Combined management report 21 Group 23 Macroeconomic and industry environment 49 Important tools of corporate management 50 Business performance 52 Financial position 64 Risk report 68 Opportunities report 77 Prospects 78 Munich Reinsurance Company (information reported on the basis of German accountancy rules) 82
Thank you – also on behalf of my 42,000 colleagues across the world – for the trust you place in Munich Re by investing in our Company.
The Personnel Committee held eight meetings in the period under review. It essentially prepared the resolutions on matters involving the Board of Management already mentioned in the report on the work of the full Supervisory Board. One of the main tasks here was to design a new remuneration system for the members of the Board of Management. It also dealt with seats held by members of the Board of Management on supervisory, advisory and similar boards, and with Group-wide succession planning, especially with respect to Board-level appointments.
At its four meetings in 2017, the Standing Committee dealt with the preparation of the respective Supervisory Board meetings and topics of corporate governance. In addition, the Standing Committee carried out a review of the efficiency of the Supervisory Board’s work in 2017, and determined that, overall, the reporting by the Board of Management and the work of the Supervisory Board was efficient and appropriate. Regular reports by the Chairman of the Board of Management covered changes to the shareholder structure and the status of the share buy-back programmes. The Committee also received the annual report on expenses for donations and sponsoring. It was also assigned specific tasks concerning the scrutiny of the non-financial reporting produced for the first time this year in accordance with the German act implementing the CSR Directive on the disclosure of non-financial and diversity information. In keeping with an applicable decision taken by the full Supervisory Board, the Standing Committee commissioned audit company Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft with the auditor’s review of the separate non-financial (Group) statement.
Peter Gruss stepped down from the Supervisory Board with effect from 30 June 2017. Maximilian Zimmerer was appointed his successor by an order of the Amtsgericht (Local Court) of Munich dated 4 July 2017. The Supervisory Board will propose to the 2018 Annual General Meeting that Maximilian Zimmerer be elected to the Supervisory Board for the remainder of Peter Gruss’s term of office.
Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder Chairman Former Chairman of the Board of Management of Volkswagen AG Member since 17 April 2002, last re-elected 30 April 2014
Gerd Häusler Chairman of the Supervisory Board of BayernLB (until 12 April 2018) Member since 30 April 2014
Important tools of corporate management 050 Munich Re’s management philosophy – based on value creation 050 The Group’s corporate management tools 050
In ERGO, we combine all Munich Re’s primary insurance activities. Some 69% (69%) of gross premiums written by ERGO derive from Germany, and 31% (31%) from international business – mainly from central and eastern European countries. ERGO has also extended its activities to Asian markets such as India, China, Singapore and Thailand. In addition, responsibility for international health primary insurance business was transferred from Munich Health to ERGO International as of 1 February 2017.
The Germany, Asia Pacific and Africa Division conducts property-casualty business with our clients in Germany, Africa, Asia, Australia, New Zealand and the Pacific Islands. In 2017, we enhanced the regional set-up of our existing branches in Mumbai, Beijing, Sydney and Singapore in order to take greater advantage of the business opportunities available in the rapidly growing Asia-Pacific insurance market. Our branch in Seoul also offers client proximity in this region, and our new composite branch office in Tokyo is now operational. In the African market, we are represented by our subsidiary Munich Reinsurance Company of Africa Ltd., headquartered in Johannesburg, and by other liaison offices. All these branches and other liaison offices, with their commitment and local presence, guarantee our competitiveness in these key growth markets.
According to the contracts of employment for members of the Board of Management appointed for the first time as from 1 January 2017, all variable remuneration components not already paid out 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.
Other remuneration Stock option plans No stock option plans or similar incentive schemes are in place for the Board of Management.
Basic remuneration 615,000 615,000 615,000 555,000 Remuneration in kind/fringe benefits 31,466 31,700 32,105 33,356 Total 646,466 646,700 647,105 588,356 One-year variable remuneration
Torsten Jeworrek Hermann Pohlchristoph Board member Board member (joined: 27 April 2017) Overall Overall performance performance evaluation evaluation
Other Total 2,134,455 2,800,796 578,272 – Pension expenses 787,504 769,154 325,328 – Total remuneration 2,921,959 3,569,950 903,600 –
In addition, the members of the Board of Management appointed prior to 2017 already hold a large number of Company shares. Moreover, all members of the Board of Management are obliged under the 2017 annual performance plan and all or individual multi-year performance plans (2015–2017, 2016–2018 and 2017–2019) to continue to invest in Company shares over the next few years.
Members of the Supervisory Board receive a daily attendance fee of €1,000 for meetings of the Supervisory Board and its committees – with the exception of the Conference Committee.
No further change to the remuneration of the members of the Supervisory Board is envisaged for 2018.
Reinsurance property-casualty % 114.1 95.7 ERGO Property-casualty Germany % 97.5 97.0 ERGO International % 95.3 98.0
Key figures 2017 Prev. year Change % Gross premiums written €m 13,726 13,637 0.7 Share of gross premiums written in reinsurance % 43.5 43.3 Technical result incl. result from reinsurance treaties with insufficient risk transfer €m 428 561 –23.7
In the USA, gross premium volume saw a slight decrease to €2.8bn (2.9bn). We are one of the most important reinsurers in this market, which is the largest worldwide. As expected, the technical result was slightly below the level of the previous year. This was because of the adverse impact on results of the recapture of loss-making contracts and negative reserving effects in health business, which could only be partly compensated for by positive special effects. After the negative impact of several large claims
Gross premiums written increased year on year, in particular on account of growth in health insurance (+6.3%) thanks to our dental plans. Premium income in property-casualty business was also up (+2.9%). By contrast, gross premiums written in life insurance business were down by 4.5% on the previous year. The decline in overall premium income was chiefly attributable to the MaxiZins capitalisation product, for which sales have been discontinued. In terms of annual premium equivalent, new business volume in life business declined by 24.1% compared with the previous year.
The rise in the technical result is partly due to higher premium income, a reduction in costs and improved profitability. At €1,384m (1,230m), the investment result developed favourably, positive contributing factors including lower write-downs and a higher result from disposals. Altogether, the operating result remained at the same level as in the previous year.
New business Life International 2017 Prev. year Change €m €m % Regular premiums 74 130 –43.2 Single premiums 262 526 –50.1
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. Supervisory authorities in some countries, for example, require foreign reinsurers to establish premium and reserve deposits to the benefit of primary insurers, or set up trustee accounts or guarantees with certain financial institutions. At the reporting date, this involved investments with a volume of €8.8bn (9.7bn). In addition, there were contingent liabilities. Information on these can be found on page 167 of the notes to the consolidated financial statements.
− The Annual General Meeting of 23 April 2015 authorised the Board of Management to issue, with the consent of the Supervisory Board, in one or more issues
Inflows from investing activities were determined by cash flows from the sale and/or maturity of investments totalling €2,067m.
The diversification effect between the risk categories property-casualty, life and health, market, credit and operational risks was, at 35%, virtually unchanged from the previous year’s percentage. Further information on the changes within individual risk categories can be found in the sections below.
Another measure for controlling underwriting risks is the cession of a portion of our risks to other carriers via external reinsurance or retrocession. Most of our companies have intra-Group and/or external reinsurance and retrocession cover. In addition to traditional retrocession, we use alternative risk transfer for natural catastrophe risks in particular. Under this process, underwriting risks are transferred to the capital markets by means of securitisation vehicles.
1 Previous year’s figures adjusted owing to a change in the composition of the reporting segments.
Gross premiums were up on the previous year’s level, despite negative currency translation effects and, at €49.1bn, were in the upper half of the expected range of €48–50bn.
We did not reach the 2017 economic earnings target that we had anticipated at the beginning of the financial year in the range of €2.0–2.4bn of the IFRS result forecast. The economic earnings for 2017 totalling €0.5bn were adversely impacted by high natural catastrophe losses and significant negative currency translation effects which, contrary to the expectations for the Group, were only partly offset by otherwise positive variances from our asset-liability management and business operations.
Overall premium income in the ERGO field of business amounted to €18.5bn, and was in the upper range of our €18–19bn target corridor for 2017. Gross premiums written came to €17.5bn, at the very upper end of our projected range of €17–17.5bn.
The combined ratio, which reflects the relation of claims and costs to net earned premiums, came to 113.7% (96.9%), mainly owing to the above effects.
In personal accident reinsurance, the premium level was up in the year under review. The result before claims equalisation provision was down somewhat on the previous year owing to higher claims expenditure and higher commissions. Once again, we generated a gratifying profit.
Third-party liability 2017 Prev. year Change % Gross premiums written €m 1,668 1,887 –11.6 Combined ratio % 138.3 114.6 Underwriting result before claims equalisation provision and similar provisions €m –634 –256 –147.7
85Combined management report Munich Reinsurance Company Information reported on the basis of German accountancy rules
The business performance of Munich Reinsurance Company is largely subject to the same risks and opportunities as the performance of the reinsurance field of business presented in the consolidated financial statements. Munich Reinsurance Company generally participates in the risks of its shareholdings and subsidiaries in accordance with its respective percentage interest held. Munich Reinsurance Company is integrated in the Group-wide risk management system and internal control system of the Group. Further information is provided in the risk report on page 68 ff. and in the opportunities report on page 77 ff.
J. Assets held for sale (16) 118 0 118 – Total assets 265,722 267,805 –2,083 –0.8 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
C. Gross technical provisions I. Unearned premiums (20) 8,857 8,984 –127 –1.4 II. Provision for future policy benefits (21) 108,956 108,108 847 0.8 III. Provision for outstanding claims (22) 63,965 61,362 2,603 4.2
Other changes 4 0 I. Items where income and expenses recognised directly in equity are reallocated into the consolidated income statement –1,494 620 Remeasurements of defined benefit plans –36 –76 Other changes 0 0 II. Items where income and expenses recognised directly in equity are not reallocated to the consolidated income statement –36 –76 Income and expense recognised directly in equity (I + II) –1,530 544 Total recognised income and expense –1,138 3,125 Thereof: Attributable to Munich Reinsurance Company equity holders –1,146 3,133 Attributable to non-controlling interests 9 –8
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.
IFRS 16 is mandatory for financial years beginning on or after 1 January 2019.
Current tax liabilities comprise current taxes on income and interest on back tax of the individual companies, based on their respective national taxation. Other tax liabilities are shown under “other liabilities”.
Reinsurance ERGO Property-casualty Property-casualty Germany International2 €m 2017 Prev. year 2017 Prev. year 2017 Prev. year
Increases resulting from business combinations are mainly attributable to the expansion of our investment in a special real estate fund. As a result of this additional investment, we attained a controlling interest in the special funds, and therefore included it as a subsidiary in our consolidated financial statements in the year under review.
Under reclassifications, we recognise land and buildings of the disposal group totalling €22m.
Gains (losses) recognised in the income statement 128 119 192 134 Gains (losses) recognised in equity –22 3 –95 70
Losses on disposal –481 –897 Fixed-interest securities –334 –414 Non-fixed-interest securities –148 –483
Equity and liabilities C. Net technical provisions 2,910 4,374 2,612 4,806
Reductions Acquisition of shares for retirement (share buy-back programme) –5,643,062 –5,880,769
Tax effects in the income and expenses recognised directly in equity 2017 Prev. year €m Before tax Tax After tax Before tax Tax After tax
The ceded share of “other technical provisions” amounts to €125m (–1m), of which €0m (1m) is apportionable to the ceded share of the provision for premium refunds based on national regulations.
Development of provision for premium refunds based on national regulations €m 2017 Prev. year Status at 31 Dec. previous year 8,209 7,730 Changes in consolidated group 0 0 Allocations/Withdrawals 433 479 Status at 31 Dec. financial year 8,642 8,209
Present value of defined benefit obligations 5,924 6,095 Fair value of plan assets –3,253 –3,388 Assets from the defined benefit plan 303 343 Effect of asset ceiling 13 9 Other –5 0
Breakdown of expenses booked in the financial year €m 2017 Prev. year Net interest income or expense 42 52 Service cost 129 162
Expenses for claims and benefits €m 2017 Prev. year Gross Claims and benefits paid –33,480 –35,973 Change in technical provisions
Other technical result –17 –67 Expenses for claims and benefits – Ceded share 1,549 669
Result from insurance-related investments €m 2017 Prev. year Result from investments for unit-linked life insurance contracts 479 238 Result from other insurance-related investments –36 88 36 Other operating result
Write-downs of non-derivative investments €m 2017 Prev. year Land and buildings, including buildings on third-party land –141 –101 Investments in affiliated companies –3 –7 Investments in associates and joint ventures –11 –14 Loans –11 –38 Other securities available for sale –137 –353 Other securities at fair value through profit or loss –22 –44 Other investments –44 –52 Total –371 –608
For the unit-linked life insurance contracts in our portfolios, the investments are held for the benefit of life insurance policyholders who bear the investment risk, meaning that there is no direct market risk. Appropriate product design ensures that the necessary premium portions for payment of a guaranteed minimum benefit on occurrence of death are based on the current fund assets.
Payments to retired members of the Board of Management or their surviving dependants totalled €8.6m (7.4m).
The auditor’s fees mainly relate to the audits of the consolidated financial statements and the annual financial statements of Munich Reinsurance Company, and to various audits of our subsidiaries’ annual financial statements, including statutory extensions of the audit assignment (in particular the audit of the solvency balance sheet). In addition, reviews of interim financial statements and project-related IT audits, and contractual reviews of the effectiveness of a service company’s controls, were carried out.
Other services essentially relate to quality assurance support and consulting services in connection with accounting issues, the introduction of regulatory requirements or of new accounting standards based on solutions and concepts produced by us. The auditor also provided administrative support and data storage services on a small scale.
Bell & Clements (Bermuda) Ltd., Hamilton, Bermuda 100.0000 Bell & Clements (London) Ltd., London 100.0000 Bell & Clements (USA) Inc., Reston, Virginia 100.0000 Bell & Clements Inc., Reston, Virginia 100.0000 Bell & Clements Ltd., London 100.0000 Bos Incasso B.V., Groningen 89.7640 Cannock Chase B.V., Leidschendam 100.0000 Cannock Chase Holding B.V., Amsterdam4 98.3300 Cannock Chase Purchase B.V., The Hague 100.0000 Cannock Connect Center B.V., Brouwershaven 100.0000 Ceres Demetra GmbH, Munich 100.0000 Closed Joint Stock Company «ERGO» Insurance Company, Minsk 92.3114 Comino Beteiligungen GmbH, Grünwald 100.0000 Compagnie Européenne d’Assurances (Société en liquidation), Paris 99.9982 Corion Pty Ltd, Sydney 100.0000 Cornwall Power (Polmaugan) Limited, London 100.0000 Countryside Renewables (Forest Heath) Limited, London 100.0000 D.A.S. Defensa del Automovilista y de Siniestros – Internacional S.A. de Seguros y Reaseguros, Barcelona 100.0000 D.A.S. HELLAS Allgemeine RechtsschutzVersicherungs -AG, Athens 100.0000 D.A.S. Jogvédelmi Biztosító Részvénytársaság, Budapest 100.0000 D.A.S. Luxemburg Allgemeine RechtsschutzVersicherung S.A., Strassen 100.0000 D.A.S. Rechtsschutz Aktiengesellschaft, Vienna 100.0000 D.A.S. Société anonyme belge d’assurances de Protection Juridique, Brussels 100.0000 D.A.S. Towarzystwo Ubezpieczeń Ochrony Prawnej S.A., Warsaw 100.0000 Daman Health Insurance – Qatar LLC, Doha 100.0000 DAS Assistance Limited, Bristol 100.0000 DAS Holding N.V., Amsterdam 51.0000 DAS Law Limited, Bristol 100.0000 DAS Legal Expenses Insurance Co., Ltd., Seoul 100.0000 DAS Legal Expenses Insurance Company Limited, Bristol 100.0000 DAS Legal Finance B.V., Amsterdam 100.0000 DAS Legal Protection Insurance Company Ltd., Toronto, Ontario 100.0000 DAS MEDICAL ASSIST Limited, Bristol 100.0000 DAS Nederlandse Rechtsbijstand Verzekeringmaatschappij N.V., Amsterdam 100.0000
Unconsolidated subsidiaries 1440 New York Ave. Associates LP, Dover, New York 100.0000 ADVIA N.V., Schoten 80.0000 Aleama 150015 S.L., Valencia 100.0000 ANOVA GmbH, Rostock 100.0000 Arridabra 130013 S.L., Valencia 100.0000 ARTES Assekuranzservice GmbH, Düsseldorf 100.0000 B&D Business Solutions B.V., Utrecht 100.0000 Badozoc 1001 S.L., Valencia 100.0000 Bank Austria Creditanstalt Versicherungsdienst GmbH, Vienna 100.0000 Baqueda 7007 S.L., Valencia 100.0000 Beaufort Dedicated No 3 Ltd., London 100.0000 Beaufort Dedicated No 4 Ltd., London 100.0000 Beaufort Dedicated No 6 Ltd., London 100.0000 Beaufort Underwriting Services Limited, London 100.0000 Bobasbe 6006 S.L., Valencia 100.0000 Botedazo 8008 S.L., Valencia 100.0000 Calliden Insurance Pty Ltd, Sydney 100.0000 Callopio 5005 S.L., Valencia 100.0000 Camcichu 9009 S.L., Valencia 100.0000 Cannock Chase Incasso II B.V., The Hague 100.0000 CAPITAL PLAZA Holding GmbH, Düsseldorf 100.0000 Caracuel Solar Catorce S.L., Valencia 100.0000 Caracuel Solar Cinco S.L., Valencia 100.0000 Caracuel Solar Cuatro S.L., Valencia 100.0000 Caracuel Solar Dieciocho S.L., Valencia 100.0000 Caracuel Solar Dieciseis S.L., Valencia 100.0000 Caracuel Solar Diecisiete S.L., Valencia 100.0000 Caracuel Solar Diez S.L., Valencia 100.0000 Caracuel Solar Doce S.L., Valencia 100.0000 Caracuel Solar Dos S.L., Valencia 100.0000 Caracuel Solar Nueve S.L., Valencia 100.0000 Caracuel Solar Ocho S.L., Valencia 100.0000 Caracuel Solar Once S.L., Valencia 100.0000 Caracuel Solar Quince S.L., Valencia 100.0000 Caracuel Solar Seis S.L., Valencia 100.0000 Caracuel Solar Siete S.L., Valencia 100.0000 Caracuel Solar Trece S.L., Valencia 100.0000 Caracuel Solar Tres S.L., Valencia 100.0000 Caracuel Solar Uno S.L., Valencia 100.0000 Centrum Pomocy Osobom Poszkodowanym Sp. z o.o., Gdańsk 100.0000 Copper Leaf Research, Bingham Farms, Michigan 100.0000 Cotatrillo 100010 S.L., Valencia 100.0000 D.A.S. Prawo i Finanse Sp. z o.o., Warsaw 100.0000 D.A.S. Rechtsschutz Leistungs-GmbH, Munich 100.0000 D.A.S., Tomasz Niedziński Kancelaria Prawna Spółka komandytowa, Warsaw 95.0000 DAS Financial Services B.V., Amsterdam 51.0000 DAS Incasso Arnhem B.V., Elst 100.0000 DAS Incasso Eindhoven B.V., ’s-Hertogenbosch 100.0000 DAS Incasso Rotterdam B.V., Rotterdam 100.0000 DAS Legal Services B.V., Amsterdam 100.0000
Basis for the Opinions We conducted our audit of the consolidated financial statements and of the Group management report in accordance with Section 317 HGB and the EU Audit Regulation No. 537/2014 (referred to subsequently as “EU Audit Regulation”) and in compliance with German Generally Accepted Standards for Financial Statement Audits promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Our responsibilities under those requirements and principles are further described in the “Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements and of the Combined Management Report” section of our auditor’s report. We are independent of the Group entities in accordance with the requirements of European law and German commercial and professional law, and we have fulfilled our other German professional responsibilities in accordance with these requirements. In addition, in accordance with Article 10(2)(f) of the EU Audit Regulation, we declare that we have not provided non-audit services prohibited under Article 5(1) of the EU Audit Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinions on the consolidated financial statements and on the combined management report.
− We assessed whether impairment of acquisition costs and reserve increases in the ERGO Life and Health segment triggered by the liability adequacy test were correct.
Net –41,645 –9,746 –12,213 –9,509 –10,178 4. Operating expenses Gross –12,498 –3,445 –2,956 –3,056 –3,041