective local currency into the Group currency (euro), consistently using the exchange rates applicable at the end of the year under review (i.e. at 31 December 2012). This ensures that currency translation does not lead to run-off effects.
Development of gross provision €m 2012 Prev. year Status at 31 Dec. previous year 5,373 5,210 Change in consolidated group and other influences 8 22 Savings premiums 760 782 Unrealised gains/losses on fund assets 603 –259 Withdrawal for expenses and risk 79 73 Withdrawal for benefits 407 309 Status at 31 Dec. financial year 6,258 5,373
Change in the present value of obligations under defined benefit plans €m 2012 Prev. year Status at 31 Dec. previous year 3,345 2,952 Currency translation differences –6 31 Change in consolidated group – –2 Current service cost 100 107 Interest cost 140 133 Actuarial gains/losses 787 210 Paid pension benefits –115 –103 Plan curtailments –2 –3 Past service cost 16 9 Other –31 11 Status at 31 Dec. financial year 4,234 3,345
Changes in deferred acquisition costs and contingent commissions, amortisation and impairment losses of acquired insurance portfolios 22 5 110 –136
Primary insurance Life Health Property-casualty €m 2012 Prev. year 2012 Prev. year 2012 Prev. year Land and buildings, including buildings on third-party land 108 57 52 59 14 40 Investments in affiliated companies 3 5 –11 –20 –26 263 Investments in associates –5 – 5 5 46 –4
Apart from this, there are credit risks from the underwriting of credit reinsurance contracts. Information on these can be found under (38) Risks from property-casualty insurance business. We do not conduct any active credit insurance business in our primary insurance.
Number of rights on 31 Dec. 2012 – 22,005 329,100 426,803 128,684 296,125
Intrinsic value 2012 for one right €46.30 €25.53 €0.33 €12.56 €36.83 €25.29 Fair value 2012 for one right – €25.53 €7.06 €12.99 €36.83 €25.29 Number of rights on 31 Dec. 2005 187,530 – – – – –
Number of rights on 31 Dec. 2006 184,458 173,682 – – – – Additions – – 121,821 – – – Exercised 34,879 – – – – –
The number of staff employed by the Group at year-end totalled 23,700 (24,299) in Germany and 21,737 (22,097) in other countries.
Non-consolidated subsidiaries 50 Plus Strategies, Inc., Atlanta, Georgia 100.0000 80e LIMITED, Bristol 100.0000 Acalater 140014 S.L., Playa del Inglés 100.0000
Income from technical interest Amount earned by assumed insurance business from the mainly risk­free investment of assets covering the technical provisions. In primary insurance, the deposits retained on ceded business are also taken into account. Thus the portion of investment income that corresponds to the deposit interest expenses is included in the calculation of the technical interest.
Mortality table Table developed using methods of probability theory for estimating the expected mortality of policyholders in a portfolio of life or health insurance con­ tracts. It shows the probability of future mortality on a differentiated basis according to age and other factors, often taking into account demographic trends. Mortality tables with provision for adverse deviation are generally used for measuring technical pro­ visions.
Value in use Present value of the future cash flows expected to be derived from a cash­generating unit or group of cash­generating units. A cash­generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows of other assets or groups of assets.
Thereof: Attributable to Munich Reinsurance Company equity holders 3,195 477 1,130 808 780 Attributable to non-controlling interests 16 4 6 4 2