Thereof attributable to minority interests €m 96 72 54 –34 –74
Management report Munich Re Group 48 Parameters 61 Business performance 66 Financial situation 97 Other success factors 104 Corporate governance report 111 Prospects 119 Risk report 124
Consolidated financial statements and notes Consolidated financial statements 142 Notes to the consolidated financial statements 156 Affiliated companies 213 Auditor’s report 216
Kent Nagano_ You bring up a very important point. In order to persevere, you need at least some people who understand what you’re talking about. Achievement is a very public-oriented task. The public in the end will form a consensus as to whether or not your efforts were successful or not successful.
Has experience from other projects of the Munich Re Group, such as those in
Chandra S. Chivukula_ First of all, we have to maintain the strong relations between the two partners in this joint venture. Both the Indian and the German partners have to understand each other’s culture and their ways of working.
Philippe Marie-Jeanne_ For some experts, Solvency II will lead to less volatility of insurance pricing and better protection of policyholders, owing to more efficient use of capital, better risk quantification and improved risk
What we really need is the possibility to personalise the standard formula.
Life reinsurance subsidiary set up in Moscow By establishing Munich Re Life E.E.C.A. in Moscow, Munich Re consolidates its outstanding market position in the Commonwealth of Independent States, where it opened its first foreign office in 1885, and strengthens contacts with clients and authorities. As the first foreign reinsurer to be incorporated there, it can now offer reinsurance solutions on a rouble basis. Page 73
(until 31 December 2006) * 1945, chartered insurer, with Munich Re since 1961 Asia, Australasia, Africa
In November 2006, the Board of Management and Supervisory Board submitted their annual declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act, which can be read on page 113 of this report and on the Company’s website.
Whereas in the previous years we had, like other large German listed companies, experienced a constant decrease in the proportion of shares represented at Annual General Meetings, Munich Re was able to reverse this trend at least to some extent in 2006. Even though more shares were held by foreign investors than in the previous year, the percentage represented rose to 43.3% of the share capital (2005: 42.5%). This included nearly 30% of the shares held abroad – an increase of almost 50% compared with 2005. We see this as the first fruits of our efforts to actively inform our investors about the Annual General Meeting and to encourage them to exercise their proxy voting rights.
Information regarding our forthcoming Annual General Meeting on 26 April 2007 can be found on our web pages www.munichre.com/agm and in the dedicated section of our shareholder portal at www.munichre.com/register.
In 2006, the prices of the subordinated bonds issued in 2003 fell as a result of the general rise in interest rates. At year-end, the euro tranche was listed at 112.0% and the pound sterling bond at 114.9%.
Integrated risk management, value-based management and a profit-oriented underwriting policy are core to our sustained good performance and our profitable-growth objective.
Reinsurance group Of the gross premiums totalling €22.2bn written in 2006, around 65.5% came from property-casualty and 34.5% from life and health business.
The division North America is responsible for our subsidiary Munich Re America, for Munich Reinsurance Company of Canada and for Temple Insurance Company.
Subsidiaries/Branches: Munich Reinsurance Company of Canada Munich Reinsurance America Temple Insurance Company
Risk-based Group return target for the financial year 2007 We have set ourselves ambitious targets again for 2007, to follow up the successful performance of the past financial year. For this purpose, we are employing a risk-based performance measure which we used for external communication for the first time in 2006: return on risk-adjusted capital (RORAC). We derive this target by placing the profit achieved or aimed at, expressed in euros, in relation to the necessary risk capital, the amount of which we determine
Dr. jur. Hans-Jürgen Schinzler Former Chairman of the Board of Management of Munich Reinsurance Company
In its present form, the proposed legislation envisages that, upon contract termination, 50% of the hidden reserves apportionable to the individual policyholders will be allocated to them on a binding basis. Legislators are no longer pursuing the more far-reaching considerations from spring 2006 that would have substantially threatened the life insurance business model. These provided for the binding allocation of hidden reserves every two years based on their respective fair value.
A further focus of the reform in life insurance is the topic of early lapse. To date, surrender values have been either low or non-existent in the first few years of a policy’s development due to the offsetting of acquisition and marketing costs under the “zillmerisation” method. These costs are to be spread equally over the first five years of a policy. However, a problematical aspect is that, according to the current draft of the reform, these regulations are also to apply to existing insurance portfolios as of 1 January 2008. The bases of insurers’ calculations would thus be interfered with retroactively. It remains to be seen whether this will be corrected in the further course of the legislative process.
The share of the investment result in the Group’s performance amounted to €8.9bn (10.8bn). Our operating result rose by 32.6% to €5.5bn (4.1bn), but it should be remembered that the previous year’s figure included large profits from the sale of the Karlsruher Insurance Group and HypoVereinsbank shares.
In reinsurance, we continue to adhere to our strictly profit-oriented underwriting policy. The realisation that risk-commensurate terms and conditions are absolutely essential is becoming more and more prevalent in the reinsurance markets. Although capacities increased, we were able to obtain attractive terms and conditions for both new business and renewals. Premium income was stable at €22.2bn compared with the previous year (22.3bn).
Overview and key figures Our reinsurance business performed most satisfactorily again in the past year. On the one hand, we benefited from the high quality of our basic business, whose current profitability is the outcome of the consistent steps we have taken in recent years. On the other hand, unlike in the previous year, we were largely spared severe natural catastrophe losses. This is reflected particularly in the share of natural catastrophes in our combined ratio. Whereas in the previous year, especially as a result of the devastating Atlantic hurricanes, this share totalled 19.4 percentage points, in the past business year it amounted to only 1.3 percentage points. For the above-mentioned reasons, we recorded a significantly improved combined ratio – an excellent 92.6% (111.7%). This enabled us to clearly surpass the ambitious targets we had set ourselves for the past year. The positive development was underpinned by a good business performance in life and health and a solid investment result.
With a gross premium volume of €1.01bn (1.04bn), our branch in the United Kingdom kept its premium more or less stable compared with the previous year. Despite the continuing pressure on prices in the high-volume segment of pure mortality covers, we succeeded in writing similar new business volumes to the previous year, whilst maintaining strong margins. This was particularly thanks to services designed to help clients effectively structure processes for new business, above all in risk selection, where we can profitably offer our in-depth knowledge.
The Gulf states are another growth region for health insurance. Munich Re has been active in this market for several years now, with managed care service companies that assist our clients in risk management and the acceptance of insurance risks. In 2005, we won a commission from the Emirate of Abu Dhabi to set up a specialist health primary insurer (DAMAN Health Insurance). The basis of this was a consultancy agreement, in which we were able to draw on all our competence in managed care. DAMAN started operating in mid-2006 and had a total of over 250,000 policyholders as at 31 December 2006. We are the exclusive reinsurer and reckon with very positive development. What is more, we expect other countries in the region to privatise their healthcare markets as well, which will give a further boost to our growth in the health reinsurance sector. In 2006, we were already able to increase our premium in the Gulf states to €49m, growth of 60% compared with 2005, which brought this region’s share of our health insurance segment’s premium volume
Premium income in our division Europe 1 fell somewhat to €1.5bn, primarily due to developments in the German market. There were several underlying causes, not least the continued application of our rigorously profit-oriented underwriting policy. We achieved the greatest premium growth in the Czech Republic, Romania and Russia. Currency translation barely affected the premium income.
The result was therefore down, despite the satisfactory claims experience in 2006.
In France and Belgium, premium volume fell from €237m to €199m. Expenses for long term care costs in motor liability insurance again rose, further increasing benefit payments for losses incurred in previous underwriting years and causing us once more to strengthen our reserves for this segment. Business experience in property business was exceptionally good.
Since we had made general provision for IBNR losses at Group level, Munich Re America’s reserve strengthening
– The more recent accident years experienced favourable loss emergence across virtually all lines of business. We therefore reduced our estimate of ultimate losses for property business and other short-tail lines of business, and released reserves of US$ 250m, whereas we did not lower our reserves for the longer-tail liability lines. The reserve action taken in 2006 underscores management’s determination to maintain its prudent reserve strategy introduced in 2005.
The 2006 treaty renewal season was very successful for both new and renewal business. Pricing integrity was maintained while MR Canada strengthened its position as the leading reinsurance group in Canada.
Temple Insurance continued its expansion into niche products with the successful launch of a comprehensive product for wind farm insurance. It also continued to implement optimal infrastructures (systems and personnel ) through further development of its primary insurance administration system. In fact, Temple recently entered into a partnership agreement with a third-party vendor to market the system internationally.
Corporate Underwriting/Global Clients (CUGC) determines the underwriting standards for the Munich Re Group’s nonlife business and assures the quality of this business (see page 56); these tasks are the responsibility of the Group Corporate Centre within the division. Claims Management and Consulting formulates the guidelines for claims handling and reserving, and safeguards the quality of these operations. Besides this, the division is responsible for underwriting business in specific classes of business.
In the final quarter of the year, we commenced the disposal of a German real estate package, reducing our real estate portfolio through sales and changes in the segregated fund portfolio by €983m overall in 2006. At the balance sheet date, the carrying amount for land and buildings was €4.7bn (5.8bn). Our ratio of real estate investments to total investments at carrying amounts sank to 2.7%, compared with 3.3% at the start of the year.
Our portfolio of fixed-interest investments has an excellent rating structure. As at 31 December 2006, approximately 97.6% of our fixed-interest securities were investment grade and 93.5% were rated “A” or better.
All insurers in the Munich Re Group met the relevant solvency requirements in 2006.
Bonds and notes issued The bonds and notes issued by our Group are rated as follows: A.M. Best Fitch Moody’s S&P
Last but not least, our cedants benefit from our local presence. Branches and subsidiaries around the world ensure that our clients can always find us where and when they need us. We thus combine international know-how with in-depth knowledge of local conditions, to offer our clients individual solutions in every case.
At the top of our security pyramid in the reinsurance group is the IS Office, which defines uniform standards and guidelines applied by all our companies globally. It is also responsible for information-security crisis management and for quality assurance in the enforcement of the relevant directives. In addition, it instructs our Security Centre of Competence in Toronto, whose functions include testing the IT infrastructure of the reinsurance group and central IT applications for weaknesses and possible security risks. We attach great importance to the security training of all our staff.
IT Security Management also supports risks analyses for future strategic and operational projects in order to safeguard the ERGO Group’s assets long term.
It is our conviction that good corporate governance creates lasting value. We therefore apply the highest standards to our operations and activities, complying with all the recommendations of the German Corporate Governance Code. Beyond this, we have our own Munich Re Code of Conduct specifying ethical and legal requirements that must be met by employees.
Internal regulation of the Board of Management Munich Re’s Board of Management had 11 members at the end of the 2006 financial year. It was trimmed down to nine members as of 1 January 2007, with a further reduction to only eight members as at 1 March 2007. Pursuant to Article 16 of the Articles of Association, the Board of Management must comprise a minimum of two persons; beyond this, the number of members is determined by the Supervisory Board. Rules of procedure issued by the Supervisory Board regulate the distribution of responsibilities and cooperation on the Board of Management, which has had two committees since 1 January 2006 – one for Group operations and one for reinsurance operations – in order to enhance the efficiency of its work.
Name Basic Remuneration Annual Medium- Value of Total Number of remuneration in kind and bonus1 term stock stock fringe bonus1 appreciation appreciation All figures in € benefits rights granted rights 1 Owing to the very good business performance, provisions have been established for the maximum bonus amounts for the Munich Re Group/Company result.
In the coming years, we will adhere to our principle of “profit before growth” in primary insurance and reinsurance. In other words, we will strive for growth in profits, not in premium income. This means that we will continue to make every effort to optimise our business portfolio and improve the efficiency of our processes. Furthermore, we intend to and will expand our business, but not at the expense of sustained profitability.
Economy The comparatively robust growth of the global economy should continue in 2007, albeit at a slightly reduced pace.
In life insurance, our gross premiums written should increase slightly. Maturing policies, i.e. policies whose premium payment period has ended, continue to have a curbing effect on premium income. The rising demand for private provision and the high attractiveness of retirement provision products are being reflected in the figures for German new business. Here, we expect higher revenue from single premiums and a rise in regular-premium income, especially in unit-linked life insurance. The sale of Riester pension products qualifying for subsidisation should develop favourably and company pension business should also gather pace.
The selective acceptance of risks in primary insurance and reinsurance companies is at the core of the Munich Re Group’s business model. The Munich Re Group complies both with the German Law on Corporate Control and Transparency (KonTraG) and with local regulations on risk management in the different countries in which it operates. Our risk early-warning system is regularly examined independently, both by internal auditing units at the individual Group companies and by the external auditor as part of the annual audits. Whilst we are in a position to adequately assess risk situations, the growing complexity and dynamism of the environment in which we operate means that there are, naturally, limits.
Aggregate and monitor Group-wide risks (e.g. risk capital) and report to Board
Where a risk assessment is performed by one of the decentralised Group risk functions, the role of the Group CRO’s central IRM unit is to independently challenge and verify the findings of that risk assessment using its own knowledge of the risks, together with structured interviews and independent analysis.
Market risks are measured and limited using a valueat -risk (VaR) approach for the asset-liability mismatch risk, which is also employed in our strategic investment planning to model the optimal investment portfolio according to our risk preference. This asset-liability mismatch risk approach measures the possible adverse changes in economic surplus resulting from changes in assets and the valuation of liabilities. Within this VaR, all important sources of the market risks of assets are considered, i.e. equity, interest rate, credit spread, and currency and real estate risks. As far as equity investments are concerned, we model diversified equities using appropriate indices, whereas concentrated equity investments are modelled by name. Besides this, the change in valuation of liabilities with respect to changes in interest rates, FX rates and inflation is included.
The terrorism attack in New York in 2001 showed that, in view of the growing concentration of wealth in economic centres around the world, terrorists can cause enormous damage. The attacks in Istanbul and Madrid in 2004 and London in 2005, as well as prevented attacks for example in Dortmund/Cologne 2006, also made it all too clear that the threat of international terrorism remains on the agenda for reinsurers, insurers and risk managers.
Financial strength on an economic basis We started the reporting year 2006 with available financial resources comfortably exceeding the risk-based capital requirements for the Group. This was also illustrated by a series of “stress tests” applied to our economic measure of financial strength. The favourable result for the business year 2006 further consolidated this position, giving us headroom to launch our first €1bn share buy-back programme. Shares repurchased during the period November 2006 to April 2007 will subsequently be retired.
II. Deposits retained on ceded business (26) 2,241 3,392 –1,151 –33.9
Thereof: – Deferred tax liabilities relating to disposal groups (16) 65 – 65 –
Total income (1–3) 46,374 48,493 –2,119 –4.4 4. Expenses for claims and benefits (31)
Munich Re Group Annual Report 2006 Consolidated financial statements_Statement of recognised income and expense
The ERGO Insurance Group has concluded profit-transfer agreements with nearly all of its German insurance companies. In our segment reporting, expenditure incurred as a result of profit transfer is deemed appropriation of net income. The segments are thus adjusted to eliminate these expenses, the elimination being carried out in the consolidation column.
Deferred tax liabilities Under IAS 12, deferred tax liabilities must be recognised if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); cf. notes on assets item H.
Growth rate used for 0–1.5% extrapolating beyond the 1.5% as maximum growth factor as per Circular 2108/2003 of the German Insurance Association cash flow planning based on financial plans/forecasts
The fair value of investment property at the balance sheet date amounted to €6,287m (7,132m). Of this, €1,714m (–) concerns investment property classified as “non-current assets held for sale”; cf. (16) “Non-current assets and disposal groups held for sale”. The valuation is performed for each site individually as at 31 December 2006 except where valuation units are formed. Calculations are carried out both within the Group and by external valuers. Material for the valuation is determining the sustainability of cash inflows and outflows, taking into account the market conditions at the respective property location. The fair value is determined individually per item by discounting the future cash flow to the valuation date. Depending on the type of property, discount rates of 3.0% to 6.5% are used for residential buildings, of 4.0% to 9.5% for office buildings, and of 4.5% to 10.0% for retail.
Over one year and up to two years 56 39 58 40
Derivatives are used by Munich Re to hedge against currency, interest-rate and other market-price risks. This is done at the Group companies within the framework of individual supervisory regulations and additional internal company directives. The risk of default is practically non-existent in the case of products traded on the stock exchange. Over-the-counter products, on the other hand, harbour a theoretical risk in the amount of the replacement costs. Therefore, in the Munich Re Group, only top-quality counterparties are selected for such transactions.
The impairment losses for owner-occupied property are mainly due to market value adjustments at Hamburg-Mannheimer Versicherungs -AG totalling €38m.
The impairment losses are distributed between the different Group segments as follows: in the reinsurance segment, €5m (6m) is apportionable to life and health and €10m (20m) to property-casualty; in the primary insurance segment, €40m (58m) is apportionable to life and health and €10m (3m) to property-casualty.
at 31 December in the financial year, €66m (–) concerns owner-occupied property classified as “held for sale”; cf. (16) “Non-current assets and disposal groups held for sale”.
Thereof: – Amounts due to banks relating to disposal groups 231 –
(17) Equity The total share capital of €587,725,396.48 at 31 December 2006 is divided into 229,580,233 registered no-par-value shares, each fully paid up and entitled to one vote. By resolution of the Annual General Meeting on 28 April 2005, Munich Re was authorised to buy back shares amounting to a maximum of 10% of the share capital up to 27 October 2006. The Annual General Meeting on 19 April 2006 renewed this resolution, thereby authorising the Board of Management to buy back shares amounting to a maximum of 10% of the share capital up to 18 October 2007. The number of shares in circulation developed as follows: Munich Re Group Annual Report 2006 Notes_Notes to the consolidated balance sheet – Equity and liabilities
Total equity 26,429 24,397 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Of the provision for premium refunds based on national regulations, €49m (42m) is apportionable to property-casualty insurance. The provision for deferred premium refunds is established solely for life and health insurance.
Effects of changes in tax rates on deferred tax –10 –
However, such biometric risks may accumulate or be aggravated as a result of interventions by legislators or courts in the distribution of risks and rewards underlying the contracts concluded between the parties to insurance. For example, in the proposed German health reform, the rules envisaged for the portability of ageing reserves or the option for clients to switch to a “basic policy” could significantly disrupt the proven system of collective risk balancing between policyholders and the reasonable balance of interests between insurance companies and their insureds.
(38) Risks from reinsurance and retrocessions In connection with the business we cede, the default risk is also of relevance. For our externally placed reinsurance and retrocessions, we choose only business partners that have been approved by our Security Committee, which regularly examines the security of potential retrocessionaires and reinsurers on the basis of a range of criteria. The minimum requirement for participating in one of our retrocession or reinsurance treaties is an S&P or A.M. Best rating of A–. Especially in the property-casualty segment, we avoid an accumulation of risks through a broad spread of our retrocessions.
Fair value 2006 for one right €0.00 €0.00 €0.02 €1.09 €47.40 €44.36 €46.03 €37.35
The retrospective first-time application of IAS 19 (rev. 2004) increased the earnings per share both in the financial year and in the previous year by €0.04 per share.
Financial Accounting Standards (FASs) US accounting regulations that give detailed rulings on individual accounting questions and which must be complied with by listed companies that prepare accounts in accordance with US GAAP.
Risk capital The amount of capital hypothetically assigned for the conducting of insurance or reinsurance business to ensure that the probability of default in respect of the portion of the business exposed to risk is kept to a minimum. The capital required for this purpose is calculated using mathematical risk and financing models.
Return on risk-adjusted capital (RORAC) 54ff., 66, 114, 119, 123 Risk capital 52, 54f., 125ff., 138 124ff., 138 Risk models 55, 61, 98, 125ff.
Combined ratio non-life reinsurance % 92.6 111.7 98.9 96.5 123.7 *Adjusted owing to first-time application of IAS 19 (rev. 2004).