Combined management report 021 Group 023 Macroeconomic and industry environment 045 Important tools of corporate management 046 Business performance 048 Financial position 061 Risk report 066 Opportunities report 075 Prospects 078 Munich Reinsurance Company (Information reported on the basis of German accountancy rules) 083
On the one hand, this confidence rests on the strength of our balance sheet. The solvency ratio is above average at 267%, and our investments show valuation reserves of €28bn. We continue to take a conservative approach when measuring our assets and liabilities, particularly the loss reserves that are so important for us. As before, the settlement of claims and
The Audit Committee met six times in 2016, and two of these meetings were attended by the external auditors. At the meetings attended by the auditors, the Committee discussed the Company and Group financial statements, the combined management report, the auditor’s report and the Board of Management’s proposal
Corporate governance Report of the Supervisory Board time. With effect from 27 April 2017, in addition to his role as Chairman of the Board of Management, Joachim Wenning will also assume responsibility for the units currently reporting to Nikolaus von Bomhard. We are confident that, under the leadership of Joachim Wenning, the Board of Management is excellently equipped to meet the business challenges of the present and the future.
Changes on the Supervisory Board With effect from the end of the 2016 Annual General Meeting, Clement B. Booth was elected to the Supervisory Board as successor to Anton van Rossum. Ann-Kristin Achleitner was elected to the Audit Committee as successor to Anton van Rossum with effect from the end of the 2016 Annual General Meeting.
This report combines the management reports of Munich Reinsurance Company and Munich Re (Group).
Munich Reinsurance Company (Information reported on the basis of German accountancy rules) 083 Market environment and major factors of influence 083 Business performance 083 Financial position 087 Combined Statement of Corporate Governance for the 2016 financial year pursuant to Section 289a and Section 315 (5) of the German Commercial Code (HGB) 088 Further information 088
The health primary insurance business managed by Munich Health was transferred to ERGO International from 1 February 2017.
The full Supervisory Board decides on the remuneration system for the Board of Management, and reviews it regularly. The Personnel Committee of the Supervisory Board, comprising the Chairman of the Supervisory Board, one shareholder representative and one employee representative, prepares the resolutions for the full Supervisory Board.
Members of the Audit Committee each receive an additional €45,000; members of the Personnel Committee each receive an extra €27,000; and 1 In the Annual Report 2015, the amounts to be paid for the 2015 annual performance and multi-year performance 2013–2015 were recognised on the basis of the reserves, as no Supervisory Board resolution had yet been passed on the amounts to be paid for the actual bonus amounts. The Annual Report for 2016 shows the actual amounts set by the Supervisory Board and to be paid out for 2015. 2 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2016 annual performance. The amount shown for the 2016 annual performance remuneration is based on estimates and the relevant provisions posted.
The revaluation of balance-sheet items in foreign currencies at period-end exchange rates led to a positive currency result of €485m (–213m), which is recognised under the “other non-operating result”. We benefited in particular from the depreciation of the British pound as a consequence of the Brexit referendum result in the second quarter.
Life Germany 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.
Reinsurance business accounts for approximately 32% of technical provisions, around 66% comes from primary insurance and about 2% is from Munich Health. In contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. This is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar, the British pound sterling and the Canadian dollar.
Each share carries one vote at the Annual General Meeting and determines the shareholders’ participation in the Company’s profit. This excludes own shares held by the Company, from which it enjoys no rights. In the cases specified in Section 136 of the German Stock Corporation Act (AktG), voting rights from the shares concerned are excluded by law. If shareholders are entered under their own name for shares which belong to a third party and exceed at this time the upper limit of 2% of the share capital as stated in the Articles of Association, pursuant to Article 3 (5) of the Articles of Association the shares entered shall not carry any voting rights.
Risk Governance Our risk governance ensures that an appropriate risk and control culture is in place by clearly assigning roles and responsibilities for all significant risks. Risk governance is supported by various committees at Group and field-ofbusiness level. The Board of Management must consult the risk management function with respect to major decisions.
Our general definition of risk is possible future developments or events that could result in a negative deviation from the Group’s prognoses or targets. We classify risks as “significant” if they could have a long-term adverse effect on Munich Re’s assets, financial situation or profitability. We have applied this definition consistently to each business unit and legal entity, taking account of its individual risk-bearing capacity. We differentiate between risks depicted in our internal model and other risks.
Diversification effect – – –9,992 –9,268 –724 7.8 Tax – – –2,615 –2,336 –279 11.9 1 Capital requirements for other financial sectors, e.g. institutions for occupational retirement provisions.
Earthquake Los Angeles Aggregate VaR (return period: 200 years) €bn (before tax), retained probabilities and additionally apply general mortality rates for the population to model the mortality trend risk. To enable us to define appropriate parameters for the modelling of the range of areas in which we operate, portfolios with a homogeneous risk structure are grouped together. We then aggregate the individual profit and loss distributions taking account of the dependency structure to obtain an overall distribution.
At the beginning of the year, we had aimed for a result of €250–350m for the ERGO field of business. With a consolidated result of –€40m, ERGO fell well short of our original expectations. In the first quarter, we had already anticipated expenditures for the implementation of the ERGO Strategy Programme that made it appear unlikely that ERGO would post a profit in 2016.
Change in claims equalisation provision and similar provisions –391 –677 42.2 Underwriting result for own account 205 517 –60.3
Notes 31.12.2016 Prev. year Change €m €m €m €m €m %
J. Assets held for sale2 (16) 0 6,947 –6,947 –100.0 Total assets 267,805 268,868 –1,063 –0.4 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 For the previous year‘s figures, see Notes to the consolidated balance sheet – Assets (16) Non-current assets and disposal groups held for sale and sold during the reporting period.
F. Liabilities I. Bonds and notes issued (26) 324 314 9 3.0 II. Deposits retained on ceded business (27) 828 1,521 –693 –45.6 III. Current tax liabilities 2,429 2,018 411 20.4
Other changes 0 25 I. Items where income and expenses recognised directly in equity are reallocated into the consolidated income statement 620 –416 Remeasurements of defined benefit plans –76 266 Other changes 0 0 II. Items where income and expenses recognised directly in equity are not reallocated to the consolidated income statement –76 266 Income and expense recognised directly in equity (I + II) 544 –150 Total recognised income and expense 3,125 2,972 Thereof: Attributable to Munich Reinsurance Company equity holders 3,133 2,947 Attributable to non-controlling interests –8 24
Our presentation currency is the euro (€). Amounts are rounded to million euros. Due to rounding, there may be minor deviations in summations and in the calculation of percentages, with figures in brackets referring to the previous year.
In the 2016 financial year, the following amended IFRSs had to be applied for the first time, after having been adopted into European law: Recognition and measurement
Consolidated balance sheet 31.12.2015 Changes due as originally to adjustments recognised in 2015 31.12.2015 €m Assets H. Deferred tax assets 7,859 –7,653 206 Equity and liabilities G. Deferred tax liabilities 9,995 –7,653 2,343
Deferred tax assets and liabilities are now 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. Consolidation of intra-Group income and debt between the operating segments was adjusted accordingly and involved a change to the accounting standards pursuant to IAS 8.14.
IFRS 9 (7/2014), Financial Instruments, replaces IAS 39 as regards the requirements relating to recognition and measurement of financial instruments. Under this revision, in future the categorisation of financial assets will be made on the basis of contractual cash flow characteristics and the business model of the asset held. Accordingly, subsequent measurement is made at amortised cost, at fair value without impact on profit or loss, or at fair value through profit or loss.
Munich Re classifies unconsolidated structured entities as either investment funds or securitisation vehicles on the basis of the type of structured entity.
Size of structured entities For investment funds, including investments in infrastructure (including renewable energies and new technologies), forestry, private equity and other investments, and investment funds for policyholders under unit-linked life insurance, the carrying amount gives an indication of the size of
Investment funds – Securiti- Securiti- Investment Investments sation sation funds – for unit- vehicles – vehicles – Munich Re linked life Debt Underwriting investments insurance securities risks Total €m Prev. year Prev. year Prev. year Prev. year Prev. year
Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the measurement differences between IFRS and local GAAP on the basis of the expected future participation quotas. For unrealised gains and losses on investments available for sale, which are recognised directly in equity (see Assets – B Investments – Fixed- interest or non-fixed-interest securities available for sale), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in this provision are recognised in the income statement.
The following table shows the exchange rates of the most important currencies for our business:
Munich Re Group Annual Report 2016 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
Acquired insurance portfolios Software Internally developed Other €m 2016 Prev. year 2016 Prev. year 2016 Prev. year Gross carrying amount at 31 Dec. previous year 1,329 1,320 388 367 1,106 1,049 Accumulated amortisation and impairment losses at 31 Dec. previous year –1,035 –1,002 –326 –285 –811 –770 Carrying amount at 31 Dec. previous year 294 318 62 82 295 279
Among the associates and joint ventures accounted for using the equity method, there are only two companies for which quoted market prices are available. These prices total €110m (81m) and are allocated to Level 1 of the fair value hierarchy.
Transfer out of Level 3 –1 0 0 0 Change in the fair value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 2 0 37 30 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 0 0 7 0
Fair value hedges In the case of fair value hedges, the change in the fair value of the hedging instrument and the change in the fair value of the hedged instrument are generally recognised in profit or loss under the item “investment result”. With Munich Reinsurance Company’s hedged subordinated bond, this information is shown under net finance costs. Munich Re uses hedging r elationships in the form of fair value hedges to selectively and efficiently mitigate interest-rate and other market risks. The main types of transaction employed for hedging are swaps and forwards. The fair value of the derivatives used for this purpose amounted to €31m (94m) at the
Periods to maturity and amount of the hedged cash flows at the balance sheet date €m < 1 year 1–2 years 2–3 years 3–4 years 4–5 years > 5 years 31.12.2016 Prev. year Notional amounts of hedged transactions 64 0 150 100 0 0 314 351
Of the amounts held on deposit with banks, €2,922m (3,747m) 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 €14m (15m) for deposits with banks.
The deferred tax assets and liabilities recognised in the consolidated balance sheet concern the following balance sheet items: Deferred tax 31.12.2016 Prev. year €m Assets Liabilities Assets Liabilities
Expiring in up to three years 36 65 101 108 97 205 Expiring in over three years and up to ten years 126 86 212 37 94 131 Expiring in over ten years 154 21 175 21 130 151
For information on the valuation models used for measuring derivatives, please see the table and explanations in the Notes to the consolidated balance sheet – Assets (4) Hierarchy for the fair value measurement of investments. The measurement of subordinated bonds for which no market prices are available is conducted using the present-value method and taking observable market inputs into account. For the bonds we have issued, we use the market prices provided by price quoters for the corresponding assets. The fair values of our amounts due to banks are determined using the present-value method, in part exclusively using observable market inputs, and partly also taking into account non- observable inputs.
In the case of Munich Reinsurance Company bonds, annual outflows of liquidity amounting to the respective interest payments occur until the first possible call dates. In the financial year, these amounted to €263m. There after, the liquidity outflows will vary, depending on the respective interest-rate level. For the registered bonds of ERGO Versicherung Aktiengesellschaft, and for the HSB Group bonds, the annual outflow is variable, depending on the respective interest-rate levels.
The fair value of the subordinated bond issued by Munich Reinsurance Company in June 2007 is hedged in respect of the risk-free interest rate by means of an interest-rate swap. The hedged changes in value of the subordinated liabilities and of the interest-rate swap are shown in the net finance costs with impact on profit or loss in each case.
Further information on the underwriting risks can be found in the risk report in the section “Significant risks”.
Thereof resulting from unrealised gains and losses on investments (recognised directly in equity) 5,589 4,841 Thereof resulting from other remeasurements (recognised in profit or loss) 4,566 4,349
Breakdown of other provisions €m 31.12.2016 Prev. year Provisions for post-employment benefits 3,058 2,751 Other provisions 1,837 1,393
Munich Re Group Annual Report 2016 components for multi-year performance and for the medium and long-term incentive plans. The other miscellaneous provisions comprise a large number of different items. The provisions for restructuring, early-retirement benefits/semi-retirement, anniversary benefits, multi-year performance and medium- and long-term incentive plans are mainly long term, whereas the provisions for earned commission, salary obligations, other remuneration for desk and field staff, and miscellaneous are essentially short term.
In the ERGO Life and Health Germany segment, the income from technical interest for life primary insurance companies comprises the gains and losses from unitlinked life insurance, plus the guaranteed interest rate and profit sharing on the basis of the non-technical result sources. For health primary insurance companies, the income from technical interest for primary insurance business corresponds to the allocation of interest to the ageing reserve (actuarial interest) and the allocation to the provision for premium refunds. The latter is based on the allocation of interest to the provision for non- performance-related premium refunds, on the investment result exceeding the actuarial interest rate, and on policyholders’ participation in the other non-technical result components.
Expenses for claims and benefits €m 2016 Prev. year Gross Claims and benefits paid –35,973 –36,473 Change in technical provisions
Deposits retained on assumed reinsurance, and other investments 174 326 Expenses for the management of investments, other expenses –530 –506
Net finance costs by financing instrument €m 2016 Prev. year Subordinated bonds of Munich Reinsurance Company, Munich –192 –211 Senior notes of Munich Re America Corporation, Wilmington –23 –23 Subordinated bonds of HSB Group Inc., Delaware –2 –2 Other –1 –1 Total –219 –238
List of shareholdings as at 31 December 2016 pursuant to Section 313 (2) of the German Commercial Code (HGB)
DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I4D), Luxembourg4 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I5D), Luxembourg4 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I6D o.N.), Luxembourg4 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I7D o.N.), Luxembourg4 100.0000 DB Platinum IV SICAV (Subfonds Institutional Fixed Income, Inhaber-Anteile I8D o.N.), Luxembourg4 100.0000 DKV BELGIUM S.A., Brussels 100.0000 DKV Deutsche Krankenversicherung Aktiengesellschaft, Cologne 100.0000 DKV Pflegedienste & Residenzen GmbH, Cologne 100.0000 DKV Seguros y Reaseguros, Sociedad Anónima Española, Zaragoza 100.0000 E&S Claims Management Inc., Reston, Virginia 100.0000 EIG, Co., Wilmington, Delaware 100.0000 ERGO ASIGURARI DE VIATA SA, Bucharest 100.0000 ERGO ASIGURARI S.A., Bucharest 100.0000 ERGO Austria International AG, Vienna 100.0000 ERGO Beratung und Vertrieb AG, Düsseldorf 100.0000 ERGO DIREKT Krankenversicherung AG, Fürth 100.0000 ERGO DIREKT Lebensversicherung AG, Fürth 100.0000 ERGO DIREKT Versicherung AG, Fürth 100.0000 ERGO Életbiztosító Zrt., Budapest 100.0000 ERGO Elfte Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 ERGO General Insurance Company S.A., Athens 100.0000 ERGO Generales Seguros y Reaseguros, S.A., Madrid 100.0000 ERGO Group AG, Düsseldorf 100.0000 ERGO Grubu Holding A.Ş., Istanbul 100.0000 ERGO Grundstücksverwaltung GbR, Düsseldorf 100.0000 ERGO Insurance Company, St. Petersburg 100.0000 ERGO Insurance N.V., Brussels 100.0000 ERGO Insurance Pte. Ltd., Singapore 100.0000 ERGO Insurance SE, Tallinn 100.0000 ERGO International Aktiengesellschaft, Düsseldorf 100.0000 ERGO International Services GmbH, Düsseldorf 100.0000 ERGO Invest SIA, Riga 100.0000 ERGO Lebensversicherung Aktiengesellschaft, Hamburg 100.0000 ERGO Life Insurance Company S.A., Thessaloniki 100.0000 ERGO Life Insurance SE, Vilnius 100.0000 ERGO Neunte Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 ERGO osiguranje d.d., Zagreb 100.0000 ERGO Partners N.V., Brussels 100.0000 ERGO Pensionsfonds Aktiengesellschaft, Düsseldorf 100.0000 ERGO Pensionskasse AG, Düsseldorf 100.0000 ERGO Poist’ovna, a. s., Bratislava 100.0000 ERGO pojist’ovna, a.s., Prague 100.0000 ERGO Private Capital Dritte GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Gesundheit GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Komposit GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Leben GmbH & Co. KG, Düsseldorf 100.0000
3 This fully consolidated German subsidiary intends to fulfil the conditions required in Section 264 (3) of the German Commercial Code (HGB) and, in the financial year 2016, to avail itself of the relevant provision exempting it from preparing annual financial statements.
11 Munich Reinsurance Company or one of its consolidated subsidiaries is a fully liable party in this company.
Important dates 2017 15 March 2017 Balance sheet press conference for 2016 financial statements 26 April 2017 Annual General Meeting 9 May 2017 Quarterly Statement as at 31 March 2017 9 August 2017 Half-Year Financial Report as at 30 June 2017 9 November 2017 Quarterly Statement as at 30 September 2017