Net expenses for claims and benefits 33,351 31,636 32,487 31,265 34,162
South America: Bogotá, Buenos Aires, Caracas, Mexico City, Santiago de Chile, São Paulo
“Focus and discipline. We must systematically build on our strengths. They will enable us to achieve the growth in profit we aspire to.”
“Knowledge and client proximity. We must be the best in risk knowledge – also for new types of risk complex. On this basis, we devise individually tailored products and solutions for our clients, bearing in mind that every client is unique.”
Further details on the distribution of Board responsibilities may be found on page 51.
Life without risk is as inconceivable as winning the World Cup without training. The word “risk” comes from Italian, and the original meaning is said to have been to circumnavigate cliffs. Thus, right from the start, risk entailed mastering threats to life and property.
Hurricane Katrina hit the insurance industry with the largest loss of all time, and our risk models and trend analyses leave little doubt that we will have to reckon with losses of this magnitude more often. What can we learn from this catastrophe? How can we ensure that uncontrollable mega-events entailing so much devastation and suffering remain insurable?
The hazard potential becomes particularly clear when these two effects are observed in concert. In the current warm phase (since about 1995) the number of landfalls involving powerful hurricanes (Categories 3–5 on the Saffir-Simpson Scale) has been about 70% higher than in the previous warm phase (approx. 1926–1970), an increase that is very probably due above all to global warming. Compared with the last North Atlantic cold phase (approximately 1971–1994), the number has shot up by about 230%, primarily under the influence of the natural climate oscillation. Loss models have to take these changes into account in future.
Munich Re supports its clients in the field of claims management, too. In ad-hoc meetings with our cedants, newsletters on claims management and special publications, we give advice on how the enormous number of individual losses can be processed in an efficient and professional manner.
The risk_ Creating the right balance in the risk portfolio is central to our business.
The risk_ Medical progress and longevity are cost drivers as well as growth engines.
Large dividend increase Given the record result in 2005, the dividend proposal of the Board of Management and Supervisory Board at the Annual General Meeting on 19 April 2006 will be payment of an increased dividend of €3.10 per share (€1.10 higher than last year). This amounts to a rise of 55%. Altogether, we will thus distribute a record amount of €707m (457m) to shareholders.
Bogotá, Buenos Aires, Caracas, Mexico City, Santiago de Chile, São Paulo
– Strategic and operative planning are closely linked. All initiatives are ultimately geared to the overriding financial objective of enhancing corporate value.
Our value-based management system takes into account the individual characteristics of the business segments In non-life business, we employ the following simple formula for measuring value creation and for managing and monitoring our business activities: Cost of equity
Any investment of capital in a company must – from the investor’s point of view – achieve at least the return of an alternative risk-commensurate investment (opportunity costs). However, in order to significantly increase its corporate value, the Munich Re Group aims to earn a return on necessary operating equity (return target) that is markedly higher than the opportunity costs.
In order to give more emphasis in external communication to the Munich Re Group’s value orientation – as implemented mainly through our internal management tools – we have geared our Group return target to risk-adjusted performance indicators, which are explained in more detail in the following section.
Dr. oec. publ. Wolfgang Strassl dkv Deutsche Krankenversicherung ag* Munich American Reassurance Company, Atlanta*
Prof. Dr. rer. nat. Drs. h.c. mult. Hubert Markl Bayerische Motoren Werke ag Sanofi-Aventis s. a., Paris Georg von Holtzbrinck GmbH
Over the course of the year, the oil price rose substantially, mainly because global demand remained at a high level. Following the hurricanes in the Gulf of Mexico in the second half of August and at the beginning of September, the us$ 65 per barrel mark was clearly exceeded at times. Since then, prices have receded a little.
Prices generally remained at a risk-adequate level in the renewals in reinsurance at the beginning of the year, at 1 April and at 1 July 2005. Virtually all market players gave priority to selective and result-oriented underwriting.
Events after the balance sheet date In December 2005, ergo Versicherungsgruppe ag signed agreements with gfkl Financial Services ag under which the latter would acquire its majority stake in the ada-has Group, an it systems specialist. In the meantime, the
Health The global health insurance market with its segments ”financial protection“, ”health services“ and ”provision of care“ offers considerable growth opportunities. Our key sector ”financial protection“ is particularly promising. Two main factors are stimulating higher demand here: healthcare is gaining in significance and the healthcare systems worldwide are undergoing further liberalisation and privatisation. The USA remains the largest single market for us. However, we anticipate strong growth in the regions outside the USA and Europe, in particular in China and the Gulf region. As the world’s leading provider, with a product portfolio that integrates reinsurance and services, Munich
Premium The renewal negotiations in 2005 showed that the reinsurance markets are stable, despite the worldwide rise in capacity. In view of the high losses from the windstorm events in the Atlantic and Pacific and the low level of interest rates worldwide, many market players continued to charge risk-adequate prices. We were largely able to implement our pricing expectations and treaty conditions and to stabilise the good premium levels achieved in previous years. We consistently refrained from writing business that could not be concluded at risk-commensurate and profitable conditions.
Owing to our rigorous underwriting policy, our premium volume of €14.5bn was 2.1% down on the level achieved in 2004. In contrast to the previous year, changes in exchange rates had a positive effect on premium income in 2005. Adjusted to eliminate effects from changes in exchange rates, premium declined by 2.6%.
Premiums in motor insurance, the class of business with the largest premium volume, came under significant pressure due to growing competition – but this development still did not have a negative impact on the combined ratio or result.
As at 1 January 2005, we optimised the structure of our units in Australia and New Zealand. Here, property-casualty business is written directly by our local branch offices, under the umbrella of Munich Holdings of Australasia (mha). However, with effect from 2005 this business has been booked within the legal entity of Munich Reinsurance Company and is thus directly recognised in its financial statements. Compared with the previous year, premium income for these segments declined by 11.3%, from €406m to €360m. Besides negative currency translation effects, the main reasons for this were consolidations of large local primary insurers and higher client retentions. Strategic partnerships with selected cedants and solutions for specific client requirements – in combination with the ongoing portfolio optimisation of recent years – led to a gratifyingly positive annual result.
In property insurance, we took advantage of the business opportunities offered by the reinsurance of infrastructure projects, such as those launched in preparation for the fifa World Cup in South Africa in 2010. As a result, our overall premium income rose by 7.5% to r 2,574m (2,394m). Since our claims expenditure was also low, our result for the year grew by 7.4% to r 277.1m.
Thanks to American Re’s disciplined underwriting policy, the profit from business written in 2005, adjusted to eliminate the losses from the hurricanes, was again satisfying. As in previous years, premiums in 2005 declined due to strict cycle management based on our ”profitability before growth“ policy. Business that did not meet our underwriting and pricing guidelines was not underwritten or was terminated.
American Re draws a line under the past Record hurricane season 2005 raises the demand for reinsurance capacity Canadian units meet their goals
Canada, too, was not spared natural catastrophes in 2005. On 19 August, a severe rainstorm in the Toronto region caused insured losses of Can$ 400m–500m, although mroc’s share of this was only about Can$ 9m. The Group’s gross premiums written decreased by 22.6% to Can$ 475m (614m), mainly due to the non-renewal – as planned – of a very large global proportional treaty. With a profit for the year of Can$ 71.5m (61.4m) and a combined ratio of 91.5% (94.9%), however, we achieved our objectives and recorded a very good result.
For the second consecutive time, the us insurance market rated American Re ”Best Overall Reinsurer in the USA“ in the renowned Flaspöhler survey 2005. This award is an incentive for American Re to keep moving on its current path and to remain its clients’ preferred reinsurer.
In the highly specialised segment of customised portfolio solutions, we provide our international clients with tailormade reinsurance solutions for loss portfolios. We continue to see attractive long-term business opportunities here.
In addition to its presence at Lloyd’s, the syndicate has developed a wide and efficient distribution network through its branch offices in Hong Kong and Singapore. Pursuing our strategy of organic growth, we established a branch office in Dubai in 2005. These branch offices allow us to make the best use of the growth potential offered by the emerging markets in the Middle and Far East. In addition, we diversify the risk with our subsidiaries Northern Marine Underwriters Ltd. and Groves John & Westrup Ltd., specialising in local marine cargo and pleasure craft hull insurance. They significantly contribute to profitable growth and act as a stabilising balance to the volatility of Lloyd’s business. The syndicate writes business in the main marine
Munich Re Group Annual Report 2005 Management report_Primary insurance classes, excluding ocean hull business, from which it withdrew in 2000 due to inadequate profitability expectations. It focuses on the areas of offshore energy insurance, where Munich Re is recognised as the global market leader, and on cargo and marine liability, in which it can draw upon sound underwriting expertise and high professional competence.
Investment principles We only make investments in assets from which we expect an appropriate return, at the same time attaching great importance to security, liquidity and diversification. We reduce currency risks by matching our expected liabilities with assets in the correlated currencies.
ergo’s life and health insurers also keep their own mortality tables in order to have customised data available for their specifically structured portfolios. Their actuaries liaise with the German Association of Actuaries to constantly extend and update their knowledge of client life expectancy.
Basic remuneration The fixed annual basic remuneration is paid in the form of a monthly salary.
Medium-term incentive plan 50% annual result 70–100% Achievement of objectives In the fourth year 50% achievement 70–100% at least 70% on average of personal objectives over three years
The dividend-related remuneration paid previously had come in for increasing criticism, in particular because the Supervisory Board could indirectly influence its compensation through the dividend proposal at the Annual General Meeting. The result-related annual remuneration is based on the undiluted earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with International Financial Reporting Standards (ifrs): each Supervisory Board member receives €4,500 for each full euro by which earnings per share exceed €4, but a maximum of €36,000.
In 2005, we consistently pursued our strategy of reducing the historically evolved concentration of our investments in the German financial services sector and will continue to actively diversify our investment risks.
Overall, our goal for the business year 2006 is a return on risk-adjusted capital (rorac) of 15%, which on the basis of our situation at the turn of the year 2005/2006, is equivalent to a consolidated profit for the year of between €2.6bn and €2.8bn.
Recent years have shown that the Munich Re Group’s risk landscape can change quickly and without warning, owing to a wide range of events and influences. We are constantly refining the tools with which we monitor and manage risks, so that in our view they have now reached a high degree of sophistication. 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 natural limits. There cannot – and never will be – absolute security when it comes to identifying risks at an early stage, measuring them sufficiently, or correctly estimating their real hazard potential. This was clearly shown last year by the unexpectedly high losses we incurred from Hurricane Katrina.
Combined ratio for the last ten years **Thereof World Trade Center and reserve strengthening at American Re: 22.4%. **Thereof World Trade Center and reserve strengthening at American Re: 15.9%.
Main operational risks By operational risk we mean the possibility of losses as a result of inadequate processes, technical failure, human error or external events. These include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations or disagreements with business partners.
We counter market-price risks from real estate by optimising the return and risk profile of our real estate investments. We are doing this by rejuvenating our portfolio on an ongoing basis, diversifying internationally and investing in top-class commercial real estate primarily located in major European cities. In addition, we are pursuing the aim of reducing the concentration of our real estate investment in Germany, which used to be very pronounced and has not yet been fully resolved. We counter the risk of rent losses by means of high credit-standing requirements with regard to our tenant structure.
– In the USA, the Fairness in Asbestos Injury Resolution Act 2005 is currently going through the federal legislative procedure. A decision on the bill, which envisages the formation of a privately financed fund to compensate asbestos victims, will in all probability be taken after 2006. What consequences this proposed legislation will have for our companies in the USA and to what extent the financial burden may impact our current provisions depends on how the individual regulations are framed.
Summary of the risk position Despite the high costs for the reserve increase at American Re and the Atlantic hurricanes, we see ourselves on course to sustain the level of profitability we have achieved. We therefore assess the Munich Re Group’s risk situation as controlled and viable. The particularly heavy burdens from the reserve strengthening at American Re and the natural catastrophes in 2005 contrast with our good basic business and the high realised capital gains from the reduction of our portfolio of participating interests. We cannot expect comparably high investment earnings in future, but are convinced that we have taken adequate measures to control our risks from investments and reinsurance, especially as regards claims reserves. Where we identify a need for further action, we will initiate the necessary steps. With our risk management instruments, we will systematically control the risks in our reinsurance business and, against the background of last year’s natural catastrophe losses, ensure that we firmly adhere to our policy of riskadequate prices, terms and conditions (e.g. exclusions), even if this means having to refrain from participating in some business. With the reinforcement of American Re’s capital base, we have substantially strengthened its market position. In addition, we have integrated American Re even more closely into the Group through extended retrocession covers.
Share buy-backs – – – –51 – – – – – –51
ias 39, Financial Instruments: Recognition and Measurement, and ifrs 4, Insurance Contracts, were modified in August 2005 with regard to financial guarantees and credit insurance contracts. As from 1 January 2006, there is the option of accounting for credit insurances in accordance with ias 39. We will not take advantage of this option, however, and will continue to account for the transactions concerned in accordance with ifrs 4.
The provision for future policy benefits is posted for the actuarially calculated value of obligations arising from guaranteed entitlements of policyholders in life and personal accident insurance. It also includes the ageing reserves for health primary insurance conducted like life insurance. The actuarial assumptions used for its calculation include, in particular, assumptions relating to mortality, disablement, morbidity, interest rate 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 take account of the risks of change, error and random fluctuations. The actuarial assumptions are adjusted if the original provisions for adverse deviation are no longer considered sufficient.
The amounts posted are the realistically estimated future amounts to be paid; they are calculated on the basis of past experience and assumptions about future developments (e.g. social, economic or technological parameters) and using appropriate actuarial methods. Future payment obligations are generally not discounted; exceptions are some actuarially calculated provisions for annuities in workers’ compensation, motor insurance, personal accident and liability insurance, which are discounted at a rate admissible under supervisory law.
Foreign-currency transactions are essentially translated into the Group companies’ respective national currencies in accordance with ias 21. In the case of reinsurance, the principle of currency matching also applies. This means that Group companies which write a significant portion of their business in foreign currency generally safeguard themselves against exchange losses by attempting to match assets and liabilities in the same currency. Where exchange gains or losses occur nevertheless in the translation of foreign-currency transactions into the national currencies of the consolidated companies, they are accounted for under “other income” and “other expenses” respectively.
The decrease in investments in associates is mainly due to the acquisition of the hvb Group by UniCredit S.p.A., Milan. The Munich Re Group’s total interest in the hvb Group amounted to 18.3%, and by accepting the exchange offer in the fourth quarter of 2005, we acquired a share of 6.7% in UniCredit. Directly after the exchange, the Munich
Notional principal amounts – – – – – – – 41
At the balance sheet date, there is an equity item of €6m (10m) from cash flow hedges.
On 31 December 2005, a total of 1,572,570 Munich Re shares with a calculated nominal value of €4,025,779.20 were held by Group companies. This represents 0.68% of the share capital.
In the business year 2005, companies of the ergo Insurance Group acquired 147,374 shares at an average price of €89.78 to cover future commitments from the long-term incentive plans launched since 2002 and sold 64,362 shares at a price of €115.18 each; it also sold 3,477 shares at a price of €97.85 each. Together with the remaining Munich Re shares acquired to safeguard the stock appreciation rights granted in 2002–2004, the ergo Insurance Group has a total portfolio of 300,235 shares as at 31 December 2005.
Less: – Provision for deferred premium refunds recognised in equity 4,075 3,279
All figures Life and health Property-casualty Life and health Property-casualty in €m * 31.12.2005 Prev. year 31.12.2005 Prev. year 31.12.2005 Prev. year 31.12.2005 Prev. year 31.12.2005 Prev. year *After elimination of intra-Group transactions across segments.
ibnr reserves are calculated using actuarial methods on the basis of current run-off triangles for payments made and claims reported.
Net run-off result of provision –739 –1,216 –350 –4,600 –5,607 –7,219 –4,642 –255 –1,390 –3,226
The changes in the consolidated group result mainly from the sale of the Karlsruher Insurance Group.
American Re Corporation, Princeton 7.45%, us$ 500m, Senior Notes 1996/2026 423 367 ergo International ag, Düsseldorf 2.25%, €345m, Bonds Exchangeable into e.on ag Shares 2001/2006 0.75%, €345m, Bonds Exchangeable into Sanofi-Aventis s.a. Shares 2001/2006 674 652
(34) Taxes on income This item shows the corporation tax and municipal trade earnings tax paid by the German companies (including solidarity surcharge) and the comparable taxes on earnings paid by the foreign companies in the Group. In accordance with ias 12, the determination of taxes on income includes the calculation of deferred taxes.
Estimation risks The degree of exposure to estimation risks differs according to class of business and also between primary insurance and reinsurance. The relevant structure of our business can be found on page 224. On the basis of the loss ratios of recent years listed there, conclusions can be drawn about the historical volatilities of the various classes of business. In estimating claims frequency in property insurance, there is a high degree of sensitivity regarding the underlying assumptions about weather-related and geophysical events. We include trends in our considerations. Beyond this, the estimation of technological and demographic parameters plays an important part. In liability insurance and sections of motor insurance, the development of economic and legal parameters is significant. In all classes of business, the estimation of claims amounts is generally affected by the same uncertainty factors as the estimation of claims frequency. In addition, the estimation of claims inflation plays an important role. Particularly in long-tail insurance business, e.g. liability and portions of accident business, the amount of the payments to be made in the future can be influenced by the development of costs in the medical sector, trends in court awards and general inflation. In primary insurance and reinsurance, we employ the latest actuarial methods to measure the provision for outstanding claims (cf. the remarks on page 159 f.). In doing so, we establish provisions for claims that have been incurred but not yet reported and for claims that have been reported but not yet settled. The basis for measuring these provisions are assumptions based on historical loss development data for the different segments. In particular, these embed various pricing, coverage and benefit/ inflation levels. Also, all foreseeable future trends are taken into account. Owing to their special economic importance, we consider major loss events separately in this process. A particular sensitivity exists in liability insurance, where liabilities can manifest themselves with a considerable time-lag. Court decisions may continue to significantly impact both claims frequency and claims amounts for insurance contracts written in the past. By constantly monitoring trends – with regard to mass torts, for example – we ensure that the assumptions underlying the measurement of the provisions always reflect the latest knowledge. In the case of the provisions for asbestos and environmental claims, the long latency period between the loss trigger date of the contractual liabilities and the actual reporting and settlement of a claim make it difficult to adequately predict ultimate losses. Therefore we supplement traditional actuarial methods for claims estimation with additional techniques. These include individual exposure analyses by specialised claims staff, detailed quarterly monitoring of emerging claims and settlements, statistical projections, and industry benchmarks. Further information on asbestos and environmental claims is provided on page 185. The adequacy of the provisions is regularly checked in internal reviews and audits. These analyses draw on the knowledge and experience of various specialists, such as actuaries, scientists of various disciplines, underwriters and accounting experts. Whenever possible, we also refer to external statistics and documents. If at a later date the assumptions underlying the measurement change, we adjust the provisions for outstanding claims for losses incurred in the past. As regards future underwriting risks from business already written, actual claims expenditure may deviate from expected expenditure, owing to unexpected changes in claims frequency and amount. As part of the monitoring of our portfolio, we check whether the original assumptions need to be adjusted. Using the liability adequacy test under ifrs 4, we compare the claims expenditure expected on the basis of updated assumptions, including costs, with the premiums still to be expected, and make additional provision if necessary. This is recognised directly in the income statement.
(40) Related parties Information on the remuneration of Board members and transactions with Board members can be found in the remuneration report on page 112. Transactions between Munich Re and subsidiaries that are to be deemed related parties have been eliminated in consolidation and are not disclosed in the notes. Business relations with unconsolidated subsidiaries are of subordinate importance as a whole; this also applies to business relations with associates.
Fair value 2005 for one right €0.09 €0.05 €0.51 €2.91 €39.30 €37.31 €39.44
(47) Contingent liabilities, other financial commitments Commitments under rental, work and service contracts amount to €147m (95m). Investment obligations total €214m (423m). These figures represent undiscounted nominal amounts.
Diluting effects to be disclosed in calculating the earnings per share were not present either in the business year or in the previous reporting period. Earnings per share can be potentially diluted in future through the issue of shares or subscription rights from amounts authorised for increasing the share capital and contingent capital.
Bloemers Holding b.v., Rotterdam 22.73% 21,002 6,334 d.a.s. Difesa Automobilistica Sinistri, S.p.A. di Assicurazione, Verona 47.34% 8,213 1,971
They have been translated using the exchange rates applicable on 31 December 2005. ***Result for the year after profit transfer.
Bornhuetter-Ferguson method Standard actuarial method used to estimate the reserves needed for future claims expenditure resulting from losses that have already occurred but are not yet sufficiently specific. With this method, the overall loss expected is determined on the basis of historical data on the run-off of losses in the portfolio and an independent assessment by the insurer. These factors are given different weightings, depending on the information available on the status of the losses.
Deferred tax assets/liabilities Deferred taxes derive from temporary differences between accounting on the basis of � ias/ifrs and national tax law. If in the consolidated financial statements asset items are valued lower, or liabilities higher, than in the tax accounts of the Group company concerned, the resulting future tax relief must be recognised as a deferred tax asset. Also included are tax assets deriving from tax loss carry-forwards. If the accounting differences between the consolidated financial statements and tax accounts will lead to future tax burdens, these must be recognised as deferred tax liabilities. Deferred tax assets are reversed if a realisation of the receivable is not probable.
Goodwill Any excess of the purchase price of a subsidiary over the acquirer’s interest in the fair value of the net assets as at the acquisition date. Goodwill is not amortised but subjected to an impairment test. A writedown is made for any impairment loss.
ibnr reserves Provisions for claims that are not yet known to the insurer (ibnyr = incurred but not yet reported) but also for claims whose case reserves are not sufficient (ibner = incurred but not enough reserved).
otc derivatives Derivative financial instruments which are not standardised and are traded not on an exchange but directly between two counterparties via over-the-counter (otc) transactions.
Munich Re Group Annual Report 2005 General information_Index of key terms