Result before amortisation of goodwill €m 4,137 3,369* 1,971 –20 –445
Thereof attributable to minority interests €m 72 54* –34* –74* 145*
Important dates 2006/2007 19 April 2006 Annual General Meeting 20 April 2006 Dividend payment 9 May 2006 Interim report as at 31 March 2006 3 August 2006 Interim report as at 30 June 2006 3 August 2006 Half-year press conference 7 November 2006 Interim report as at 30 September 2006 20 March 2007 Balance sheet press conference for 2006 financial statements 20 March 2007 Analysts’ conference for 2006 financial statements 26 April 2007 Annual General Meeting 27 April 2007 Dividend payment 8 May 2007 Interim report as at 31 March 2007 7 August 2007 Interim report as at 30 June 2007 6 November 2007 Interim report as at 30 September 2007
Amortisation and impairment losses of goodwill 7 344 687 371 230
Income statement 1. Earned premiums 4. Expenses for claims and benefits 5. Operating expenses 7. Result before amortisation and impairment losses of goodwill 4,137 1,255 652 1,098 1,132 8. Amortisation and impairment losses of goodwill 7 3 – 4 –
Asia: Beijing, Hong Kong, Kolkata, Kuala Lumpur, Mumbai, Seoul, Shanghai, Singapore, Taipei, Tokyo
Group portrait 13 Case 1_Hurricanes 16 Case 2_Retrocession 18 Case 3_Wiehl Valley Bridge 22 Case 4_Disease management programme 24 Case 5_Abu Dhabi 26
Group management report 40 The Munich Re Group 42 Parameters 55 Business performance 61 Financial situation 98 Other success factors 104 Corporate governance 110 Prospects 118 Risk report 123
General information Glossary 213 Index of key terms 221 Important addresses 222
chance:risiko Risk is our business. The exhibition “chance:risiko” at Haus der Kunst in Munich presented risk from different angles. We underscore our plea for a risk-taking culture.
Complex, networked, vulnerable We never stop learning. In a world of ever-increasing complexity, what new risks are developing? How do risk scenarios have to be modelled so that they reflect chaotic systems? Nature is such a chaotic system, with countless small factors impacting the whole. That is why it is extremely difficult for geologists to make predictions about earthquakes, volcanic eruptions or other geologically determined natural disasters.
hvb shares exchanged into UniCredit stock The Munich Re Group accepts UniCredit’s exchange offer, sells approximately one-third of the UniCredit stock acquired and now holds a stake of under 5% in the major Italian bank. Page 95
Costliest natural catastrophe year in insurance history The negative natural catastrophe figures of over us$ 90bn in insured losses worldwide are attributable in particular to the unusually active and destructive hurricane season. Hurricane Katrina becomes the most expensive insurance event of all time. Page 16, 70
In the Munich Re Group, we can look back on an eventful anniversary year 2005, in which the overall outcome was very successful. We bettered our 2004 record profit of €1.9bn to €2.7bn, and surpassed our result target of a 12% return on ifrs equity after tax, with an roe of 12.3%. This enables us to substantially increase the dividend by 55% to €3.10 per share.
Our performance in primary insurance and reinsurance was very good in basic business (our underwriting business below the threshold of major individual and catastrophe losses). This has been the case in primary insurance for quite some time. But in reinsurance, too, our basic business has continually improved in recent years and has long since attained an excellent quality. We are reaping the benefits here of our consistent line of not following cyclical market fluctuations, even if it means losing premium volume.
Another feature of the business year that I see as positive was our decision in reinsurance to put an end to the issue of reserve strengthening for American Re’s business. Although our package of measures involved a major financial effort, we have freed Munich Re from a burden that had hindered us and adversely affected our Group’s public image – especially in the capital markets.
This contrasts with the huge burden from the series of natural catastrophes in summer and autumn. Indeed, 2005 can justifiably be called the “year of natural disasters”. Not only the hurricanes and the vast amount of damage they caused, especially in the USA, made headlines. The severe earthquake in Pakistan, which claimed so many lives, and the catastrophic floods in the Alpine region, particularly in Switzerland, were also major news items that contributed to the negative picture. Our result was impacted above all by the losses from Hurricane Katrina, which we expect to give rise to claims expenditure of over €1.6bn. Altogether, we estimate that claims costs for natural catastrophes in 2005 at Group level will total €2.6bn. Natural catastrophe losses consumed nearly 18% of the reinsurance
Dr. Nikolaus von Bomhard Chairman of Munich Re’s Board of Management group’s total premium income in the past year, compared with an average of only 3% per annum in the ten-year period 1995–2004; last year’s losses alone raise the average for the ten-year period 1996–2005 to 4.6%. But I would like to explicitly stress that we do not determine our pricing policy for natural catastrophe business just retrospectively, from many decades of past claims data, but naturally also prospectively – with due regard to expected developments such as climate change.
At this point last year, I described three cardinal virtues as the foundation of our strategy on which we intended to build our programme for the next few years. They were: focusing on “risk” as the underlying object of our business, actively diversifying risks, and optimising management quality/improving methods and tools for steering our business. We continue to consistently gear our work to these principles in order to achieve our most important corporate objective: turning risk into value.
I consider it essential in this context to provide you with more details of the change in our communicated result targets (which, incidentally, would not have been possible without the work on the above-mentioned virtues). Up to now we have defined our result target in terms of return on equity (roe), basing it on the shareholders’ equity shown in our balance sheet. This will now change. In future, we will be using return on risk-adjusted capital (rorac), meaning a result target related to our risk-based capital. In my view, this is the only economic basis that permits meaningful statements on the performance of our business operations. For the same reason, we use value-based management to steer and measure our business internally (reinsurance was the pilot). The amount of equity in our
Letter to shareholders balance sheet is directly influenced by changes in the market values of our investments. Increases would automatically raise the result target, even though they have nothing to do with our real business, especially our risk position. The same applies conversely, of course, with falling market values leading to a lower result target. If we take risk-adjusted capital as the yardstick throughout, we build a direct bridge with the development of the risks we assume on the asset and liability sides of our balance sheet when we acquire investments and write insurance or reinsurance business. Our risk position is aggregated in our risk-based capital. And it is on this capital that we have to earn the return which you, our shareholders, expect.
I freely admit that this material is somewhat complex. But I think it important to present the background to you, since corporate management and control are becoming more methodology-oriented, giving these issues increasing significance.
When it comes to our core business of handling risk, the Munich Re Group has a competitive advantage – our option of coordinating and combining competence in primary insurance and reinsurance, which allows us to realise integrated business models along the whole insurance value chain. Exploiting this option naturally presupposes that we have created suitable structures on the Group’s decision-making bodies. That is why we have established a Group Committee and a Reinsurance Committee on Munich Re’s Board of Management, enabling us to determine and implement strategy for the whole Group and our reinsurance business more stringently in each case and with enhanced focus. Value-based management and risk management will become more efficient, with even greater advantage being taken of synergies.
An area in which we are already systematically combining our specialist know-how from primary insurance and reinsurance, and thus achieving clear synergetic effects, is the global health market. It is characterised by high growth and earnings potential and offers much scope for innovation. Two examples of the realisation of our integrated health market strategy are China and Abu Dhabi. In the growth market of China, the Munich Re Group is involved through dkv in the formation of the first private health insurer, picc Health. In Abu Dhabi we are taking on the development and operation of the first private health insurance carrier, offering basic and supplementary insurance for expats and thus improving healthcare provision.
Group Development (formerly Strategic Planning); Press; Internal Auditing; Executive Offices, Group Top Executives
Dr. jur. Heiner Hasford * 1947, lawyer, with Munich Re since 1978
Dr. rer. nat. Torsten Jeworrek * 1961, mathematician, with Munich Re since
Corporate Underwriting/Global Clients; Reinsurance Investments; Accounting, Controlling and Central Reserving for Reinsurance
Munich Re Group Annual Report 2005 Members of the Board of Management
“Seeing risks as a positive challenge and tackling them with creativity, courage and a sense of proportion in order to exploit the opportunities. What appears to be an obstacle can be a chance to forge ahead.”
Dr. phil. Detlef Schneidawind (until 31 December 2005) (Board member in charge of industrial relations, within the meaning of Section 33 of the German Co-Determination Act) *1944, lawyer, graduate in business management, with Munich Re since 1973
“Turning risk into value implies a readiness to acquire a thorough understanding of the risks which our clients may face, together with both a willingness and an ability to imaginatively and intelligently devise mutually beneficial solutions. Risk is not our adversary, it is our opportunity!”
Dr. jur. Jörg Schneider * 1958, business graduate, lawyer, with Munich Re since 1988
In the year under review, the Supervisory Board again fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association. We worked closely with the Board of Management, advising it on the management of the Company and constantly monitoring its conduct of the business, whilst it consulted us directly and without delay on all decisions of fundamental importance. The Board of Management satisfied its reporting obligations towards the Supervisory Board by briefing us regularly and in detail on all important business transactions. We discussed these written and oral reports intensively and openly with members of the Board of Management at our meetings. In order to prepare for important topics that were to be dealt with at the meetings, the shareholder representatives and the employee representatives met the Chairman of the Board of Management separately beforehand. In addition, I remained in contact with the Chairman of the Board of Management throughout the year under review regarding Munich Re’s main business developments. Inspection measures in accordance with Section 111 para. 2 sentence 1 of the German Stock Companies Act were not required in 2005.
Focal points of the meetings of the full Supervisory Board The full Supervisory Board met four times, with virtually complete attendances. Taking part as guests at two meetings were representatives of the German Federal Financial Supervisory Authority (BaFin), which for some years now has been making use of the powers granted to it in Section 83 of the German Insurance Control Act to routinely attend the Supervisory Board meetings of insurance and reinsurance companies. The Board of Management reported in depth at the meetings about the quarterly financial statements and the outlook for the 2005 results. We regularly discussed in detail the development of results in the Munich Re Group and in the business fields of primary insurance and reinsurance, also making comparisons between the Munich Re Group and its competitors. The Board of Management reported to us on the business situation of the major subsidiaries on an ongoing basis, and we took a critical interest in the development of American Re in particular. We devoted special attention in the year under review to the strategic alignment of the Group, dealing with this topic thoroughly on several occasions, as well as with the planning for 2006 and 2007. The Board of Management kept us informed about the Company’s risk situation and profitability. We were given a presentation of the various initiatives in integrated risk management, which we then discussed intensively on the full Supervisory Board.
At the suggestion of the Board of Management, we considered and approved changes in the Board of Management ’s rules of procedure. The newly established Board of Management committees for Group and reinsurance operations will provide for more efficient management of the Group as a whole, with its business fields of primary insurance and reinsurance. We reviewed and further enhanced the process of succession planning for the Board of Management and appointment of new members. Other focal points dealt with at the meetings were the Board of
Apart from preparing the Supervisory Board meetings, the Standing Committee devoted itself at its three meetings mainly to topics of corporate governance, share transfers and UniCredit’s offer to HypoVereinsbank shareholders.
Regular and extensive information about the work of the committees was given at the meetings of the full Supervisory Board.
Annual financial statements kpmg Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audited the following documents and gave them an unqualified auditor’s opinion: Munich Reinsurance Company’s financial statements and consolidated financial statements as at 31 December 2005, and the management reports for the Company and the Group. All members of the Supervisory Board received the auditor’s reports promptly. The Audit Committee examined in advance the Company and Group financial statements and the management reports, and discussed them in detail with the auditor at the Audit Committee meeting on 12 March 2006, which also considered the auditor’s reports, in order to prepare for the examination by the full Supervisory Board. The Audit Committee informed the full Supervisory Board at the balance sheet
As at 31 December 2005, Mr. Stefan Heyd and Dr. Detlef Schneidawind retired as members of the Board of Management. We thank both gentlemen for their many years of successful work and their great personal dedication in responsible positions.
On behalf of the Supervisory Board, I would like to take this opportunity to thank the members of the Board of Management and all the staff most sincerely for their untiring commitment which enabled Munich Re, in its anniversary year, to post a new record result.
After the Audit Committee, the Supervisory Board also checked the Company financial statements, the Group financial statements, the Company management report, the Group management report and the proposal of the Board of Management for appropriation of the net retained profits for the year. The Supervisory Board agrees with the outcome of the external audit and after its own concluding examination also has no objections to the Company and Group financial statements. Consequently, on the basis of the Audit Committee’s prior examination and the result of its own examination, the Supervisory Board approved the Company and Group financial statements at the balance sheet meeting on 13 March 2006. We unconditionally support the Board of Management’s proposal for the appropriation of the net retained profits.
“Better safe than sorry” is never a safe bet Our lives are wrapped in a closely woven cocoon of safety. But as soon as we master the risks we know, new ones take their place. There is no such thing as technological progress without risk. Blind faith in safety standards lulls us into a false sense of security. The Titanic is a perfect example: believing his ship to be unsinkable, the captain steered it on the riskier northern route and collided with an iceberg.
The bottomry bonds of the seafaring Phoenicians and the first marine insurance policies used by Lombardy merchants in the 14th century were based on the most important element of insurance: spreading risks on the many shoulders of a risk community. An international spread of risks was also one of Carl Thieme’s principal ideas when he established Munich Re as a professional reinsurer in 1880.
With over 5,000 clients in around 160 countries, Munich Re is today one of the global market leaders in reinsurance. And since 1997, when Munich Re combined four long-established insurance companies to create the ergo Insurance Group – Germany’s second-largest primary insurer – its services have covered virtually the whole value chain of insurance. Reinsurance and primary insurance are two elements that complement and strengthen each other: whether in identifying and assessing a risk, in calculating loss probabilities or in risk and claims management. The Munich Re Group operates in life and health insurance as well as in the many different classes of property -casualty business, with products ranging from traditional forms of risk transfer to innovative coverage and service concepts.
In 2005, Munich Re celebrated its 125th anniversary and took advantage of the occasion to highlight the many facets of risk: not just the hazards, threats and suffering, but also the inherent opportunities, the momentum with which risk drives development, the knowledge edge gained from being familiar with it, the innovative climate it creates, and the related affirmative approach to life.
Severe accidents can be horrific – there is no question about it. But when they happen, calm analysis and competence are invaluable, as was demonstrated in the case of the Wiehl Valley Bridge. How can losses be reliably determined? Can the extent of their consequences be reduced once they have occurred?
It is common knowledge that demographic trends and technological progress are causing healthcare costs to climb to dizzying heights. Less well known are the solutions that service providers like ArztPartner, rehacare and Health Dialog offer: disease management programmes, for example. What are the options for keeping costs from spiralling out of control? How can we cut costs without compromising quality?
Or let us take Abu Dhabi. For us in western countries, it is difficult to imagine what it means not to have access to adequate and affordable medical care. How do we go about introducing compulsory insurance in a country without burdening its economic system? How can we succeed in creating profitable health insurance for the future?
Only if we write risks responsibly and spread them intelligently can we be the client’s preferred partner in risk. This is one of the challenges for integrated risk management. How can we achieve a balance between our risk appetite, the risks we assume, and sustained financial strength? How do we decide which risks to carry ourselves and which to purchase retrocession for, so as to share them with others?
At the time, 2004 went down as the most expensive natural catastrophe year in insurance history. But the annals had to be rewritten again following the events of 2005.
Scientists cite two reasons for this. First, the summer temperature of the upper layer of water in all tropical oceans has increased by an average of 0.5°c since 1970. The proportion of “severe” tropical cyclones (Categories 4–5 on the Saffir-Simpson Scale) has accordingly increased from 16% to 36%. There are strong indications that human activity is responsible for this long-term warming.
limits that are necessary – as in Florida, where a single cyclone can generate immense losses on account of the extreme concentrations of values.
It is generally no problem to make a quick and reliable assessment of any major loss. When it comes to extremely large losses, however, there are various reasons why such an assessment is only possible with a certain delay. In the case of Katrina, for example, an area that was partially barely accessible, the tremendously complex loss profile due to the combined effects of windstorm, dyke breaches and storm surges, and a grand total of more than two million individual insured losses made it difficult to obtain a reliable picture. Initially it is our own underwriting that benefits from the lessons we learn in the context of such mega-events, but our clients eventually benefit too.
This selection of measures shows that we actively endeavour to ensure that natural catastrophes will continue to be insurable risks. All those involved can depend on our expertise and experience – be it in risk modelling, portfolio analysis or claims management. Furthermore, we are convinced that an appropriate price policy and intelligent terms and conditions are a good basis for making the insurance of natural catastrophes a profitable undertaking for primary insurers and reinsurers.
In this way, we take into account the increased frequency and intensity of extreme events, but not only in the form of price adjustments.
The opportunity_ How do retrocession and risk trading work? We asked our specialists Hans-Joachim Thoenes (HJT) and Rupert Flatscher (RF) to explain.
What risks do we mainly retrocede? HJT_ Primarily natural catastrophe risks – above a certain amount. They are the biggest exposure, which dominates the volatility of our balance sheet. In June 2001, we defined retrocession as a corporate function. Ultimately this means that we protect Munich Re’s results and not the performance of individual lines of business. In this way, we exploit Munich Re’s financial strength and the diversification of our portfolio – for us and our cedants.
Do we only need retrocession for extreme events? RF_ Yes, because Munich Re sees itself as a risk carrier, not as an intermediary. We use retrocession to reduce the volatility of our results and, in doing so, save risk capital for our business.
What methods do we use to balance risks in our portfolio? HJT_ First and foremost, we purchase excess-of-loss cover on the retrocession market from reinsurers and insurers in Europe, North America and Asia.
RF_ Additionally, in November 2005, we placed a catastrophe bond (“cat bond”) covering the European windstorm peril. The objective was to transfer a peak exposure to the capital markets in a cost-efficient manner. An advantage of a bond like this is that in the event of a predefined occurrence, the capital (held in a trust account) flows immediately to Munich Re. We deploy such instruments flexibly, thus utilising the capacity of different markets.
How difficult is it to define the parametric trigger for a cat bond? RF_ Well, it is certainly a challenge! At Munich Re we have many experts working intensively on the various natural hazards and the losses they cause for the insurance industry. Of course, it is not always possible to combine a parametric trigger with a precisely predefined loss amount. But we believe that, given our expertise in this area, the risk of a very large loss occurring without the cat bond being paid out is very remote.
RF_ The capital market for insurance risks has also grown in the last few years, and natural catastrophes have recently been supplemented by other risk classes. I therefore believe that the capital market for insurance risks will remain dynamic. But for this to happen the time-consuming structuring process for the transactions will have to become more efficient.
In the period from 1996 to 2005, our retrocession cover was triggered only twice – in 2001 and 2005, years with an extremely high claims burden. Only in these two years do the losses retroceded exceed the retrocession premiums paid.
30 August 2004_ The main third-party liability insurer affected reports the loss to us and informs us that the motor policy in question provides unlimited liability for
9 September 2004_ It is now certain that the loss amount will be only a fraction of the nine-figure sum originally feared. Munich Re’s share of the loss is approximately 40%.
Such loss events can also be of significance for the market as a whole. It is abundantly clear from this particular incident that unlimited covers for property losses in motor liability insurance are more than just a theoretical risk for the insurance industry. Exposures of this nature prove that the case for introducing limits on liability is justified.
Opportunity and value_ Reacting quickly and competently for the best possible settlement of the claim.
The risk_ Chronic conditions take their toll on individuals and insurers.
Chronic illness is a burden for all concerned. Whether it is a disease like cardiac insufficiency or the consequences of a serious accident, everyday activities become a problem, the ability to lead a normal life is severely impaired, and often even living arrangements have to be adjusted to the new situation. Physical limitations and disabilities frequently have implications for work as well, of course – without professional help, it can be difficult to make the necessary changes to the workplace or to find a suitable new job.
Case 4_More quality of life does not have to cost more. Disease management programmes and rehab management – Advantages for patients and insurers
Frequent hospitalisation and rehabilitation, changing therapies or insufficiently coordinated treatment place a strain on both parties: the patient (who virtually never has a central contact, is uncertain about the chances of a cure and suffers setbacks) and the insurer (who faces extensive costs).
ArztPartner almeda (a subsidiary of our health insurer dkv) and rehacare (in which Munich Re has a stake) resolve this apparent paradox, in cooperation with patients, doctors and health insurers.
How intensive the measures are depends entirely on the individual risk and the potential for improvement. Unnecessary burdens for patients, and therefore unnecessary costs, can be avoided.
The success of these programmes is reflected above all in patients’ satisfaction. But the figures also communicate a clear message: on average, total costs are some 23% lower. Extrapolating this figure to Germany as a whole, we arrive at a savings potential of €100m–200m annually for cardiac insufficiency alone. And this if merely one-fifth of all those affected take part in a disease management programme.
We have also expanded our worldwide opportunities with our participation in Health Dialog, a leading provider of care management services including disease management in the USA. It successfully improves quality and reduces medical costs with its Collaborative Care Program.
Disease management programmes reduce costs Benefit expenses per patient and year – Control group study
Case 5_Better healthcare in Abu Dhabi. Thanks to Munich Re, the desert state will soon have its first private health insurer.
Project manager Michael Bitzer reports on his daily work: I wish there were twice as many hours in a day! By 1 May, a specialised primary health insurer must be up and running in Abu Dhabi – and we have had to start from scratch.
Only a small proportion of employees posted abroad are currently privately insured here. In the Emirates, these so-called expats constitute as much as 80% of the population. The majority have access to state health facilities, but many are uninsured. Despite huge out-of-pocket payments from the expats themselves, the state facilities are heavily subsidised. Care is especially inadequate for the lowerincome groups. To improve the situation, Abu Dhabi passed a law in September 2005 making health insurance compulsory for expats and introducing partial privatisation.
The Abu Dhabi Investment Company (adic) and the General Authority for Health Services in Abu Dhabi (gahs) put the project out to tender to eight international health insurers. Munich Re had impressive credentials in every respect – its competence in health insurance and reinsurance, healthcare management and assistance services; its experience in the Gulf gained through its MedNet subsidiaries over a period of more than ten years; its portfolio of successful and efficient risk management tools; its international networks and, not least, its professional team.
The value_ Well-balanced solutions that fit the needs of the country and its inhabitants benefit all concerned.
Who will benefit from daman? Certainly to a great extent the country and its inhabitants, as the state healthcare provider will have to compete in quality and price with private providers. If value for money and risks are made more transparent, healthcare financing using primary insurance and reinsurance solutions will be more attractive and easier to plan.
daman offers an individual solution for basic health insurance. It is tailored to the special conditions of the market, such as the structure of the Abu Dhabi population, and in agreement with the government takes account of overarching political factors such as the country’s attraction as an economic centre. This means that daman, in which the Emirate of Abu Dhabi currently has a share of 100% and which is expected to operate without state subsidies within five years, will be able to design products and set prices competitively on the basis of its data, thus ensuring its long-term business success.
The Munich Re Group covers the whole range of business models and competences with its companies – from traditional reinsurance to managed care services and integrated primary insurance. This enables us to offer appropriate solutions in all the markets and optimally exploit earnings and growth potentials.
After a subdued start to the year, the major international stock markets began to climb in the second quarter of 2005. Prices were driven by healthy company profits and a favourable interest-rate environment. The upward trend was broken for a time by rising energy prices and fears of inflation, before the stock markets started a year-end rally. By the end of 2005, the dax was 27.1% up on the start of the year, and the euro stoxx 50 showed an increase of 21.3%. The star of the stock market year 2005 was the Japanese Nikkei, with a rise of 40.2%. The performance of the us stock exchanges, on the other hand, was disappointing, with the s&p 500 closing only 2.9% higher than at the beginning of the year, and the Dow Jones almost unchanged.
Despite the record claims burdens for the insurance industry – 2005 was the costliest natural catastrophe year of all time – their performance was very respectable. The msci insurance index rose by 30.8% in 2005. A large part of these price gains was achieved towards the end of the year, when the industry benefited from positive profit expectations.
Long-term performance of Munich Re shares On 1 July 1988, the date on which the German share price index dax was launched, a shareholder buying a portfolio of 100 Munich Re registered shares with a par value of dm 100 each (= €51.13) at a share price of dm 1,450.00 (= €741.37) would have had to invest a total of €74,137.32 (excluding transaction costs). After the two stock splits in August 1997 and January 1999, this investment would today comprise a portfolio of 2,000 no-par-value shares. By reinvesting dividends to purchase further shares and making use of opération blanche (i.e. reinvesting the proceeds of subscription rights), a German shareholder would have been able to add a total of 1,054 no-par-value shares to the portfolio.
The fact that our shares are also attractive from the dividend point of view is reflected by Munich Re’s membership of the DivDax. This subindex of Deutsche Börse ag features the 15 dax companies with the highest dividend yield.
Free float increases to over 90% Munich Re’s largest shareholder at the end of 2005 was Allianz, with a stake of 9.8% of which 9.4% is classified by Allianz as a strategic holding. In the course of its acquisition by UniCredit, HypoVereinsbank reduced its stake in Munich Re from nearly 10% to under 5%. The remaining shares held by the UniCredit Group via HypoVereinsbank are now allocated to the free float. This has resulted in a marked increase from 80.6% to 90.6% in our free float, which is a prime factor for the weighting of Munich Re shares in various indices.
Strong weighting in many indices Munich Re shares have been represented for many years in the main national and international share price indices like the dax and the euro stoxx 50. In the sector indices for insurance companies, Munich Re has traditionally had a high weighting. Since 2001, our shares have also been included in the Dow Jones Sustainability and the ftse4Good index family. These sustainability indices only accept companies that fulfil exacting ecological and social criteria and are among the best in their sector.
Internet services expanded We publish all important investor relations information on our website where, besides annual and quarterly reports and investor presentations, we provide details about our shares, analysts’ opinions, important dates in the financial calendar, and much more. We have further expanded our new shareholder portal, which has been online since 3 January 2005. www.munichre.com/register
The portal’s service pages offer our shareholders various facilities, such as registering to receive documents for the Annual General Meeting by e-mail or updating their registered shareholder data online. It also provides historical share prices, by means of which shareholders can trace the performance of their Munich Re share portfolio using a share calculator. Altogether, we are pleased to note that investors are making increasing use of our information on the internet.
Great interest in the Annual General Meeting The 118th Annual General Meeting of shareholders on 28 April 2005 was attended by over 4,000 at the International Congress Center Munich. With 42.5% of the share capital represented, the proposals of the Board of Management and Supervisory Board on the individual agenda items were adopted by the shareholders with clear majorities in each case. Our extensive internet service for the Annual General Meeting again met with a great deal of interest in 2005. Nearly every fourth admission card was ordered electronically. Many shareholders not able to attend in person once more took advantage of the option to appoint a Company proxy to exercise their voting rights. All shareholders who were unable to attend also again had the opportunity to follow the Annual General Meeting live on the internet. In line with the general trend, Munich Re’s Annual General Meetings have shown a steady decline in attendances in the last few years, presumably linked to the growing proportion of foreign shareholders. We therefore actively support all legislative moves at national and international level that appear conducive to improving opportunities for shareholders to participate in the Annual General Meeting and to increasing attendances. All the information relating to our forthcoming 2006 Annual General Meeting on 19 April can be found on our website www.munichre.com/agm and in the dedicated section of our shareholder portal at www.munichre.com/register.
Type Subordinated bonds Subordinated bonds Exchangeable bonds Exchangeable bonds Senior bonds
The subordinated bonds we issued in 2003 continued to perform well. At the end of 2005, the euro tranche was listed at 117.1% and the pound sterling bond at 120.5%. The bonds exchangeable into Allianz shares were redeemed on 9 June 2005 at 108.56%.
Strategy Managing risks across segments and exploiting opportunities: the Munich Re Group creates value – in primary insurance and reinsurance.
Life – A venture Our magazine “chance : risiko. For a risk-taking culture” transports us from the risk of life itself into the realms of risk business. This publication succeeds in tracking down the fascination of risk.
Turning risk into value We can take advantage of market opportunities in both primary insurance and reinsurance. We exploit this competitive edge with integrated business models, guided by our cardinal virtues.
Professional handling of risk as our core business, active risk diversification, and constantly improving methods and processes to control and steer our business – these remain our three cardinal virtues. Our strategy is thus built on firm foundations, without which we would not have achieved the excellent result of our anniversary year 2005. These foundations are the precondition for turning risk into value.
The precondition for leveraging this potential is enhanced insurance-reinsurance coordination that enables us – to cover large portions of the value chain in the health insurance segment, – to specifically combine different competences, and – to make flexible use of various business models in the various health insurance markets.
Our core business of risk Our Group is in an advantageous position in its core business of handling risk, because our operations cover primary insurance as well as reinsurance. In other words, we distinguish ourselves from other leading insurance groups by being able to assume risks regardless of whether they come from the primary insurance or the reinsurance sector. So we can adapt flexibly to changes in market situations and also pinpoint opportunities for cross-segment solutions. A good example is our strategy for tapping the great potential of the international health insurance market.
We can thus exploit market opportunities whether they present themselves in primary insurance or reinsurance. Our objective continues to be sustained profitability. And we actively seek growth opportunities. As an integrated insurance and reinsurance group that can develop its markets through different brands, by focusing on specific target groups, we channel our growth initiatives into the business segments and regions that promise the largest value increase. Hence, as far as we are concerned, defending or acquiring positions in rankings for individual fields of business based on premium volume is meaningless.
Our strategic concept of enhancing the synergies of primary insurance and reinsurance “under one roof” is also reflected in our Group’s new decision-making structures. On the parent company’s Board of Management, we now differentiate clearly in terms of organisation between Group matters and the operative management of our reinsurance business, enabling us to focus resources better and manage the Group as a whole more efficiently.
Board committees1 1 See page 8 f. for distribution of responsibilities on the Board of Management. 2 Not a member of the Board of Management.
Meaningful steering with risk capital These two cardinal virtues, active risk diversification and business management, are closely linked, serving directly to realise our ambitious result targets. Over the last few years, we have made great advances in refining models and methods of integrated risk management and active risk diversification. And the same goes for their practical application. We set standards, which we are continually improving. Their significance for business management and decision-making cannot be overestimated, which is why we are investing so much to develop them further. In addition, the different elements of our risk management are not isolated from each other, but have been integrated into an overall system.
By refining our risk model, for example, we optimise our risk capital deployment and thereby ensure that we can continue to assume substantial liabilities for individual and catastrophe risks. Our budgets for writing, say, natural hazard risks are geared chiefly to the risk capital that is available for that area of business. Retrocession, i.e. external transfer of liabilities, is also structured on the basis of our evaluations from the risk model, with which we steer our risk capital consumption as well. Through asset-liability management – tailoring investments to the structure of our liabilities – we avoid mismatch of risks on the asset and liability sides of our balance sheet. Sophisticated asset-liability management also enables us to achieve significant diversification effects. The reduction of concentration risks in our investments, which is now well advanced, has released substantial risk capital that can be used for growth. Finally, risk capital is indispensable as an indicator and measure of performance. Consequently, we will in future be defining our result target in relation to the extent of the entrepreneurial risks we assume, using return on risk-adjusted capital (rorac) (see page 49 f.).
Knowledge counts However, our focus is not solely on integrated risk management. We are also steadily working on improving such areas as strategy development, performance measurement and our knowledge of risk. The definition of our strategic objectives in balanced scorecards, which are “cascaded” from the top of the Group down to the individual operative units, and the use of vbm (see page 46) are essential components of corporate management. In this context, too, the findings from current claims experience – such as the catastrophic hurricanes in the second half of 2005 – are indispensable for the further development of our risk knowledge and thus for our underwriting. A particular challenge is posed by new, previously unknown risks. We have to identify and evaluate these as swiftly as possible, with a view to maintaining our competitive advantage. In so doing, we need to correctly structure the conditions and calculate technically adequate prices to secure the profitability of our business. For this, we rely on our broad knowledge of risk, our expertise in the management of individual risks and whole portfolios, and our experience in the markets.
Keeping on course Our three cardinal virtues – risk as our core business, risk diversification, and high standards of business control and steering – will continue to determine our course in the current year. They are essential for creating sustained value for our Group, our shareholders and our clients.
– A pronounced performance culture that motivates our staff, setting clear objectives, giving feedback openly, learning from our mistakes and rewarding success
The division Life and Health underwrites our life and health reinsurance business worldwide and its structure reflects that of many of our clients, which conduct these two classes of business separately from property-casualty insurance, often through independent entities. In Europe 1, we handle non-life business from our clients in Germany, Switzerland and Austria, Eastern Europe, Greece, and Turkey.
Subsidiaries/Branches: New Reinsurance Company Great Lakes Reinsurance (uk) Munich American Capital Markets Munich-American RiskPartners
Legal expenses d.a.s. Subsidiaries and branches in Austria, Belgium, the Czech Republic, Estonia, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Poland, the Slovak Republic, Spain, Switzerland and the UK
With numerous subsidiaries and affiliated companies in 11 countries, as well as a network of strategic cooperation agreements, Europäische Reiseversicherung is an effective international alliance. Its most important product is travel cancellation insurance.
Mercur Assistance offers 24-hour assistance services worldwide in the field of medicine and mobility. The Watkins Syndicate, which operates within Lloyd’s, has been part of the Munich Re Group since 1997. It specialises in marine insurance business and has taken advantage of the favourable conditions over the last few years to substantially improve its market position and broaden its risk profile. Today it is the largest marine insurance syndicate at Lloyd’s and is represented in the UK, Hong Kong and Singapore.
Following the integration of the real estate business of ergo Trust GmbH into meag with effect from 1 January 2006, all the Munich Re Group’s real estate activities are now dealt with under the roof of meag.
Increasing corporate value is therefore the key factor in our business decisions. This means optimising capital deployment and risk management for all Group activities in reinsurance, primary insurance and asset management. There are differences between the two main fields of business: While our reinsurance group already uses value-based management tools in all of its units, our primary insurers are still in the process of implementing them. In past years, the approach used at individual company level among our primary insurers has in many cases still been based mainly on an accounting perspective.
Munich Re’s approach to value-based management offers a number of advantages: – It enables us to assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed, which is material for the question of added value. Only the risk-return relationship reveals how beneficial an activity is from the shareholder ’s point of view.
– With clearly defined performance indicators, we ensure the necessary comparability of value-adding measures and initiatives. Fields of business that add value for the Group can be more easily identified and the use of resources optimised accordingly.
– The consistent use of value-based management tools helps the Munich Re Group respond to the tougher competition in the global capital markets and the increasing demand by institutional investors for more transparency and comparability.
The adjusted result serves as the basis for determining the value added. It consists of the operating result, the investment result and the remaining non-technical result. In each case value-based adjustments are made, including the smoothing of expenditure for major losses and the recognition of claims expenses at present value.
Consequently, value is only added if the adjusted result exceeds the cost of equity. Given the generally short-term nature of non-life business, this procedure focuses on measuring single-period performance. In assessing the profitability of our underwriting business, we mainly use indicators from the income statement.
The products of life primary insurance and reinsurance, and the bulk of our health primary insurance business, are characterised by their long-term nature and the distribution of results over the duration of the policies. To account for this multi-periodic characteristic, we use key performance indicators for this business that relate to the respective portfolio value – the embedded value. By setting a minimum return requirement, we aim through value-based management to ensure that here, too, an adequate return is earned on the capital employed and appropriate value is added. Our steering of Munich Re’s investments is strongly geared to the liabilities on our balance sheet. With the help of asset-liability management, we determine the ”neutral position“. This involves a synthetic investment portfolio which – taking into consideration significant additional parameters in the investment of the capital – best reflects the characteristics of our liabilities towards clients. Further information on asset-liability management is provided on page 99. The target return, i.e. the expected income from the neutral position, is compared with the return from the actual portfolio, bearing in mind the risk-based capital required for deviating from the neutral position. Finally, a comparison with the returns of relevant stock market indices provides important insights into the performance of our own investments.
In addition to these purely financial performance factors, non-financial performance measures like market share, speed of processes, staff-training level and client satisfaction play a major part in the strategic management of the Munich Re Group. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors as well.
We closely link strategy and operative planning by defining our objectives in structured overviews or ”scorecards“, from which we derive initiatives, performance measures and responsibilities within a framework of four perspectives: ”financial“, ”market and client“, ”process“ and ”employee“. We promote an entrepreneurial culture among staff through the clear allocation of responsibility and accountability, recognising how much the individual, unit or field of business contributes to increasing value. The integration of the financial and non-financial objectives into Board and senior-executive remuneration incentive systems for the Board of Management and executives supports the clear orientation towards value creation. Value-based management is a holistic system with which managers at all levels of the Group can steer their units in such a way that lasting value is created. Sustainable value creation is also a key factor for our investors.
What we aim to achieve A look back at 2005 In the past year, the Munich Re Group’s business performed very well as a whole. The burdens from the Atlantic hurricanes and reserve strengthening at American Re were compensated for by high realised capital gains and, thanks to the very good results of our primary insurance and reinsurance basic business, we recorded an excellent consolidated profit of over €2.7bn. We achieved a return of 12.3% on the average of our ifrs equity at the balance sheet and quarterly reporting dates, even surpassing our return-onequity target of 12% after tax.
Our return on investment was a very satisfying 5.9% (4.5%). This is the ratio of the investment result of €10,818m to the average market value of the investment portfolio at the balance sheet and quarterly reporting dates, totalling €184.5bn.
The combined ratio in primary insurance is determined for the property-casualty segment (including legal expenses insurance). In 2005, paid claims and the change in claims provisions totalled €2,338m (2,287m) and net operating expenses €1,390m (1,374m), compare with net earned premiums of €4,005m (3,938m). Our combined ratio in primary insurance thus amounts to 93.1% (93.0%), an excellent figure both in absolute terms and in comparison with competitors.
When it comes to interpreting the combined ratio, the particular circumstances of the class of business in question have to be taken into account. Of substantial significance, for example, is the composition of the portfolio. The following factors (among others) are important: – The more the claims burden fluctuates over time, the greater the risk is, and so the rates needed to cover the risk must be higher; loss ratios in good years, as well as average loss ratios, have to be all the lower to provide the reinsurer with an adequate return for assuming this risk – particularly true in the case of natural catastrophes, which may occur rarely, but are often very severe when they do.
– Another important distinguishing feature relates to the time-lag between premium being received and claims being paid. The longer these periods are, the longer the premiums received can be invested in the capital markets. High combined ratios in classes of business in which claims settlement takes a long time (e.g. casualty) therefore also generally entail higher returns from investments with which the loss reserves are covered. These returns are not reflected in the combined ratio.
Taking risk assumed into account in our return target In summer 2005, for the first time, Munich Re officially presented its internal risk model in detail, including the Group-wide, risk-based capital position derived from the model, thus considerably enhancing transparency. Our risk-based capital was divulged for both the reinsurance and primary insurance segments, according to the risk categories of underwriting, market and credit risk. The risk-based capital in question quantifies the risk of the individual units and enables us to make comparisons between non-life, life and investments, as well as between reinsurance and primary insurance.
The next step – after publishing our risk-based capital – is to integrate the risk perspective into our external Group target. This move away from a return based on average ifrs equity to a risk-adjusted return target (return on riskadjusted capital – rorac) results in a closer convergence of our internal value-based management and the external communication of our targets. We thus also take greater account of risk-based standards that shape the current and future requirements of supervisory authorities and rating agencies.
The numerator in the formula comprises the published ifrs net income adjusted for post-tax income (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. The basis for the adjustment is the capital exceeding the necessary risk-based capital (additional available equity). This is calculated as follows: the starting point is the equity recognised in the ifrs financial statements, from which the “economic equity” is derived by means of various adjustments. These include the addition of the unrecognised valuation reserves and the unrecognised portion of the embedded values in life and health insurance, and the subtraction of goodwill and deferred tax assets. From this economic equity a margin is deducted for the settlement of existing obligations in following years. The difference between the amount then remaining and the required riskbased capital is the additional available equity, which is also necessary for rating and solvency purposes, as well as for profitable growth. The additional available equity in the system presented here earns a risk-free interest rate, as rorac = Net income–Interest rate x (1–tax rate) x Additional available equity
The calculation of the target is based on published figures that are regularly updated and are transparent to external audiences. With the additional information provided on the assumptions for important key indicators, shareholders will find it easier to assess the likelihood of the target being reached.
This will enable our investors to better judge Munich Re’s business performance and economic value added in future.
all the risk components of the investment and underwriting are covered with risk-based capital by the internal risk model, and thus assigned appropriate return requirements.
How high should the rorac target be set? For determining the concrete rorac target figure, we start with our sustainable result expectation per unit of risk. In doing so, we use among other things capital market prices for comparable risks, bearing in mind that no precise methodology exists. Thus, in setting our target, we consider it important to make the level ambitious but also realistic.
After weighing up many factors, we have decided to aim for a rorac of 15%.
What assumptions is this target based on? In both primary insurance and reinsurance, we are proceeding on the basis of statistically expectable claims experience. Provided there are no significant shifts in the composition of our business portfolio, we reckon with a combined ratio of less than 97% in property-casualty and health reinsurance, which includes an amount equivalent to around 5% of premiums as projected claims expenditure for natural catastrophes costing over €5m per event. In property-casualty primary insurance, we expect a combined ratio of under 95%.
Embedded values as additional performance indicators In life primary insurance and reinsurance and in health primary insurance, we will use key indicators based on European Embedded Value (eev), parallel to the new rorac perspective. Embedded value is a form of valuation for long-term portfolios whose performance cannot be reasonably measured on the basis of a single year. Specifically, embedded value is the present value of future net earnings from business in force plus the value of shareholders’
In primary insurance, we write both personal lines and commercial business. This results in a heterogeneous portfolio of risks. We therefore have line- and segment-related guidelines for rating and underwriting designed to ensure the requisite risk balance in the community of policyholders. Besides this, the actuaries responsible (life and health insurance) and the heads of the actuarial departments (property-casualty insurance) make sure that rating is appropriate and that sufficient reserves are set up to cover the obligations assumed. We regularly check by means of independent audit processes whether these guidelines are appropriate.
Dr. rer. pol. Thomas Blunck (from 1 October 2005) Special and Financial Risks (until 31 December 2005 together with Dr. Jeworrek) Information Technology (until 31 December 2005 together with Dr. Jeworrek)
Dr. rer. nat. Torsten Jeworrek Corporate Underwriting/Global Clients (since 1 October 2005; until 31 December 2005 together with Mr. Heyd) Reinsurance Investments (from 1 January 2006) Accounting, Controlling and Central Reserving for Reinsurance (from 1 January 2006) Special and Financial Risks (until 31 December 2005; from 1 October 2005 together with Dr. Blunck) Information Technology (until 31 December 2005; from 1 October 2005 together with Dr. Blunck)
Dr. phil. Detlef Schneidawind (until 31 December 2005) (Board member in charge of industrial relations, within the meaning of Section 33 of the German Co-Determination Act) Life and Health (from 1 October 2005 together with Dr. Strassl) Human Resources
Dr. jur. Jörg Schneider Accounting (from 1 January 2006 without Accounting for Reinsurance) Group Controlling (from 1 January 2006 without Controlling for Reinsurance) Integrated Risk Management Taxes Investor Relations
Dr. oec. publ. Wolfgang Strassl (from 1 October 2005) (Board member in charge of industrial relations, within the meaning of Section 33 of the German Co-Determination Act) (from 1 January 2006) Life and Health (Until 31 December 2005 together with Dr. Schneidawind) Human Resources (from 1 January 2006)
Prof. Dr. rer. nat. Drs. h. c. mult. Hubert Markl Former President of the Max Planck Society Emeritus Professor of Biology
Prof. Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Chairman of the Supervisory Board of Siemens ag
Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder Chairman of the Board of Management of Volkswagen ag
Dr. phil. Ron Sommer Former Chairman of the Board of Management of Deutsche Telekom ag
Stefan Heyd (until 31 December 2005) extremus Versicherungs-ag – Münchener und Magdeburger
Munich Re Group Annual Report 2005 Management report_Other seats held by Board members *Own group company within the meaning of Section 18 of the German Stock Companies Act.
Wolfgang Mayrhuber Bayerische Motoren Werke ag Heico Corporation, Miami Eurowings Luftverkehrs ag Swiss International ag, Basle Thomas Cook ag lsg Lufthansa Service Holding ag*
Our business environment is marked to an increasing extent by growing complexity and the upward trend in natural catastrophes. There has also been a disproportionate rise in man-made losses in relation to economic activity. The reasons are many and varied, ranging from technological progress and the advancing geopolitical interdependencies to climate change and trends in international liability. Besides this, concentrations of values are increasing strongly, while economic units and regions are becoming more dependent on each other, giving rise to new risk potentials and accumulation hazards. These phenomena pose demanding challenges for the insurance industry. It is therefore imperative to carry on refining risk models and to swiftly incorporate new findings.
The general economic parameters for the insurance industry became slightly less favourable in 2005. Despite higher oil prices, the global economy continued to expand, albeit with somewhat lower growth rates than in 2004. Share prices rose appreciably in Europe and Japan, compared with only a moderate upward trend in the USA. Long-term yields on the bond markets fell in the first half of the year. But after a further interim low in autumn they recovered, with the interest rate level in the USA – in contrast to Germany – higher at the end of the year than at the beginning. Owing to higher energy prices, inflation rates climbed significantly throughout the world. In this environment, some central banks increased their interest rates. The us Federal Reserve raised its reference interest rate in eight steps from 2.25% at the start of the year to 4.25%. At the end of the year, the European Central Bank followed suit and increased its reference interest rate by 0.25 percentage points to 2.25%. Of the major central banks, only the Bank of England reduced its key interest rate.
Economic development in the eurozone was somewhat more subdued than in 2004, albeit with marked regional differences. Growth in Spain and Ireland, for instance, was above average, whereas in Italy it remained below the average level.
At 0.9%, real economic growth in Germany in 2005 was considerably down on the previous year, since 2004 had an above-average number of working days. Adjusted to eliminate this calendar effect, however, real growth in 2005 was exactly the same as in the previous year, namely 1.1%. Exports were again the mainstay of economic development, with corporate investment also increasing in the second half of the year. Some early indicators, such as the much heeded ifo business climate index, brightened as well. But domestic consumption remained very disappointing, curbing the growth rate of the economy as a whole. The persistently high unemployment rate (11.1% at year-end) and uncertainties about future reforms had a negative impact on consumer confidence.
Growth in the emerging markets generally flattened slightly in 2005, a development even oil-exporting countries like Russia, Venezuela and Mexico were not spared. With a real growth rate of 9.9%, however, expansion in China continued almost unabated. Measures by the Chinese government to cool the economy have borne little fruit so far. The Chinese current account surplus reached a new record. In July, a new exchange rate policy was introduced as a first step towards making exchange rates more flexible.
India’s economy also grew strongly, whereas economic momentum in the other Asian emerging markets slackened in line with the global economy.
With only a small increase in domestic demand and weak exports to the European Union, growth in the countries of central and eastern Europe also decreased. Despite the failed ratification of the eu constitution, Bulgaria and Rumania are still expected to join the European Union in 2007. In autumn, the EU additionally began accession negotiations with Turkey.
Growth rates in Latin America slowed as well. In Brazil and Mexico, this was partly owing to interest-rate increases by the Brazilian and Mexican central banks.
Capital markets Prices on the international stock markets showed a largely upward trend in 2005. The euro stoxx 50, for instance, improved by 21.3% and the dax by 27.1%. The Japanese stock market performed particularly well, achieving an increase of 40.2%. Price gains in the USA were distinctly more modest, even though prices rose in the last few months of the year. By the end of 2005, the s&p 500 was up 3.0%. Starting from a level of 3.7% at the beginning of the year, yields on ten-year German government bonds initially fell owing to an expected weakening of economic growth, recording a low of 3.0% in September. However, budding concerns about inflation and a somewhat more optimistic estimate of the economy caused them to turn upwards again to 3.3% by the end of the year. Having stood at 4.2% at the start of 2005, yields on ten-year us government bonds reached their low (3.9%) in June and rose to 4.4% at year-end.
Insurance industry Writing business at risk-adequate prices was again the central issue on the insurance markets in 2005.
Hurricane Katrina caused the highest insured loss in the history of insurance. Quite a few market players and also risk modelling firms had to change their assessments of the frequency and size of loss potentials. In the case of some companies, the losses amount to more than half their equity capital. The windstorms of the last few years have also shown that it is no longer capital but knowledge that is the decisive factor required in reinsurance. Major reinsurers with extensive internal resources for risk modelling and own risk capital allocation are clearly at an advantage here compared with smaller companies that, in many cases, only use vendor models. All in all, the re-evaluation of the risk and loss estimations has stabilised the pricing environment, especially in property insurance.
Reinsurers’ capital base continues to be good. Presentable underwriting results improved capitalisation in the first half of the year, until the heavy losses in the third quarter subjected it to a substantial burden. Altogether, however, it appears that the effects on the capitalisation of the insurance industry have been limited. On the one hand, the industry’s earnings situation is otherwise good; on the other hand, capital increases by some of the reinsurers particularly affected and the formation of new companies, especially in Bermuda, have provided additional capacity. With the announced acquisition of ge Insurance Solutions by Swiss Re, moreover, the global reinsurance market’s number 2 and number 5 in terms of premium are combining forces.
Important insurance markets Premium growth in the insurance industry, in particular in property-casualty business, is strongly influenced by the overall economic situation. In life and health insurance, market dynamics are also impacted by changes in the legal and tax environment.
According to initial estimates, growth in premium income in property-casualty insurance cooled noticeably in the USA, the main causes being a slight decline in economic growth and cyclical aspects. Nevertheless, until the hurricane losses occurred, the insurers’ technical results and profitability developed positively. The improved resilience and mechanisms of global reinsurance helped the industry to cope with the huge hurricane losses.
Premium again grew most strongly in the emerging markets, where above-average macroeconomic growth rates and the gradual development of the insurance markets led to increasing insurance penetration. In China, for instance, premium volume in life business showed a rise of 14.5% and the increase in non-life amounted to 12.8%. Premium growth in the Indian market remained healthy, with nonlife premium rising by 15.4% in the first three quarters of the fiscal year 2005/2006.
The regulatory environment for German primary insurance and reinsurance is in a state of flux. Various European and global initiatives in the field of supervisory law have altered the parameters and will continue to provide for a restructuring of the regulatory landscape in future.
The new rules in the 2004 amendment to the German Insurance Control Act must be seen against the background of the eu reinsurance directive, which has applied since December 2005. German legislation anticipated central elements of this directive and translated them into German law. This means that probably no major adjustments for further implementation will be necessary.
Changes are also planned in Germany as regards the legal parameters for primary insurance.
Justice criticised the fact that the formulations regarding surrender values in the event of premature termination were incomprehensible to clients. The life insurers of the Munich Re Group are actively and constructively looking for solutions in collaboration with the legislators. But other lines of insurance will also be affected by legal changes. An expert commission set up by the German Federal Government has submitted proposals for reforming insurance contract law. It remains to be seen to what extent the new Federal Government acts on these recommendations; a draft statue is expected in the first half of 2006.
Overview and important key figures Excellent business performance despite very high burdens ”Profitability before growth“ strategy consistently pursued Return-on-equity target surpassed, with a profit of over €2.7bn sales channels. However, this sale hardly had any effect on growth in the year under review. Premium income in primary insurance was up slightly, chiefly attributable to the health segment. In life insurance, premium volume was down as anticipated following the changes in fiscal parameters. Claims experience in the year under review was again very satisfactory, with no exceptional burdens. Furthermore, we concluded the cost-reduction programme initiated in 2002 and were even able to clearly outperform the combined ratio target of 95%.
Owing to these significant exceptional burdens, we did not achieve our combined ratio target of 97%. Our profitoriented underwriting policy has nevertheless continued to pay off, because our business performed well apart from these major events. Especially in the life and health segment, business experience was very positive. Thanks to an excellent investment result, we achieved a good operating result overall in reinsurance, where, as expected, total premium volume declined somewhat owing to our strictly risk-adequate underwriting policy.
Combined ratio *Adjusted owing to first-time application of ias 1 (rev. 2003).
Result Compared with the previous year, the consolidated result improved to an excellent €2.7bn (1.9bn). The investment result, which was outstanding thanks to considerable realised capital gains, largely offset the burdens from the increase in reserves at American Re and from the hurricanes. At €976m (432m), the life and health reinsurance segment accounted for the largest share of the result. However, primary insurance contributed more significantly to the Munich Re Group’s success than in the previous year. Here, the consolidated result climbed by 270.7% to €1,175m (317m) and was thus well above our planned figure. The operating result rose by 36.5% to €4.1bn (3.0bn). Tax expenditure incurred at Group level for the reserve strengthening at American Re had an adverse effect on the consolidated result.
– The reserve strengthening at American Re reduced the Munich Re Group’s operating result by €388m and impacted the combined ratio with 2.6 percentage points. The relief effect of €906m from the release of the ibnr reserve is included in this figure.
Result before amortisation and impairment losses of goodwill 4,137 3,369 1,971 –20 –445 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Life and health 13.9% Property-casualty 44.7% Life and health 29.4% Property-casualty 12.0%
Life and health 17.3% Property-casualty 36.7% Life and health 32.4% Property-casualty 13.6%
Reinsurance Burdens cushioned by successful basic property-casualty business Excellent performance in life and health
Combined ratio: Consolidated result in property-casualty €m 418 1,234 * 1,370 788 –1,203
Our reinsurance business is divided between seven divisions (see page 43): Life and Health; Europe 1; Europe 2 and Latin America; Asia, Australasia, Africa; North America; Corporate Underwriting/Global Clients; and Special and Financial Risks.
In the year under review, we continued to gear our underwriting policy consistently to profitability. Although the favourable market environment led to an increased supply of reinsurance, we obtained attractive conditions for both new business and renewals. Claims-free treaties came under moderate price pressure. In loss-affected areas of property insurance, we raised prices across the board. Premiums for natural hazards rose above all in regions affected by losses. The substantial natural catastrophe losses served as a pertinent reminder of the necessity for risk-adequate prices, terms and conditions. We were thus able to improve the adequacy of our portfolio prices at generally stable conditions.
Hurricanes Katrina, Rita and Wilma left their mark on the combined ratios, in particular in the divisions Corporate Underwriting/Global Clients; North America; Europe 2 and Latin America; and Special and Financial Risks. The division Europe 1 was not only affected by Winter Storm Erwin but above all by the floods in the German, Austrian and Swiss Alps in August 2005.
Despite the outstanding business experience in the life and health segment and the excellent investment result, our operating result for reinsurance dropped by 9.8% to €2.4bn (2.6bn).
Reinsurance result *Adjusted owing to first-time application of ias 1 (rev. 2003).
was in us dollars and 17% in pounds sterling. 31% of our premium volume was transacted in euros.
Business experience was determined not only by the maintenance of established large treaties under which we assume mortality risks but also by the unbroken demand for reinsurance of the disability risk. The good development is mainly ascribable to the fact that state benefits are being cut back in many countries. In a number of important markets, the penetration of our products has in the meantime reached a very high level. Primary insurers in the USA, for example, are already ceding well over 50% of their individual life insurance business in reinsurance. These high penetration rates and price increases in some areas could hamper future growth. All in all, we achieved an outstanding result for 2005, with life reinsurance contributing significantly to the success of the overall reinsurance segment.
Life reinsurance: 6.1% growth with high profitability Health reinsurance: Result at an exceptionally high level and good growth opportunities
About 35% of our total premium income was attributable to life and health reinsurance and 65% to the propertycasualty segment. While our selective underwriting policy had an adverse impact above all on premium income in property-casualty insurance, we experienced growth in the life and health segment, despite our high-level profitability requirements. This growth was largely due to the strong demand for private-provision products worldwide, a positive effect that is partially offset by the loss of largevolume business.
Munich American Reinsurance Company (marc), our subsidiary in the USA, maintained its position among the leading life reinsurers of the us market by adhering to its strategy of controlled organic growth. Gross premium income rose to us$ 1.4bn (1.3bn), not least because of the ongoing consolidation of the reinsurance market, especially in the area of disability and long term care. The annual result, by contrast, was impacted by one-off effects and deteriorated compared with the previous year to us$ 29m (35m). marc’s financial strength, excellent service focus and partnership with clients constitute the basis for a sustained positive income and result trend.
(1.3bn), thus continuing to lead the market by a wide margin. The premium increase of more than 11% was accompanied by a very pleasing development of the result. The branch provides a host of individual and group insurance covers ranging from mortality, disability and ltc risk covers to critical illness insurance. In addition, it has detailed knowledge of the complex supervisory and accounting regulations and draws on its long-standing experience to provide reinsurance solutions tailored to the clients’ specific requirements. Our branch’s extensive know-how is the foundation on which we will continue to profitably expand Canadian business.
As for the rest of western Europe, our premium income was up substantially in some markets, with very marked increases in Spain. Here, Munich Re consolidated its leading market position thanks to a rise in premium volume of more than 35%. The main reasons for this increase were the expansion of our reinsurance relationships with individual clients and our reinsurance of mortality and disability risks transferred by private pension funds to primary insurers.
Investments US$ m 3,542 3,183 *Financial statements in accordance with national accounting law.
In central and eastern Europe, the eu accession of eight countries from this region had a positive impact on growth. The average rise of 4% in gdp caused the insurance markets, and with them our reinsurance portfolio, to develop very satisfactorily. Premium volume rose by a good 29% to €40m as against the previous year. Our key task as a reinsurer is to establish the concept of insurance in the central and eastern European countries even more firmly with the help of our clients and to provide attractive reinsurance solutions.
On the major Asian growth markets India and China, sustained economic growth had a favourable impact on life insurance, as the growing middle class increasingly demands financial and life insurance products. Since the need for professional assistance from international reinsurers is on the rise, we see excellent opportunities for participating in the dynamic growth of the primary insurance markets. Our premium income in these regions is still very low compared with our overall premium volume, but with our service company in Mumbai and our offices in three major centres of China (Beijing, Shanghai and Hong Kong) we are well positioned to assume a leading role in these markets of the future.
In Australia and New Zealand, we continue to write life insurance business via our subsidiary Munich Reinsurance Company of Australasia (mra). With total premium income of €143m (138m) and adequate profitability, our business in these markets developed satisfactorily.
In the year under review, the United Kingdom again accounted for a significant share of overall premium income, contributing a total of €187m (276m), partly due to our major corporate clients. Like many other countries, Germany is looking for ways to fund its healthcare system so that it remains viable in the longer term. The future role of private health insurance as a fully fledged and equal-ranking alternative to statutory health insurance is a key issue of the ongoing political debate. Demographic trends as well as medical and technological progress are pushing up healthcare expenses.
China currently accounts for less than 1% of the Group’s overall health reinsurance business but it is still one of the most promising markets for the future. It is opening up more and more to foreign investors. The formation of several specialist health insurers reflects the fact that the health insurance system is undergoing systematic privatisation. The Munich Re Group is represented in the Chinese primary insurance market as well, where we have a minority shareholding in the specialist health insurer picc Health via dkv. In the field of reinsurance, we support our Chinese clients in all matters related to professional risk management and work very closely with the respective supervisory authorities on the creation of suitable parameters. An example of this good cooperation is the market symposium on managed care topics that we organised together with the Insurance Institute of China at the end of 2005.
The Gulf states are another growth region for health insurance. Munich Re has been present in this market for several years now, with managed care service companies that support our clients in risk management and the acceptance of insurance risks. Munich Re’s outstanding position in the Gulf states is underlined by the fact that it was awarded the contract for creating the first specialised health insurance company in the Emirate of Abu Dhabi. We expect other countries in the region to privatise their healthcare markets as well, which will clearly boost our growth in the health reinsurance sector. In 2005, the Gulf states accounted for 2.3% (1.7%) of the Munich Re Group’s total premium. Other markets such as the Netherlands and Italy were also responsible for the health segment’s good performance in the past business year. Since premium volume and result are fed by many regions, our risk is broadly spread.
Our performance in property-casualty reinsurance business was solid and satisfactory. In addition, our business in the past year was marked above all by higher claims reserves at our subsidiary American Re and severe natural catastrophes in North and Central America.
Result Owing to our good return on investment and favourable result in basic business, we achieved an excellent operating result of €1,280m (1,944m) and a consolidated profit of €418m (1,234m) in the property-casualty segment. Compared with the operating result, the consolidated result was additionally affected by tax expenditure incurred at Group level as a consequence of the reserve strengthening at American Re. The exceptional number and severity of the natural catastrophes in 2005 had a significant bearing on our result. The combined ratio came to 110.5%; excluding natural catastrophes and the reserve strengthening, it was as low as 90.2% (91.9%). The improvement in portfolio quality that we have achieved over several years has thus proved to be sustainable.
Underwriting policy still geared to profitability Reserve strengthening of us$ 1.6bn at American Re Natural catastrophes impact result after retrocessions and before tax with over €2.6bn
Reserve increase gross of corporate/net specific retrocessions 1,671 Ceded through third-party corporate retrocessions –42
Net to Munich Re Group 1,294 (converted into € at 1.25887 us$/€) Already provided for through Group ibnr reserve –906
Nevertheless, Munich Re was affected by losses from Hurricane Katrina totalling over €1.6bn net before tax.
Munich Re Group Annual Report 2005 Management report_Reinsurance billion-dollar losses in the state of Florida and devastated wide areas of the Mexican peninsula of Yukatan. In terms of losses, Wilma cost the Munich Re Group around €330m net before tax and was thus the second most expensive hurricane (after Katrina) of the 2005 season.
In other parts of the world too we recorded substantial losses from floods. In August, heavy rainfall flooded the valleys of the German, Austrian and Swiss Alps, impacting the result with approximately €140m net before tax. It was the most expensive natural catastrophe in Switzerland to date. On top of this, the Indian city of Mumbai was ravaged by floods caused by the heaviest monsoon rains in nearly 100 years, claiming hundreds of fatalities. This natural catastrophe also had a negative influence on the result for 2005.
The total insured losses from natural catastrophes in 2005 cost the insurance industry over us$ 90bn, a burden far above the average that impacted us with €2,629m (713m) net before tax, above all in property insurance and offshore energy insurance. These losses mainly left their mark on the results of the divisions Corporate Underwriting /Global Clients, North America, Europe 2 and Latin America, Special and Financial Risks, and Europe 1. The burdens from natural catastrophes in 2005 thus accounted for 17.7 (4.5) percentage points of the combined ratio of 110.5% (98.9%) for the property-casualty segment. Compared with the dramatic natural catastrophes, Munich Re’s burden from man-made losses in the business year 2005 was on the low side, totalling €664m net before tax. Worthy of particular mention in this context are the fires that occurred at a German electronics company and in Madrid’s Windsor Tower, each requiring loss expenditure of about €30m.
In the liability, motor and fire classes of business, the reductions in premium volume were especially pronounced, the main reason – apart from our selective withdrawal from business – being that large-volume treaties were terminated as agreed. In the reinsurance markets, it was apparent that cedants were seeking higher retentions, especially for claims-free business, as a consequence of their improved capitalisation.
In property reinsurance, premiums came under pressure, especially for claims-free treaties. However, in the case of natural hazards covers where there had been claims in the previous year, we were able to raise prices across the board. The continued trend towards more frequent and extreme weather events confirmed our assessment that the insurance industry’s exposure to natural hazards risks is growing. It is therefore necessary to adapt prices, terms and conditions to the rising loss trend if these risks are to be covered in the future.
In liability reinsurance, the pricing structure largely remained stable at a good level. We attached great importance in treaty design to transparent loss exposures, clearly defined scopes of cover and the avoidance of unlimited liability in motor third-party business.
We raised prices both in marine and motor reinsurance. In credit and aviation reinsurance, prices came under pressure owing to the good results of recent years.
The division Europe 1 recorded virtually unchanged premium income of €1.7bn due to our strictly profit-oriented underwriting policy and the shift from proportional to nonproportional treaties. Decreases in premium volume in Germany were largely balanced by increases in Turkey, Switzerland and Russia. Currency translation effects barely affected premium income.
The impact of major losses from natural catastrophes and of individual losses in industrial property insurance business was much greater than in the previous year. The floods in the Alpine region in August 2005 led to a clear increase in the claims burden, especially in Switzerland but also in parts of Austria and southern Germany. The combined ratio deteriorated to 94.2% (89.1%) but was still very satisfactory, despite the substantial expenditure incurred.
Premiums at the same level as last year Expenditure of €181m for major losses Result target slightly surpassed
In addition to Windstorm Erwin, we were hit by extreme regional weather events involving hail and heavy rain, entailing severe floods in the Bavarian Alpine region. The result declined because of major-loss expenditure totalling €107m but still remained positive.
In facultative business, segment development was varied. Prices, terms and conditions in commercial and personal lines remained stable. The industrial segment with high sums insured experienced individual reductions in prices in the first half of the year; but, because of the higher cost burden from major losses compared with the previous year and the natural catastrophe losses in Europe in the second half of 2005, prices, terms and conditions stabilised or improved again.
Austria, which accounts for 9% of the division’s overall premium volume, is our second most important market. Having carried out portfolio remedial measures in 2004, we lost distinctly less premium volume in the period under review than in the previous year. The profit recorded was even higher than planned. Since our Austrian clients are very active and successful in the neighbouring eastern European countries, Austria remains a highly attractive market for Munich Re.
In Switzerland, the August floods were responsible for the largest insured loss in the country’s history. Between 21 and 22 August, 100 to 300 l/m2 of rain fell on the northern side of the Alps. Not only rural areas were affected by the floods but also the towns of Berne and Lucerne. The floods damaged buildings, contents and infrastructure and, above all, gave rise to business interruptions. The insured losses came to well over €1bn. The division’s loss from the floods totalled €104m net before tax, so that the result of our Swiss business was distinctly negative. Premium income totalled €96m (94m).
The United Kingdom is still the division’s largest individual market. We see growth potential here, especially for innovative business segments. Compared with 2004, premium volume dropped by 3.9% to €946m (984m). Two developments were chiefly responsible for this reduction: On the one hand, the trend towards converting proportional into non-proportional treaty covers was unbroken, causing a decrease in reinsurance cessions. On the other hand, we did not renew a number of non-proportional treaties because their prices, terms and conditions were unsatisfactory. In the United Kingdom, there was no significant expenditure for major losses and natural catastrophes in 2005, which led to a gratifying result.
In Latin America, we recorded an increase in premium volume of 23.1% to €389m (316m) thanks to new business acquired. The hurricanes in the Gulf of Mexico burdened the result by approximately €271m before tax. The focus of our business activities in Latin America is on engineering and agricultural insurance. Our strategy of providing comprehensive services on the spot and being represented in the markets through local offices has proved successful – a fact reflected by our leading position.
In contrast to 2004, when Asia – in particular Japan – was badly hit by natural catastrophes, business performance in 2005 was pleasing for the division Asia, Australasia and Africa, despite unchanged exposure to natural hazards in the regions concerned. Especially tropical storms caused less damage in Asia in 2005. Premium volume rose appreciably by 26.5% to €1.9bn (1.5bn). A major portion of this increase was achieved – as planned – in Asian countries with dynamic economic development. The regions of Greater China (Taiwan, Hong Kong, pr China) and Southeast Asia deserve special mention in this context, representing 41% of the division’s premium volume.
Responsible for: Middle East, Africa, Asia, Australasia, Greater China, Southeast Asia
In addition to the region of Greater China, the markets of Japan, Korea and Australia – producers of some 50% of its premiums – remain the division’s core markets. To support the expansion of our business, we therefore provide individual and innovative solutions as well as additional services, e.g. in the area of integrated risk management. Higher cedant retentions – above all in Japan and Australia – work against the expansion of our business. Nevertheless, our premium income in Japan rose by 15.0% to €269m (234m), with positive value added, given the price increases we were able to achieve following the above-average claims burden of the previous year.
In Korea, we expanded our business, partly through covers for direct insurers selling motor insurance. Premium volume climbed by a significant 30.9%, reaching a total of €250m (191m).
As a consequence of supervisory regulations, our subsidiary Munich Reinsurance Company of Australasia (mra) continues to be responsible for the life and health segments. Premium volume for these segments remained largely unchanged in comparison with the previous year. The following table therefore only includes the figures for the life and health segments for 2005.
The outstanding position of Munich Re in Australasia is illustrated by the fact that it was twice named reinsurer of the year in August 2005. The basis for these awards was a vote by the jury of the “Australia and New Zealand Insurance Industry Awards” and a survey among the companies of the Australian and New Zealand financial and insurance sector.
Result for the year A$ m 10.3 54.3 *Financial statements in accordance with national accounting law.
In Israel, there was a decline in the price of indemnity insurance – especially industrial fire insurance. In many cases, we nevertheless maintained the shares we had accepted, as we were able to compensate for the price reductions by taking accompanying measures, for instance by lowering commissions. However, we had to relinquish part of the portfolio.
The annual result of –us$ 1,530.1m is primarily the consequence of the reserve strengthening at American Re for the years 2002 and earlier. The gross loss caused by the cyclones in 2005 totalled us$ 831m. After retrocessions and before tax, however, the impact of the hurricanes on American Re’s result was fairly modest.
Gross premiums written by the North America Division decreased by 15.9% to €2.7bn (3.2bn) in 2005. Our strict adherence to a profit-oriented underwriting policy was the main reason for the decline.
The Munich Reinsurance Canada Non-Life Group achieved its objectives despite lower premium volume and the loss burden from a severe storm in Toronto.
In setting up Temple Insurance Company about seven years ago, we embraced an innovative concept. Temple primarily provides niche products, such as windfarm business, film insurance or contractors’ equipment insurance, which it writes nationwide via a network of specialised underwriters. It also supports the global activities of the Munich Re Group. In 2005, Temple issued primary insurance policies for aviation business written by the Munich Re Group in Canada.
After an extensive review of the reserves as at 31 March 2005, American Re strengthened its reserves in the second quarter of 2005 by us$ 1.4bn net after corporate retrocessions. This reserve strengthening had become necessary in particular because the run-off of losses incurred in general liability, professional indemnity and workers’ compensation in the years 1997 until mid-2002 did not develop as well as expected. Besides this, American Re strengthened the reserves for asbestos and environmental claims as well as for other latent liabilities related to covers written decades ago. The underwriting years in question have become more mature, enabling us to determine the level of reserving with sufficient certainty to draw a line under the various reserve strengthenings of recent years. American Re fundamentally altered its underwriting policy after carrying out organisational and personnel changes in 2002; the successful outcome is reflected in the profitable performance of underwriting years 2003–2005.
To position American Re for future business opportunities, Munich Re executed a comprehensive recapitalisation plan for American Re consisting of a capital injection of us$ 1.1bn, a conversion into capital of intra-Group loans to two intermediate holding companies of us$ 1.6bn (which were virtually irrecoverable), and an optimisation of American Re’s retrocession structure as at 1 July 2005. Collectively, these measures significantly enhanced American Re’s financial strength, ensuring that it remains one of the most strongly capitalised reinsurers in the USA.
Premium income 3.0% lower than in the previous year Expenditure of €1.1bn as a result of hurricanes
Responsible for: Global clients, Lloyd’s, us business, special lines cugc determines the underwriting standards for the Munich Re Group’s non-life business and assures the quality of the business (see page 50 f.), tasks which are to become the responsibility of the Group Corporate Centre within the division. In addition, the division’s underwriters write business for specific segments.
In marine reinsurance, the lion’s share of the premium volume is generated by our Watkins Syndicate at Lloyd’s in London, which also writes policies for oil platforms (offshore energy insurances). Because of the hurricanes, the losses in this area were high and the results were consequently burdened.
Performance of aviation, space, trade credit and bonding reinsurance again very pleasing Natural catastrophes impact result with €395m
Responsible for: Aviation and space, credit and bonding, enterprise and contingency risks, Munich-American RiskPartners, New Re Geneva, Great Lakes UK, Munich American Capital Markets
The division Special and Financial Risks again achieved very satisfactory results in trade credit and bonding, aviation and space reinsurance in 2005. Nevertheless, we were not able to offset the exceptionally high burdens from natural catastrophe losses incurred by major industrial clients.
Our expenditure for large and very large losses increased 3.6-fold compared with the previous year. The combined ratio, including recoveries from our retrocessionaires for Hurricane Katrina, deteriorated to 110.5% (78.9%). The income from and expenses for our retrocession cover for the reinsurance group as a whole are accounted for in Special and Financial Risks. Premium volume decreased slightly to €2.03bn (2.04bn), in particular because we also declined business transactions for which we could not obtain the necessary prices. We anticipate stable premium income for 2006. In 2005, the premium volume in aviation and space declined by around €100m to €748m. The results we achieved in both segments were again clearly positive.
In aviation, market loss expenditure was lower than the long-term average, despite the higher number of plane crashes compared with 2004. Premium levels continued to fall but largely remained within the range we had expected. We turned down individual offers whose prices were significantly below our requirements.
In credit and bonding business, we reinsure default risks that are related to the sale of goods and services or accepted via bonds. The worldwide primary insurance and reinsurance market in this segment again recorded good results in 2005, with a lower number of major losses and stagnating or even marginally decreasing insolvencies in the core markets of France, Germany and Spain having a positive impact.
Business written in the summer months performed very favourably. For the winter months 2005/06 we achieved a viable volume with a well-diversified portfolio. We also concluded contracts for intellectual property financing and other structured credit derivatives. Beyond this, Munich Re acquired additional protection through the securitisation of catastrophe risks on the capital markets. The transaction, carried out by Aiolos Ltd., protects us against loss events from windstorms in western Europe in the period from November 2005 to April 2009.
In the previous year, we had already initiated the centralisation of our underwriting for enterprise risks, contingency risks and political risks. This allowed us to take advantage of significantly more business opportunities and to raise our premium volume. We focused not only on established business fields such as cancellation-of-events insurance (in the area of sports and music) but also on future-oriented technologies, such as cover for renewable energies, as well as on individual insurance concepts in the areas of residual value insurance and weather insurance.
Our Swiss subsidiary New Re, whose focus in traditional reinsurance is on non-proportional covers, enhanced its position in most European markets. It profited from the continued shift in demand from proportional to non-proportional covers. New Re also acquired new business in life reinsurance and in non-traditional forms of reinsurance. Premium volume grew to Sfr 868m (630m). High burdens from natural catastrophes, for instance from the hurricanes in the USA and the severe floods in Switzerland, led to a combined ratio of 117.6%. The result for the business year totalled Sfr 18.9m.
Our primary insurers performed very well in the past year. The operating result improved by 242.9% to €1,519m (443m) compared with the good previous year, thanks to a pleasingly low number of losses and the very good investment result. All in all, the consolidated result grew by 270.7% to €1,175m (317m) and thus clearly exceeded our original expectations. Gross premiums written were up 0.3% to €17.6bn (17.5bn), with health insurance accounting for most of this growth. In the fourth quarter, we sold our majority stake in Karlsruher Lebensversicherung ag, the parent company of the Karlsruher Insurance Group, to Württembergische Lebensversicherung ag for €338m. The deconsolidation of the
We considered the various bidders and concluded that Württembergische with its business concept and bid price was the most convincing.
Consolidated result life and health €m 594 25 * –960 –591 *Adjusted owing to first-time application of ias 1 (rev. 2003).
In property-casualty insurance (including legal expenses insurance) the combined ratio of 93.1% (93.0%) was only marginally higher than the previous year’s extremely low level but it was nevertheless well within our target of 95%. This is all the more pleasing given that there were several major losses. Loss frequency in motor insurance remained low.
All in all, our primary insurers wrote premium income of €17.6bn (17.5bn), representing growth of 0.3%. The deconsolidation of the Karlsruher Insurance Group as at 1 October 2005 had an impact on the development of premium volume. If the Karlsruher Insurance Group had been included in the consolidated group for the whole year, growth would have been approximately 1.6 percentage points higher.
Result The two primary insurance segments property-casualty and life and health contributed €581m (292m) and €594m (25m) to the consolidated result. The overall result for primary insurance was thus 270.7% higher than in the previous year.
The operating result of the two segments climbed from €0.4bn to €1.5bn, a 242.9% increase. This was attributable to the favourable performance of the bond and equity markets, which we used to further reduce our shares in the financial sector.
Our health insurers’ premium income showed a strong rise of 7.8% to €4.9bn (4.5bn). Price increases at the beginning of 2005, which had become necessary due to rising healthcare costs, strengthened growth in German business. Moreover, we achieved good results with supplementary insurance sales.
Premium income in property-casualty insurance, including legal expenses insurance, grew slightly by 0.8% to €5.3bn (5.2bn). Personal lines business expanded especially in liability and homeowners’ insurance, whereas motor insurance declined. Adjusted to eliminate the effect of the sale of ergo’s subsidiary Nieuwe Hollandse Lloyd Verzekeringsgroep n.v. (nhl) as at 30 June 2005, premium growth amounted to 1.6%.
Gross premiums in the property-casualty segment in €bn Status: 31 December 2005
The sale of unit-linked products was satisfactory, and life insurance products such as “Riester” pensions also sold better than planned.
Consolidated result of €782m significantly higher than in previous year Further reinforcement of franchise strength Implementation of new management structure completed *Adjusted owing to first-time application of ias 1 (rev. 2003).
The cost-reduction programme initiated in 2002, allowing us to achieve sustained reductions of €300m per year, was successfully concluded as planned in 2005. Cost discipline will continue to play a major role at ergo going forward.
Premium As in primary insurance as a whole, the ergo Group’s premium income developed positively, especially in health insurance. In life insurance, there was a 2.5% rise in total premium income, i.e. including savings premiums for unitlinked life insurance and capitalisation products (e.g. “Riester” pensions). Gross premiums written, by contrast, experienced a slight decline of 0.2%. In property-casualty insurance, our gross premiums remained nearly stable, as did the market volume. Overall, gross premiums written were up 2.2% to €15.9bn (15.6bn).
In life insurance, the ergo Group recorded an increase in premium income of 2.5% to €7.5bn (7.3bn). Unit-linked policies and capitalisation products sold especially well. We benefited considerably from the surge in demand for “Riester” products. Gross written premiums under ifrs, which do not include the savings premiums of unit-linked life insurance and capitalisation products, were down by a marginal 0.2% to €6.76bn (6.77bn).
In the health segment, premium income appreciated strongly by 7.8% to €4.9bn (4.5bn). This was attributable to good organic growth abroad and above all to higher volumes of German business, the latter being mainly the result of price increases at the beginning of 2005, which had become necessary due to rising healthcare costs. We were also very successful in selling supplementary insurances. Here, we expanded our client base by 10.7%, due to some extent to our partnerships with statutory health insurers in Germany. In addition, the good sales figures point to the growing awareness among clients that they themselves must bridge the gaps in state health insurance coverage by taking out private insurance.
Marketing Karlsruher Insurance Group pursues a multi-channel distribution strategy focused on an exclusive Germany-wide sales organisation. In life insurance, it also cooperates closely with banks, partnerships that are especially successful in southwestern Germany. In addition, Karlsruher works with brokers.
Result The operating and consolidated results of the Karlsruher Insurance Group in the first nine months of the year were below the high level reached in the same period of the previous year, partially owing to weak new business in life insurance. Besides this, the claims reserves in propertycasualty insurance were significantly increased for numer-
Premium income in property-casualty insurance remained constant at €3.44bn (3.44bn), as there was virtually no growth in our most important market, Germany. Domestic business, which accounts for the major share of the segment ’s premium volume, only registered a slight decrease of 1.6%. The sale of the Dutch ergo subsidiary, nhl, as at 30 June 2005 had the effect of reducing growth in our foreign business, which increased by 5.5%. Adjusted to eliminate the effect of this sale, growth totalled 13.5% in foreign business.
With our introduction of a new motor tariff as at 1 July to take account of additional and more individual client risk features, we have responded to the keener price competition in German motor insurance, while remaining true to our principle of “profitability before growth”. Thus, we recorded a decrease in premium income of 2.8% in motor insurance. In Germany, personal lines business expanded especially in liability and homeowners’ insurance. Gross premiums in legal expenses insurance rose marginally by 0.8% to €851m (844m), the increase in foreign business being somewhat more pronounced.
Consolidated result of €10.2m, lower than in the same period of the previous year Strengthened risk provision in property-casualty Deconsolidation with effect from 1 October 2005 *For the business year 2005, the consolidated financial statements include the Karlsruher Insurance Group only until 30 September 2005, as the company was sold to Württembergische Lebensversicherung ag (see page 61), making a comparison with the previous year’s figures of limited value.
Marketing Europäische Reiseversicherung (erv) works with over 17,000 partners in the tourist industry, making it the market leader. These partners include major groups as well as individual travel agents. Europäische Reiseversicherung, the European Travel Insurance Group, is represented in all the main European countries through its international network of subsidiaries and affiliates. It accompanies its marketing partners in their expansion throughout Europe. In order to be able to react to frequent changes in travel patterns, europäische offers products specially tailored to budget travel, city trips, package tours, study tours and cruises.
europäische continued to expand the segment of business travel insurance in Germany. It successfully launched products for groups of companies as well as for small and medium-sized enterprises. Its Scandinavian subsidiaries are leaders in their markets in business travel insurance. In Sweden and Denmark, more than 50% of europäische’s gross premium income is attributable to this line of business.
In recent years, Germans have booked a rising number of inland trips. To tap this potential, europäische has launched a marketing campaign, including a new commission -based system for brokering travel insurance that takes this trend into account.
Munich Re Group Annual Report 2005 Management report_Primary insurance ous legacy losses, in particular severe personal injuries. In establishing these reserves, Karlsruher took into account the rise in health and long term care costs, which are likely to continue to considerably exceed regular inflation rates. Owing to this special effect, the combined ratio in the first nine months of the year deteriorated to 110.3% compared with the same period of the previous year (100.9%). Thanks to the positive developments in the financial markets, the investment result reached €479m by 30 September 2005, an improvement of 12.2% compared with the first three quarters of the previous year.
The decrease in new business caused gross premiums written in life insurance in the first nine months to fall to €681m.
In property-casualty insurance (including legal expenses insurance) gross premiums written reduced as a result of our consistent remediation of the portfolio.
Result europäische’s result was generated primarily outside Germany, in particular in the Scandinavian countries. As part of its remediation programme initiated in 2002, it divested itself of loss-making sales partners. Agencies and other sales partners are strongly involved in the result planning.
As a consequence, the expense ratio was stabilised in 2005. Because of additional loss burdens, the erv Group’s combined ratio climbed to 97.1% (94.6%). Much more significant for the development of the Group’s result, however, was the change in the way the German fiscal authorities view the issue of insurance tax on health insurance provided in insurance packages. This insurance will be subject to taxation in future and, as the tax will also apply with retroactive effect, europäische had to set up an almost double-digit million euro tax provision at short notice. The consolidated result therefore fell to €2.0m (10.8m).
Premium Although in 2005 the travel industry was not affected by exceptional events like the tsunami, subdued demand curbed premium growth in Germany. The uncertain economic situation in Germany contributed to this weak performance. In addition, there was a continued trend towards booking bargain holidays, for which insurance is often not taken out.
In 2004, erv Munich set up new branch offices in Poland and the United Kingdom which, in their first full year of business, accounted for more than 10% of premium income. europäische improved its gross premiums group-wide from €316m to €343m, with the share of foreign business in its premium volume remaining more or less constant at
Result for the year* £m –13 33 23 10 –23 *Financial statements in accordance with national accounting law.
Result The devastating hurricane season in the Gulf of Mexico had a massive impact on the result for 2005. The local oil platforms were affected by Hurricanes Katrina and Rita to an unprecedented degree. The two hurricanes are among the largest losses ever to affect the marine market. Owing to our strongly diversified portfolio and our risk management, we succeeded in keeping the result for the year within reasonable bounds at –£13m (33m). The highly positive results of previous years ensured that, despite the year’s burdens, we achieved our return targets on a multiple-year average. The combined ratio amounted to 110.0% (83.5%), of which approximately 23.8 percentage points were attributable to the enormous hurricane burdens.
Premium We systematically used the favourable market cycle of recent years to achieve selective growth. As a consequence, premium volume rose by 24.0% to £258m (208m) in 2005, allowing us to secure an outstanding position in the market. To consolidate this position, we improved our risk profile through diversification in other markets and business segments such as local cargo and yacht insurance, thus complementing traditional Lloyd’s business by building up a balanced portfolio with broad market penetration and less volatility.
After recording a loss of €45m in 2004, our asset management segment achieved a positive result again in the year under review, posting a profit of €30m.
Besides this, the Munich Re Group keeps sufficiently liquid funds available to meet its payment obligations at all times. Finally, we take care that the maturities of our investments are geared to patterns of our liabilities. We provide details on asset-liability management on page 99. The methods we use for controlling the various investment risks are described in detail in the risk report on page 123.
In this section, we report on the performance of the Group’s own investments, derived almost entirely from our core business fields of reinsurance and insurance. In addition, we provide information on third-party business, where we manage the assets of non-Group institutional investors and private investors.
Overview and important key figures Around 94% of the assets under management derive from the Munich Re Group’s own investments. The vast majority of these are managed by meag munich ergo AssetManagement GmbH, a 100% subsidiary of Munich Re and ergo, while ergo Trust GmbH for the most part develops and markets real estate products with an international orientation for Group companies and external investors.
Together, meag and ergo Trust had investments of €154.9bn (143.5bn) under management for the Group as at 31 December 2005. The other Group investments are managed by the units meag New York and meag Hong Kong and by the insurance companies of the Munich Re Group themselves.
Asset management Very good investment result of €10.8bn for the Munich Re Group Further reduction of shareholdings in the banking and insurance sector Increase in business with third-party institutional investors
Munich Re’s investment strategy also takes account of sustainability criteria. One of the goals we have set ourselves is to ensure that 80% of our equities and corporate bonds are included in recognised sustainability indices. We have already surpassed this target. In the case of government bonds, we have achieved a gratifying rate of around 95% compliance in terms of the indices in question.
Land and buildings, including buildings on third-party land 663 731 759 928 4,169 6,634 179 710 28 43 5,798 9,046
The majority of the derivatives in our portfolio at year-end (see notes to the consolidated financial statements, page 170 ff.) are for hedging our equity investments against possible price losses. The life insurers in the ergo Group in particular use interest-rate derivatives to protect their regular investment income in the long term against the reinvestment risk in the event of falling interest rates.
Real estate The focus in our real estate investments is on further optimising the return profile and risk profile. To this end, we continually monitor existing items with regard to their long-term profitability and future exposure to risks. The size and liquidity of the market is an important criterion for our investment decisions. We are rejuvenating the portfolio on an ongoing basis. To provide for greater regional diversification, we are selling directly held property in Germany and investing instead in top-class real estate primarily located in major European cities. In some cases we also invest in Asia and the USA to give the portfolio a more international spread. Our aim is to ensure a predictable earnings contribution from real estate.
In 2005, we continued our portfolio remediation, selling property which had reached a point in its life cycle where value development was likely to be below average. This resulted in gains on disposal of some €33m.
Shareholdings in insurance companies and other financial services providers In the past business year, the Munich Re Group further reduced its shareholdings in German financial services providers, thus lowering the concentration risk. The ergo Insurance Group sold its 9.2% interest in bhw Holding in the first quarter with a gain on disposal amounting to a good €60m. In the second quarter, we cut back our stake in Commerzbank to just under 5%, realising a gain of around €130m. Our shareholding in Allianz, which still amounted to 9.0% at the start of the year, was reduced to just under 5% in the second and third quarter, yielding an overall capital gain of €550m.
In the course of the year, there was nevertheless growth in the portfolio of equities and equity funds, which are carried at fair value in the balance sheet. The reason for this was the good performance of the stock market, which caused the balance sheet reserves of our equity holdings to grow. We took advantage of the low volatility of the equity markets to hedge parts of the portfolio cost-effectively using derivative financial instruments. At the end of the year, the ratio of equities to total investments – on a market-value basis – amounted to 14.0%. After taking account of hedging transactions, it was 13.4%.
Group; the sale was also responsible for the decrease in the case of land and buildings.
All figures in €m 31.12.2005 31.12.2005 31.12.2005 Prev. year Prev. year Prev. year *Including owner-occupied property.
Investment result by type of investment 2005 Prev. year Change €m €m in %
Our investment result increased by €2.8bn or 34.5% to €10.8bn in 2005. We achieved a return on investment of 5.9% in relation to the average investment portfolio at market value, thus exceeding our target of 4.5%.
Third-party investments meag offers retail and segregated funds for private and institutional investors. It largely uses the distribution channels of the ergo Insurance Group companies for marketing retail funds in the personal sector. An increasingly significant role is also being played by asset-management consultancy, which has established itself as an independent service in meag’s asset management operations. Provision for old age remains a very important topic for private and institutional investors. In personal lines business, meag’s investment funds are offered as a supplement to conventional insurance products. When newly investing in meag investment funds, private investors continue to place great emphasis on security. Client demand is increasing especially for bond funds, where meag generally pursues a conservative investment strategy. With our offerings for institutional investors, we mainly meet the needs of insurance companies and pension funds. In 2005, meag acquired new mandates for important pension funds in the retirement provision market.
Reinsurance business accounts for approximately 41% of underwriting provisions and primary insurance business for about 59%. Further information on these provisions may be found in the notes to the financial statements on page 180 ff. As distinct from liabilities from loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will occur. This is especially true in the case of reinsurance business. The payout pattern of the underwriting provisions varies from one segment to another and from one line of business to another. In property insurance, for instance, a major portion of the reserves is generally paid out after one year, whereas in life insurance substantial amounts are still 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 and pound sterling.
We ensure that our business is sufficiently capitalised at all times by monitoring the situation on an ongoing basis and taking suitable measures, which are dealt with in the section on capital management.
To optimise our capital position and reduce capital costs, we have not only employed internal forms of financing in previous years but have also used strategic debt, primarily in the form of subordinated and/or exchangeable bonds. A detailed analysis of the structure of our outside capital is provided in the section on strategic debt.
In the year under review, the amount of new external funds acquired by the Munich Re Group was insignificant, as were extensions of credit lines. Outside capital reduced by €1,239m, mainly because we redeemed the Munich Reinsurance Company bonds exchangeable into Allianz ag shares.
Analysis of our capital structure Our primary insurance and reinsurance activities have a significant influence on the capital structure of the Munich Re Group. Investments on the assets side of the balance sheet mainly serve to cover underwriting provisions
Our internal risk model plays a central role in capital management. We use it to analyse how certain risk scenarios affect the results of the segments life and health, propertycasualty and the investments of the reinsurance group. We determine our economic capital on the basis of the internal risk model data so that we are able to absorb two successive annual losses of a size only to be expected every 100 years. In the next step, the capital so determined is allocated proportionately to the individual divisional units on a proportional basis in line with the volatility of their business activities. The procedure we use in the primary insurance group is similar, but substantially affected by other steering aspects, as supervisory restrictions and clients’ participation in surplus play a greater role in that field of business.
We regularly review the assumptions on which the internal risk model is based and adjust them as required.
The most important changes in equity are due to the following: – The increase mostly derives from the consolidated profit of €2,671m attributable to Munich Re equity holders. The previous year’s profit of €1,833m, net of the dividend payment of €457m for 2004, was offset against retained earnings.
– Owing to the deconsolidation of the Karlsruher Insurance Group, retained earnings decreased by €76m and the other reserves fell by €34m. We realised gains by exchanging our hvb stake (which we valued at equity for the last time in the quarterly financial statements as at 30 September 2005) into UniCredit shares. This transaction led to a realisation of valuation reserves previously not recognised in the balance sheet.
Valuation reserves not recognised in the balance sheet, including those apportionable to minority interests and policyholders (before tax) 2.6 3.2 1.8 1.1 16.4 *Adjusted owing to first-time application of ias 1 (rev. 2003).
For further information regarding the valuation reserves for assets not accounted for at fair value, please see page 95.
Subordinated bonds issued by Munich Re Finance b.v., Amsterdam 3,408 3,393
Group solvency The Munich Re Group is subject not only to the supervisory requirements applying to individual insurance companies but also to supervision at Group level. Munich Reinsurance Company as the parent has introduced suitable control methods and its reports to the German Federal Financial Supervisory Authority (BaFin) responsible for the Munich Re Group include supplementary aspects at Group level, such as shareholdings, consolidated financial data and intra-Group transactions.
Solvency in the case of insurance companies is generally understood to be the ability of an insurer to always meet the obligations assumed under its contracts. In concrete terms, this means an insurance company must fulfil specific minimum capital requirements. “Adjusted solvency” focuses on the prevention of multiple use of equity to cover risks from underwriting business at different levels of the Group hierarchy. To calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the ifrs consolidated financial statements. In determining the eligible capital elements, the ifrs equity is adjusted; specifically, it is increased by portions of the subordinated liabilities and reduced by intangible assets. The Munich Re Group’s eligible capital is more than three times as high as that required by law.
In 2003, the Munich Re Group strengthened its capitalisation with the subordinated bonds issued by Munich Re Finance b.v. These subordinated liabilities are recognised as own funds by the German Federal Financial Supervisory Authority (BaFin) but do not meet the strict requirements of ias 32 for recognition as equity. They were placed in two tranches with nominal values of €3,000m and £300m each and will mature in 2023 (euro tranche) and 2028 (pound sterling tranche). The first possible redemption dates are 21 June 2013 (euro tranche) and 21 June 2018 (pound sterling tranche).
All insurance companies in the Munich Re Group met their pertinent solvency requirements in the year under review.
The rating agencies A.M. Best, Fitch and Moody’s put Munich Re in their second-best category for financial strength, and Standard & Poor’s placed us in its third-best category. The Munich Re Group’s market position, expertise and capitalisation are cited by the rating agencies as its particular strengths. Given the tough competition in the reinsurance markets, however, Munich Re’s ability to sustain the strong increase in earnings was still seen critically.
The ratings for our subsidiaries on 22 February 2006 at a glance:
American Re Corporation, 7.45%, us$ 500m, Senior Notes 1996/2026 bbb A2 BBB+ ergo International ag, 0.75%, €345m, Bonds Exchangeable into Sanofi-Aventis s.a. Shares 2001/2006 A– A–
ergo International ag, 2.25%, €345m, Bonds Exchangeable into e.on ag Shares 2001/2006 A– A–
Analysis of the consolidated cash flow statement The Munich Re Group’s cash flow is strongly influenced by our insurance and reinsurance operations. We first collect the premiums for the risks assumed and do not make payments until later in the event of loss. The cash flow statements of insurance companies are therefore of limited relevance.
The cash outflows from financing activities stem mainly from the dividend payment for 2004 of €473m and the redemption of the bonds exchangeable into Allianz ag shares totalling €1,223m.
Overall, in the year under review cash – which includes cash with banks, cheques and cash in hand – rose by €290m to €2,337m.
The Munich Re Group has different client bases in reinsurance and primary insurance. The reinsurance group works together with some 5,000 corporate clients – traditional insurers and captives – from around 160 countries. By contrast, our primary insurance companies service around 30 million policyholders throughout Europe, most of whom are private clients. The products and services we offer therefore differ accordingly.
Reinsurance As reinsurers, we aspire to be the preferred partner in risk for our clients. Our operative business consequently provides companies wishing to cede insurance risks with the full range of underwriting products. In addition, they can benefit from our strengths that go beyond the provision of actual reinsurance cover: our financial strength, our knowledge, our solution-oriented approach and the treatment of our clients as partners.
We also share our know-how with our cedants. In 2005, for instance, we again organised a large number of seminars on fundamental topics in all lines of insurance. We also stage numerous specialist events at our clients every year – forums, symposiums and seminars – dealing with current developments in the individual markets and ensuring a continual transfer of knowledge.
Our two scholarship programmes, which offer high-quality advanced training for our clients’ prospective managers, have enabled us over the years to strengthen the partnerships we enjoy with our cedants. We also pass on our competence to our business partners in printed form, of course: in 2005 we brought out a total of 75 technical publications incorporating Munich Re’s concentrated knowledge – in German, English, French, Italian, and Spanish. How much our clients appreciate this service is indicated by the access figures for our publication portal at www.munichre.com, where last year nearly 750,000 Munich Re publications were downloaded.
Our solution-oriented approach to collaboration is clearly illustrated by connect.munichre, our internet client portal, where we provide our cedants with round-the-clock assistance: useful knowledge, services, analysis and quotation tools from the property-casualty and the life and health segments. This both supports primary insurers in their daily business and presents a direct and secure interface to Munich Re. With its swift, efficient and safe interactive facilities, connect.munichre supplements and optimises Munich Re’s range of services and rounds off personal client relationships. The portal is already used by 203 insurers worldwide.
Munich Re Group Annual Report 2005 Management report_Other success factors asset manager of Munich Re and ergo, and bank products from our cooperation partner HypoVereinsbank. With this all-round offering, our companies are well positioned in the market: their clients can cover all their financial-service needs comfortably from one familiar and proven source.
Overall staff turnover at the main Group companies in Germany ergo
We are also firmly committed to giving young people sound professional training and good career perspectives: in 2005, a total of 1,450 trainees were employed in the Munich Re Group. At ergo, for example, the percentage of trainees – 6.5% – was better than the industry average (2004: 5.9%).
International promotion of talent Since 1997, Munich Re Munich has been systematically identifying and preparing staff for future management tasks with its scheme for assessing and developing staff potential. We have now extended this system to the international reinsurance group. Highly talented and qualified staff are selected and groomed for management functions in Munich and for leading functions at business units abroad. As a result, we create career prospects for our staff internationally, throughout the reinsurance group. In 2005, candidates were nominated for the scheme from Asia, Australia, South Africa, North America, the United Kingdom and Germany. ergo managerial staff benefit from the rich opportunities offered by the ergo Management Academy (ema), whose programmes support employees assuming executive functions for the first time, as well as experienced managers. Above and beyond this, it promotes the exchange of views and ideas between executives of the ergo companies.
Munich Re’s business is inextricably linked with ecological aspects, even if as a service provider we place comparatively little burden on the environment ourselves. We are directly affected by environmental impacts, such as the growing number and intensity of weather-related natural catastrophes. A particular focus of our commitment is therefore climate protection: for many years Munich Re has been contributing its specialist knowledge to numerous organisations and associations concerned with global climate change, especially unep fi, the Finance Initiative of the United Nations Environment Programme, which promotes understanding of climate change in the financial sector.
As a globally operating corporation, the Munich Re Group accepts its responsibility towards society and supports various social and cultural projects. Knowledge obligates – that is the conviction that led to our setting up the Munich Re Foundation, whose operations were publicly launched in April 2005, with a capital of €50m. Under the motto “From Knowledge to Action”, the Munich Re Foundation has set itself the aim of helping people in risk situations and improving their situation – especially in countries where the people are too poor to make use of financial services like insurance. The Foundation not only provides direct support but also devotes itself to promoting knowledge, heightening awareness and networking, which facilitates self-help. In its work, the Munich Re Foundation can build on the highly developed risk knowledge of its benefactor.
Munich Re staff also practise solidarity. Their voluntary work is supported by the Dr. Hans-Jürgen Schinzler Foundation, which provides a platform for private initiatives. The foundation makes it easier to exchange ideas with likethinking individuals and to provide mutual support. As a result, numerous charitable projects in Germany, Latin America and Asia benefit.
it processes it security Munich Re ensures the security of all its data, computers and networks through a system of complementary functions and processes.
The Chief Information Security Officer sees to it that there is an active exchange of information between the primary insurance and reinsurance groups on information security issues. In disk (the Munich Re data protection and information security group), all the parties responsible meet regularly to discuss project results and risk evaluations, compare notes, utilise synergy effects and launch ideas for Group-wide projects.
Beyond this, it security in primary insurance and reinsurance is organised in separate, but individually effective structures.
At the top of our security pyramid in the reinsurance group is the is Office, which defines uniform global standards and guidelines applied by all the companies. 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.
ergo’s it security is part of our cross-corporate it security management, which embraces four levels: security policy, guidelines, concepts and technical implementation. Existing security management is being continually refined and extended, with a view to obtaining it security certification from the bsi (German Federal Office for Information Security ) by 2008. This will be followed by further steps to gear ergo’s it security management to international standards.
genesys Our primary insurers are also standardising their business processes and developing new software applications for this purpose. Since 2003, ergo has gradually been introducing a uniform it landscape as the precondition for harmonised processes in the different segments. The HamburgMannheimer companies were successfully integrated into the system in 2003, followed by d.a.s. and victoria in 2004. At the start of 2005, we began work on the project genesys in the health segment.
Corporate governance Corporate governance as an ongoing process Taking account of national features
How we view corporate governance Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. Of particular importance to us in this context are the promotion of shareholders’ interests, efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies, and corporate communications that are open and transparent both internally and externally.
We see corporate governance as an ongoing process, whose rules must not only be clearly stated but also lived out in practice. Major contributors to ensuring this are Internal Auditing, Risk Management and the Compliance Office.
What rules apply to Munich Re? With its international organisation, the Munich Re Group has to consider corporate governance rules in different national legal systems. Clearly, we observe not only the respective national standards but also internationally recognised best practices. In Germany, where Munich Re has its registered seat, corporate governance rules are laid down above all in the German Stock Companies Act, the German Co-Determination Act and the German Corporate Governance Code. The latter, which entered into force in 2002 and has since been amended several times, contains the main legal rules that must be observed by German listed companies. In addition, it includes recommendations and proposals based on nationally and international recognised standards of good and responsible management. Every year, Munich Re’s Board of Management and Supervisory Board publish a declaration stating how far the Code’s recommendations have been complied with. The declaration we published in November 2005 can be found at the end of this section.
The Board of Management is responsible for managing the Company and representing it vis-à-vis third parties. It reports regularly to the Supervisory Board. Certain types of transaction, such as investments of substantial size, generally require the Supervisory Board’s consent. The members of the Board of Management are appointed by the Supervisory Board and may be dismissed by the latter at any time for good cause. On initial appointment, members of the Board of Management are usually given contracts for a term of between three and five years. One or more extensions of up to five years each are possible. Rules of procedure issued by the Supervisory Board determine the distribution of responsibilities and cooperation on the Board of Management. At the end of 2005, the Board of Management set up two committees from amongst its ranks – one for Group operations and the other for reinsurance operations – in order to enhance the efficiency of its work.
Munich Re’s Supervisory Board has four committees: the Standing Committee, the Personnel Committee, the Audit Committee and the Conference Committee.
Taking due account of differences The legal framework for corporate governance rules varies from country to country. A standard that incorporates “good” corporate governance in one legal system may contravene mandatory law in another, where its observance by a company would be deemed “bad” corporate governance. Despite the fact that there are now numerous international best practices, national law always needs to be considered as well when assessing a company’s corporate governance. Here are two related examples: German joint-stock companies have two boards, the Board of Management and the Supervisory Board, which are strictly separate bodies. The Board of Management manages the company and conducts its business; the Supervisory Board monitors and advises the Board of Management. It is not possible to be a member of both bodies. By contrast, Anglo-American companies in particular have only one board, meaning that both management and monitoring are performed by the same body. This explains the special attention Anglo-American investors pay to whether a company’s audit committee has members who are nonexecutive directors. As Munich Re’s Supervisory Board (and consequently the latter’s committees) are not allowed to contain any members of the Board of Management, we naturally fulfil this criterion.
The German Co-Determination Act mandatorily determines the composition of Munich Re’s Supervisory Board. Half of the members of the Supervisory Board are representatives of the shareholders and half are employee representatives, elected by the staff. The Chairman – who has a second, casting vote in the event of voting on the Supervisory Board ending in a tie – is generally one of the shareholder representatives. In the Anglo-American legal sphere, there is no comparable form of co-determination. The us Securities and Exchange Commission nevertheless recognises that employee representatives on the Supervisory Board of a German joint-stock company make a valuable contribution to providing an independent check on management (sec in Final Rule Relating to Listed Company Audit Committees, p. 18802).
Last year, too, the Supervisory Board reviewed the efficiency of its activities. This showed that the efficiency enhancement measures decided on in previous years had been effective. Despite some room for improvement in the details, the form, content and timing of reports from the Board of Management to the Supervisory Board, and the flow of information between the committees and the full Supervisory Board were assessed as generally positive and efficient.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits are granted to differing extents, depending on function, and are in line with market trends. Tax has to be paid on the related benefits individually.
Long-term incentive plan This remuneration component with a long-term incentive is linked to the sustained appreciation of Munich Re’s share price. The long-term incentive plan is set up at annual intervals, and the participants receive a certain number of stock appreciation rights. These can only be exercised if, after a two-year vesting period, Munich Re’s share price has risen by at least 20% since inception of the plan and the shares have outperformed the euro stoxx 50 at least twice at the end of three-month period during the term of the plan. The exercise hurdles are exacting and in keeping with the German Corporate Governance Code.
The remuneration of the members of the Board of Management is made up of fixed and variable components. Specifically, these comprise the following: Component Assessment basis/parameters Corridor Precondition for payment Payment
Basic remuneration, remuneration Function, responsibility, Fixed Contractual stipulations Monthly in kind/fringe benefits (company risk-based capital, car, healthcare, security measures, length of service on Board insurances, special remittances)
Annual bonus 50% annual result 0–100% Achievement of objectives Annually, 50% achievement 0–100% in the following year of personal objectives
Long-term incentive plan Appreciation in share price 0–150% > End of vesting period As from third year (stock appreciation rights; (two years) of plan until end of term: seven years) > 20% share price increase plan > mr shares have outperformed euro stoxx 50 twice at the end of three-month period during the term of the plan
Management report_Corporate governance to exercise stock appreciation rights under the plans set up in 1999 and 2003. Further information on the long-term incentive plans can be found on pages 202 to 205 of the notes to the financial statements.
In the case of 100% achievement of objectives (annual bonus, medium-term incentive plan) and a 35% share price increase (long-term incentive plan), the weightings of the individual components are as follows: basic remuneration approx. 30%, annual bonus approx. 35%, medium-term incentive plan approx. 15%, and long-term incentive plan approx. 20%.
In accordance with the recommendations of the German Corporate Governance Code, the total remuneration of the Board members thus comprises fixed and variable components, all of which are appropriate in themselves and as a whole. Criteria for this are in particular the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re, taking into account the relevant benchmarks for Board remuneration.
Expenses for the remuneration received by Munich Reinsurance Company’s Board of Management for fulfilment of their duties in respect of the parent company and its subsidiaries in the year under review totalled €32.5m (18.2m), €8m (3m) of which is apportionable to previous years. This includes the compensation components that Mr. Phelan received for his work as President, Chief Executive Officer and Chairman of the Board of American Re Corporation. The accounting method for the long-term incentive plans was changed in 2005 from measurement at intrinsic value (difference between current share price and initial share price for the stock appreciation rights) to measurement at fair value. The latter includes not only the intrinsic value but also the possibility of growth in value up to the date of forfeiture or expiry of the rights and is determined on the basis of recognised valuation models, taking into account the exercise conditions. From now on, we will include the personal expenses for the stock appreciation rights granted in the year under review so that the stock appreciation rights granted are transparent and presented in relation to the correct periods. In addition, we show the personnel expenses incurred in the business year from the development of stock appreciation rights issued in previous years. The higher personnel expenses shown in 2005 for previous years derives primarily from the one-off adjustment required by the new accounting method. If the stock appreciation rights granted in 2004 had been measured using the new accounting method, the personnel expenses for these would have amounted to €3,365 thousand. This figure is comparable with the €5,476 thousand shown for 2005. The expenses incurred in 2005 for previous years would be reduced accordingly.
Munich Re Group Annual Report 2005 Management report_Corporate governance 1 Presentation on an accruals basis as from 2005. The previous year’s figures have been partially adjusted for comparative purposes. 2 For example, gifts on special birthdays/anniversaries, travel expenses for Mr. Phelan from Princeton to Munich, other American Re personnel expenses for Mr. Phelan.
3 Annual bonus payment for 2003 higher than estimated and reserved bonus amount. 4 Annual bonus payment for 2004 lower than estimated and reserved bonus amount.
5 The provisions for the medium-term incentive plan 2003–2005 total €8.042m as at 31 December 2005. 6 2004 provisions shown on the basis of intrinsic value; as from 2005 personnel expenses shown on fair-value basis.
Higher expenses in 2005 for previous years derive from one-off adjustment required. 7 Thereof €0.562m for the stock appreciation rights of retired members of the Board of Management, who were granted these rights during their period of active service on the Board. 8 Annual bonus payments for 2004 at subsidiaries lower than estimated and reserved amount. 9 Expenses in business year 2004 for bonuses at subsidiaries higher than estimated and reserved amount.
Total remuneration of former members of the Board of Management Payments to retired members of the Board of Management or their surviving dependants totalled €4.3m (4.3m).
Pension commitments Personnel expenses of €0.1m (0.3m) were incurred for the increase in pension commitments for retired members of the Board of Management. As at 31 December 2005, the pension provisions and provisions for comparable benefits for the retired members of the Board of Management or their surviving dependants amounted to €0m (–) after deduction of plan assets held by a separate entity (e.g. under a contractual trust agreement). The value of the defined benefit obligations pursuant to ifrs for former members of the Board of Management or their surviving dependants amounted to €58.4m (57.9m) as at 31 December 2005.
All other members of the Supervisory Board (Prof. Dr. Markl, Mayrhuber, Prof. Van Miert, Prof. Dr. v. Pierer, Dr. Sommer, Emmert, Dr. Janßen, Michl, Müller, Dr. Schimetschek, Võ) each received total remuneration of €76,500 (fixed remuneration of €45,000 and dividend-related remuneration3 of €31,500).
Munich Re Group Annual Report 2005 Management report_Corporate governance importance of the committee work, regardless of corporate performance and the economic situation. We thus comply with the recommendation of the German Corporate Governance Code for committee remuneration relating to chairmanship and membership of committees.
Remuneration of Supervisory Board members in the business year 2005 in accordance with Article 15 of the Articles of Association1) is as follows: Remuneration of Supervisory Board members in the business year 2005 in accordance with Article 15 of the Articles of Association1 in €
Prospects Adherence to “profitability before growth” strategy New target: Return on risk-adjusted capital (rorac) of 15%
For information on the risks emanating from our business, please consult pages 123 ff.
Our successful performance in 2005 and the gratifying trend of the past two years are proof that we are on the right track with our strictly profit-based corporate policy. The exceptionally high burden from natural catastrophes and the reserve strengthening at American Re on the one hand and an especially good investment result on the other may tend to mask the fact that we actually slightly exceeded our target by achieving a profit for the year of over €2.7bn and a return on equity of 12.3% in 2005. As specified in the section “What we aim to achieve”, our targets for 2006 have been developed further, taking into account the extent of the risks we assume. The goal for the Group 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. Details on our corporate steering systems and in particular on our new rorac target figure are provided on page 46 ff.
We remain committed to active capital management and a shareholder-friendly dividend policy. The Board of Management and Supervisory Board will propose at the Annual General Meeting that the dividend per share be increased by €1.10 to €3.10, thus enabling our shareholders to participate in Munich Re’s good result.
In contrast to the general trend of the global economy, there are indications of a slight economic recovery in the eurozone. Besides exports, which have thus far acted as the stimulator for expansion, a moderate rise in domestic demand should increasingly do its part to revive the economy. Nevertheless, growth will still lag behind that of the USA. Within Europe, Germany looks set to achieve only below-average growth again. For the United Kingdom, we anticipate further subdued economic activity. The slight decrease in global dynamics will probably even make itself felt in the emerging markets. Growth should decelerate somewhat in most regions, including Latin America. The strongly export-oriented Asian markets in particular are likely to suffer from the anticipated slowdown in the USA and China. In central and eastern Europe, by contrast, economic momentum should remain relatively strong.
Markets continue to be subject to the risk that surprisingly intense competition – whether from new or established providers – may have a negative impact on the insurance cycle. A clear focus on profitability before growth, and efficiency of management systems, will remain crucial for success.
Reinsurance As expected, the renewals at 1 January 2006, which involved approximately 66% of our property-casualty business, went well. In property reinsurance and offshore energy business, prices for natural catastrophe covers in some cases rose significantly in the wake of the 2005 hurricane season, with especially steep increases for loss-affected treaties and the coastal regions of the USA and the Caribbean.
In classes of business and markets not directly affected by catastrophe losses, prices, terms and conditions have largely remained stable at a high level, with a slight upward trend.
The reinsurance of natural hazards will continue to be a significant part of our business. With Atlantic cyclones becoming potentially more frequent and more extreme, we must be prepared for further high burdens in future. However, we consider these risks insurable, provided prices, terms and conditions remain commensurate with the risk.
Provided there are no strong shifts in exchange rates, reinsurance should record gross premiums of between €22bn and €23bn overall in 2006, which is roughly equivalent to the previous year’s level. We expect a combined ratio of less than 97% in property-casualty and health reinsurance. Altogether, we anticipate a profit for the year in reinsurance in the range of €2.1–2.3bn.
Primary insurance Recent developments in the individual segments are likely to continue in the next few years: in life insurance, we consider that there will be increased demand for privateprovision products. The trends towards pension insurance products will probably be maintained. On top of this, we expect a further rise in the sale of “Riester” pension products qualifying for subsidisation. With demand for private provision growing, sales of supplementary health insurances should continue to develop positively. It may be assumed that the ongoing political debate about a restructuring of the German health insurance system will lead to further uncertainty in the area of comprehensive health cover in 2006. Even if the ramifications of such reforms are not yet foreseeable, the uncertainty is curbing the dynamics that would normally be present in this segment. In the property-casualty segment, overall economic development will again not provide any strong impulses. For this reason and because of consistent adherence to our profit-oriented underwriting policy, our premium volume will not experience more than a modest rise. In other words, we are prepared to sacrifice premium volume for the sake of profit. This will be most significant in the fiercely competitive German motor insurance market.
In legal expenses insurance, we see medium-term opportunities in the field of legal advice, which is increasingly being offered as a supplement to purely financial coverage.
We strongly gear the composition of our investment portfolio to the structure of our liabilities as well as reserves, and this asset-liability management also takes into account the guarantees and options granted to policyholders in our life insurance business. With our clients and shareholders in mind, we have hedged against sustained low-interest scenarios using interest-rate derivatives in order to secure the interest rates guaranteed on savings premiums. If interest rates were to rise, we would suffer price losses in our fixed-interest securities: in the case of the fixedinterest securities accounted for at market value, this would cause our equity to decrease. We consider the resultant hazards to be low, in particular since these assets match longterm liabilities that would likewise fall in value economically even though their carrying amount in accordance with the valid accounting rules would not decrease.
By achieving a 5.9% return on investment in the past business year, we again exceeded our target of 4.5%. For the coming year, we do not think comparably high realised capital gains will be possible, and therefore aim for a 4.5% target for our Group companies’ investments. This would amount to an investment result in the range of €7.8–8.0bn (which will be credited to the segment results in primary insurance and reinsurance).
meag intends to selectively extend business with private and institutional investors. It will also offer more guaranteed and portfolio protection products to meet investors’ increased need for more security. Private provision for old age continues to be a crucial topic. Here, meag is planning to market new retail products in the form of special savings plans to support private provision.
The risk report is based on German Accounting Standard drs 5–20. In accordance with ifrs 4, Insurance Contracts, it is supplemented by “Disclosures on the uncertainties of future cash flows from insurance contracts”. Following a short description of the functions, organisation and important tools of risk monitoring and control, we focus on the main risks and key risk management measures. At the end of the report, we evaluate the risk position of the Munich Re Group as a whole.
Functions, organisation and important tools We adopt a holistic risk management approach, the main objective of which is to analyse and control the interdependencies between risks on the asset and liability sides, and between strategic and operational risks. This entails considering economic parameters as well as the requirements and expectations of clients, shareholders, supervisory authorities and rating agencies.
Munich Re Group Annual Report 2005 Management report_Risk report by the subsequent Hurricanes Rita and Wilma, which inflated the costs for Katrina. Therefore the losses from Hurricane Katrina were significantly higher than we would have expected on the basis of our models for a hurricane of comparable strength. From such experience, current geoscientific research, far-reaching proprietary loss analyses and models, and benchmarking of our models against external calculations, our Geo Risks Research Unit obtains the necessary findings used in underwriting.
In life insurance and reinsurance, biometric, lapse and interest-guarantee risks are especially relevant. The calculation of underwriting provisions is based on “biometric” actuarial assumptions, i.e. on assumptions with regard to mortality and disablement, which also take future trends into account. In primary insurance, the assumptions are determined by the requirements of the supervisory authorities or institutes of actuaries, depending on the specific national regulations, and include appropriate safety margins.
Control measures for underwriting risks The selective acceptance of risks in primary insurance and reinsurance business is at the core of the Munich Re Group’s business model. As a global reinsurer, we can systematically diversify our portfolio through the broadest possible mix and spread of individual risks, thus significantly reducing the volatility of total underwriting payments and substantially increasing the value added by all divisional units.
The diversification approach has its limits, however, where systematic effects such as fluctuations in interest rates, exchange rates and inflation impact a majority of the treaties or even whole classes in equal measure, so that an overall balance within the portfolio cannot be achieved. To control such systemic risks, we use asset-liability management, which simultaneously monitors investments, underwriting provisions and other liabilities. Its aim is to synchronise fluctuations in the value of assets with those in the value of underwriting provisions and other liabilities, thus stabilising corporate value. The section “Financial situation” deals with this topic in greater detail.
Munich Re Group Annual Report 2005 Management report_Risk report fied, to changes in individual parameters or in our portfolio composition and to resultant alterations in our overall risk situation, by taking suitable action.
In addition to risk measurement, we use the following tools for controlling risks, including concentration effects. Binding underwriting guidelines and limits and clear underwriting authorities precisely regulate who is authorised and accountable for concluding insurance and reinsurance contracts in the Munich Re Group and at what conditions. We regularly check compliance with these guidelines and closely observe developments in the global and local markets, reacting where necessary with appropriate measures that are translated without delay into underwriting guidelines if required. As a general rule, our treaties and original business ceded to us contain clear liability limits (exception: unlimited motor liability cover, which still exists in certain markets).
Reinsurers assume very large liabilities for earthquake and windstorm losses, and to a lesser extent for hailstorm and flood risks, which often affect many clients at the same time. We monitor and control our liabilities by means of established accumulation assessment and control systems and a clearing process. This preventive risk-controlling measure, with which we limit concentrations, was introduced many years ago for the hazards earthquake and windstorm in the form of accumulation budgets for the individual reinsurance companies of the Munich Re Group. Although we regularly check the loss scenarios underlying the accumulation budgets, we are nevertheless not immune to misestimation. Thus the effects of Hurricane Katrina significantly exceeded our expectations with regard to a natural catastrophe of this type and intensity.
An excellent tool for risk prevention, and thus for risk controlling, is careful reserving to ensure that sufficient funds are available to cover future ibnr claims – losses which have been incurred but not yet reported or not reported enough, and have not yet been settled. Therefore, using recognised underwriting methods, we set up appropriate provisions for ibnr losses and for known claims (case reserves). In addition, where required under national rules of insurance supervision and accounting, we establish provisions for fluctuations in claims experience, which are recognised as part of equity under ifrs rules. Further information on how claims reserves are posted is provided in the notes to the consolidated financial statements. Another important risk control measure in the field of underwriting is the transfer of a portion of our risks to third parties via external reinsurance and retrocession. Most of our companies have intra-Group and external reinsurance and retrocession cover. The core component is an accumulation excess-of-loss cover placed on the international reinsurance market, which provides protection against losses from natural catastrophes. This enabled us, for instance, to reduce the burdens from Katrina by approximately €400m. In addition, Munich Re is the sponsor and potential beneficiary of a catastrophe bond for windstorms in the UK, the Netherlands, Belgium and Germany. Its term began in midNovember 2005 and will end on 31 March 2009. As a result, we have additional protection from the capital markets for almost four years of seasonal windstorm activities and, if the specifically defined criteria are met, will receive payments totalling €110m.
Risks from defaults on receivables from underwriting business 6.4% of all our receivables on underwriting business at the balance sheet date were outstanding for more than 90 days. The average default rate of the last three years amounts to 2.8%.
As at 31 December 2005, our accounts receivable on ceded business were split between the following ratings (based on those of Standard & Poor’s): The market value of our equity investments, including participating interests, amounted to €25.1bn at 31 December 2005. We aim to spread equity risks by means of systematic diversification in different sectors and regions. In the year under review, companies in the Munich Re Group also made use of derivative financial instruments for hedging purposes. We continued to systematically reduce the historically evolved overweight of our equity investments in the banking and insurance sectors. For example, we cut back our stakes in the Allianz Group and in Commerzbank to under 5% and completely sold our shares in bhw Holding. The Munich Re Group accepted UniCredit’s exchange offer for their shares in the hvb Group. After the exchange, we sold a portion of the shares and now hold a stake of less than 5% in UniCredit. We thus further reduced our concentration risks.
12.2% of our accounts receivable were from companies without an external rating.
Main investment risks The market value of our fixed-interest securities as at 31 December 2005 totalled €100.6bn, representing 56.0% of the market value of the Munich Re Group’s overall investments. These securities thus make up the largest portion of our investments available for sale and our investments held to maturity in accordance with asset-liability-management criteria.
Investment principles and risk controlling Within the framework of asset-liability management (see page 101), the Munich Re Group is guided by the following investment principles: only investments are to be made from which an appropriate return can be expected and which offer a high degree of security, as reflected in highquality ratings of the relevant issuers and counterparties, for example. Also important is sufficient liquidity at all times to cover obligations from underwriting business, as is a targeted diversification in terms of region and type of investment. In addition, the Munich Re Group meets the regulatory solvency requirements stipulating a specified minimum capitalisation.
Change in share prices Change in market value of investments sensitive to share prices
Credit risks in the investment portfolio are measured and limited using the credit-value-at-risk approach. The main elements for measuring the credit risk are the investment volume, the term of the investment, the quality of the collateralisation, and the default probability of the individual issuers in the portfolio.
We minimise such risks through systematic application of specific risk management measures. It is our declared corporate aim, which we consistently pursue, to sensitise employees to possible risks and to establish an appropriate risk culture. This includes the willingness to learn from mistakes and to recognise and grasp opportunities for change and improvement. To this end, we organise seminars and information events, support open communication in the field of risk management and give thorough consideration to constructive criticism.
Risks in the area of information technology and project risks Munich Re’s global business requires a networking of our business units and systems worldwide, both organisationally and technically. The consequence of this is a growing dependency on electronic communications technology, the complexity of which is continually increasing. The significance of the processed information is also growing. As a result, we are also increasingly exposed to it risks such as breakdowns and outages, disruptions due to viruses, attacks by hackers and theft of data.
Various major projects are currently being realised in our primary insurance and reinsurance business that will, among other things, develop integrated information architecture in the back-office area. Proceeding from project management, Munich Re’s project landscape will be made more transparent and the interfaces of individual projects enhanced by means of multi-project management designed to assess and control interdependencies better. In addition, the dependencies and priorities within the systems architecture are analysed and addressed by specially appointed committees.
The aim of our Gloria project is to unify the entire reinsurance group’s it and process landscape on the basis of an sap standard product. We plan to put the system into operation at Munich Reinsurance Company in 2006 and to successively expand it to the other reinsurance companies in the Group. – is also conducting important major projects, such as the ongoing convergence of it systems and processes in the health segment (genesys). The size and complexity of such undertakings naturally entail substantial project risks. Risk management and problem-handling are therefore central tasks of the project management.
With the reorganisation of the management structure at ergo, we have laid the foundations for a uniform management organisation based on classes of business, which has been in effect since 2005. The related changes in processes, tasks, allocations of responsibility and functions harbour the risk of short-term inefficiencies. By preparing ourselves thoroughly for the systematic implementation of the new structure, we have been able to make these risks sufficiently manageable.
Risks in the human resources sector The companies in the Munich Re Group have binding rules setting out minimum standards of corporate integrity for conduct within the companies themselves, their business transactions and other relationships with external parties. These standards are tailored to the special features of each company and serve to prevent conflicts of interest for staff, thus ensuring that we use only fair and legal means of competition. The clear separation of management and control functions limits the risk of internal and external regulations being breached.
The following are examples of currently relevant legal risks: – In the pending preliminary antitrust proceedings against victoria Versicherung ag, the Federal Cartel Office imposed a fine in March 2005 for alleged collusion in restraint of competition in industrial insurance business. A fine was also imposed on nine other industrial insurers. victoria Versicherung ag has lodged an appeal, which has a suspensive effect. The Düsseldorf regional appeal court will rule on the appeal.
– There are still uncertainties regarding the size of our final claims burden in connection with the attack on the World Trade Center of 11 September 2001. A portion of the claims resulting from this event are the subject of pending cases concerning the amount and scope of the
– In the us states hit by Hurricane Katrina, there are various lawsuits pending which are aimed at circumventing the exclusion of flood damage routinely included in private buildings insurance policies. The claimants are of the opinion that this damage falls under covered windstorm losses, since the storm surges on the coast and levee breaches in New Orleans were caused by Katrina. The insurers, on the other hand, take the view that the exclusion is clear – having been established for decades – and was approved by the regulatory authorities. Furthermore (particularly in view of this exclusion) the National Flood Insurance Program provides for special flood insurance. Not least owing to political pressure on the insurance industry and the unpredictability of jury decisions, it is difficult to estimate the claimants’ prospects of success.
Main other risks As insurers and reinsurers, we are dependent on economic and political parameters in the different markets in which we operate, as well as on macroeconomic and geopolitical risks. The development of the economy not only affects our insurance business but also influences the capital markets and hence our investment portfolio. An economic downturn can lead to payment defaults and downgradings of credit ratings among our debtors, which may require write-downs in our books.
When developing new markets, such as those in Asia and eastern Europe, the Munich Re Group is largely dependent on the prevailing economic, political and regulatory conditions, the accessibility of market segments, and the local sales channels. But even in developed markets, social or political changes may result in a deterioration of legal, fiscal or economic conditions, and this may ultimately affect the assets, liabilities, financial position and results of individual companies or the Munich Re Group as a whole.
Strategic risks arise if the strategy at overall Group level or business-segment level is not compatible with existing and future client requirements, market conditions or other parameters (e.g. economic or regulatory). If these disparities were not recognised, our objectives and initiatives would not take sufficient account of developments. In our strategic planning, we therefore carefully analyse the strategic risks, which are evaluated in individual projects (e.g. investment or market-entry projects) using scenarios and at an aggregate level on the basis of “wild cards”. In addition, we systematically perform “swot analyses” (strengths, weaknesses, opportunities, threats) and, building on these, specify what action is to be taken.
One of the main risks for any company is being too conservative and failing to recognise new business opportunities. We counter this danger by, among other things, integrating innovation teams into our operative reinsurance units in order to tap into new product and client segments at an early stage. This approach is also designed to ensure that we identify and work on topical market and client issues, as well as fields of knowledge that are of critical importance for the future.
We are intent on maintaining clear strategic management of the Munich Re Group, with its equal-ranking business segments of primary insurance and reinsurance, and providing for a clear assignment of responsibility. We have therefore separated Group and business-segment responsibilities more distinctly at our parent, Munich Reinsurance Company. In order to give integrated risk management more weight, the head of our irm Division will, as Chief Risk Officer, take part in all meetings of the Board of Management ’s Group Committee in future. We are thus pursuing our risk-conscious business policy consistently and with utmost priority. We see opportunities and risks as inextricably linked. Only through first-class identification, analysis and continual monitoring of our risks can we also recognise business opportunities and exploit these decisively for the benefit of our shareholders, clients and staff.
According to our assessment, there are no risks which could have a significant, lasting adverse effect on the assets, liabilities, financial position and results of our Group.
Ageing: No limits The curve of our life expectancy is upwards – in an unbroken trend. Living to be a hundred will soon be the rule. But what can you do with 40 years of retirement? Will they be a source of enjoyment or despair? On the one hand, there is the danger of age-related diseases and infirmity. On the other hand, there are the opportunities: many 60- to 80-year-olds feel fit and as the “golf-course generation” live life to the full.
Munich Re Group Annual Report 2005 Consolidated financial statements and notes
Declaration of compliance with the German Code of Corporate Governance as per Section 161 of the German Stock Companies Act 152
Standards or changes in standards not yet entered into force 155
(C) Investments for the benefit of life insurance policyholders who bear the investment risk 157
(37) Controlling underwriting risks by means of reinsurance, retrocession and capital market instruments 201
Consolidated financial statements Consolidated balance sheet as at 31 December 2005
II. Investments in affiliated companies and associates (4) 1,312 3,883 –2,571 –66.2
V. Deposits retained on assumed reinsurance (9) 14,581 14,530 51 0.4
IV. Consolidated profit attributable to Munich Re equity holders 2,671 1,833 838 45.7
II. Provision for future policy benefits (19) 94,445 101,926 –7,481 –7.3
D. Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders (22) 1,516 1,328 188 14.2
II. Deposits retained on ceded business (25) 3,392 2,900 492 17.0
7. Result before amortisation and impairment losses of goodwill 4,137 3,369 768 22.8 8. Amortisation and impairment losses of goodwill (1) 7 344 –337 –98.0
Thereof: – Attributable to Munich Re equity holders 2,671 1,833 838 45.7 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Munich Re Group Annual Report 2005 Consolidated financial statements_Group statement of changes in equity
Change in consolidated group – – –13 – – 9 – – – –4
Change resulting from valuation at equity – – –1 – 102 – – – –1 100
Allocation to retained earnings – – 1,376 – – – – –1,376 – –
Change resulting from valuation at equity – – –62 – –98 – – – 3 –157
Dividend – – – – – – – –457 – –457
Effects pursuant to ias 8 – – –59 – – – – – –14 –73
Changes from cash flow hedges – – – – – – –4 – – –4
Other changes – – –115 – – – – – –56 –171 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Change in deposits retained and accounts receivable and payable –1,268 –177
Change from the acquisition and sale of investments for unit-linked life insurance –20 –252
Cash flows for the business year (I+ II+ III) 290 153
Life and health Property-casualty 31.12.2005 Prev. year 31.12.2005 Prev. year €m €m €m €m
I. Land and buildings, including buildings on third-party land 663 731 759 928
II. Investments in affiliated companies and associates 2,910 3,449 3,238 3,842
Life and health Property-casualty 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 €m €m €m €m €m €m €m €m €m €m
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.
Life and health Property-casualty 2005 Prev. year 2005 Prev. year (adjusted)* (adjusted)*
Thereof: – From insurance transactions with other segments 859 957 848 869 – From insurance transactions with external third parties 6,952 6,583 13,699 13,988 1. Earned premiums
Thereof: – Income from associates 51 –24 208 –87 4. Expenses for claims and benefits 5. Operating expenses 7. Result before amortisation and impairment losses of goodwill 1,104 704 1,280 2,038 8. Amortisation and impairment losses of goodwill – 6 – 94
Thereof – Attributable to Munich Re equity holders 976 432 418 1,229 – Attributable to minority interests – – – 5 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Life and health Property-casualty 2005 Prev. year 2005 Prev. year 2005 Prev. year 2005 Prev. year 2005 Prev. year (adjusted)* (adjusted)* (adjusted)* (adjusted)* (adjusted)*
Secondary segmentation is based on the geographical origin of our investments and gross premiums written.
Gross premiums written* Reinsurers Primary insurers Total 2005 Prev. year 2005 Prev. year 2005 Prev. year €m €m €m €m €m €m
Declaration of compliance with the German Corporate Governance Code in accordance with Section 161 of the German Stock Companies Act In November and December 2005 respectively, the Board of Management and Supervisory Board of Munich Reinsurance Company and the corresponding Boards of ergo Versicherungsgruppe ag published, in each case, an updated declaration of compliance with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act and made this declaration permanently available to shareholders on the internet.
Figures for previous years Insofar as under the transitional rules of ifrs 4 comparative information relating to annual periods beginning before 1 January 2005 is not required, we have in certain cases dispensed with the disclosure of previous year’s figures in the notes to the consolidated balance sheet and to the consolidated income statement.
Germany Other Total countries *In addition, 67 German and 8 non-German special funds were included in the consolidated group.
Profits earned by the subsidiaries or special funds after their first consolidation are included in Group equity.
Recognition and measurement The annual financial statements of the consolidated subsidiaries and special funds are subject to uniform accounting policies. For the annual financial statements of significant associates we have, in accordance with ias 28.27, made appropriate adjustments for the purposes of the consolidated financial statements. Valuations used in the financial statements of associates not classified as significant are maintained.
Changes in accounting policies Application of the recognition, measurement and disclosure methods follows the principle that a method once chosen should be applied consistently. Changes have become necessary as a result of new or revised ifrs. We have complied with all new and revised ifrs whose application is compulsory for the first time for periods beginning on 1 January 2005. The following standards are of significance in this context: ias 1, Presentation of Financial Statements, stipulates that for periods beginning on or after 1 January 2005, the part of the result attributed to minority interests has to be shown in the consolidated income statement not as expenses before the consolidated result but as appropriation of profit after the consolidated result. Correspondingly, minority interests in the balance sheet have to be recognised as part
Notes of equity. Direct minority interests in special funds, however, are not equity within the meaning of ias 32. We therefore disclose direct minority interests in special funds under “other liabilities”. In accordance with ias 8, adjustment has been made retrospectively. The carrying amount of the reclassified direct minority interests in special funds totals €93m (93m) for 2005. In connection with the reclassification, we have measured the items at fair value. The valuation effect of €7m attributable to previous years is reflected by a reduction in retained earnings in 2005. In order to provide a better insight into our operating result, we show finance costs separately in the income statement for periods beginning on or after 1 January 2005. By finance costs we understand all interest and other expenses attributable to strategic debt. Debt has a strategic character for us if it does not have an original, direct link with our operative business. The previous year’s figures have been adjusted accordingly.
We have accounted for changes in accounting policies and corrections of errors in accordance with ias 8. As from 2005, the revised ias 8 generally requires changes in accounting policies and corrections of errors to be recognised retrospectively and without impact on profit or loss. In cases where it was not possible to make a retrospective adjustment on the basis of the available data and for non-material circumstances, we have recognised the adjustments in the year under review without impact on profit or loss. Resultant changes to retained earnings are explained in Note (16) Equity.
In the notes to the consolidated balance sheet and the consolidated income statement, we dispense with the disclosure of additional information in accordance with ifrs insofar as the details involved are of minor relevance. As far as underwriting items are concerned, we regard information as significant if the amount or change to be disclosed represents at least 1% of the value of the relevant balance sheet item.
Standards or changes in standards that have not yet entered into force ias 19, Employee Benefits, allows the option for business years beginning on or after 1 January 2006 of recognising all actuarial gains and losses from pension obligations outside profit or loss. We plan to take advantage of this option and to replace the previously prescribed corridor method for determining the actuarial gains and losses to be recognised in the income statement. Its application will probably result in a higher disclosure of pension provisions. We will apply this change retrospectively as from 1 January 2006, in accordance with ias 8. ifrs 7, Financial Instruments: Disclosures, will be applicable as from 1 January 2007. In addition to the existing disclosure obligations in respect of recognition and measurement of financial instruments, the new standard requires enhanced disclosure of information on the type and extent of risks from financial instruments. Parallel to this, the revised ias 1, Presentation of Financial Statements, requires qualitative disclosures on objectives, policies and processes for managing capital. We will probably already meet the requirements of both standards in the business year 2006.
Intangible assets In accordance with ifrs 3, goodwill from the first-time consolidation of subsidiaries is tested for impairment at least once annually, i.e. the carrying amount of goodwill is compared with the recoverable amount and written down for impairment if necessary.
Other intangible assets mainly comprise purchased and internally generated software and acquired insurance portfolios. The software is carried at cost less straight-line amortisation. The useful life assumed is three to five years. Acquired insurance portfolios are recognised at their present value on acquisition (pvfp: present value of future profits ). They are amortised in accordance with the realisation of the profits from the insurance portfolios underlying the pvfp calculation.
Other investments are also carried at face value. Financial assets in our direct portfolio are generally accounted for at the settlement date. Investments held in special funds are accounted for at the trade date.
Investments for the benefit of life insurance policyholders who bear the investment risk These are investments for policyholders under unit-linked life insurances. They are measured at amortised cost. All unrealised gains or losses from changes in fair value
Receivables Receivables on primary insurance business, accounts receivable on reinsurance and other receivables are carried at face value; adjustments of value are made where necessary.
Cash with banks, cheques and cash in hand Cash and cheques are accounted for at their face value.
In life primary and reinsurance and in health primary insurance, the deferred acquisition costs are also capitalised and amortised over the terms of the contracts either proportionally to the premium income (fas 60) or proportionally to the respective contracts’ expected gross profit margins calculated for the relevant year of the contract term (fas 97, 120). The allocation of individual contracts to the fas concerned is shown in the notes to equity and liabilities item C. In determining the amount of amortisation, an actuarial interest rate and changes resulting from the disposal of contracts from the portfolio are taken into account. In other reinsurance and in property-casualty insurance, the deferred acquisition costs are amortised on a straightline basis over the average term of the policies, from one to five years.
Deferred acquisition costs are regularly tested for impairment using a liability adequacy test (cf. notes to equity and liabilities item C).
Where unrealised losses on securities available for sale are recognised in equity (see “other securities available for sale”), the resulting deferred tax assets are recorded but not recognised in income. Deferred tax assets are reversed if a realisation of the corresponding receivable is not probable.
In accordance with ias 32, own shares held by Munich Re at the balance sheet date have been deducted directly from retained earnings.
Subordinated liabilities Subordinated liabilities are liabilities which, in the event of liquidation or insolvency, are only satisfied after the claims of other creditors. They are recognised at amortised cost, i.e. any premiums or discounts are deducted from or added to the acquisition costs according to the effective interest method, with impact on the income statement, until the redemption amount becomes payable.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. The posting of unearned premiums is generally restricted to short-term underwriting business.
For contracts in accordance with fas 60, the provision for future policy benefits is calculated from the present value of estimated future policy benefits (including claims adjustment expenses) less the present value of future net level premiums. Net level premium is that part of the
C gross premium that is needed to finance future policy benefits. Life primary insurance contracts with limited premium payment as per fas 97 are generally valued in the same way as contracts falling under fas 60. For all other contracts as per fas 97, an account is kept to which premiums and interest earnings are credited and from which risk premiums and administration expenses are debited, not all credits and debits being contractually fixed at the time the contracts are concluded. Premium components exceeding the net level premium are recognised as unearned revenue liability and amortised over the remaining term of the contracts.
The provision for future policy benefits for life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance) is shown separately under equity and liabilities item D.
In the case of contracts as per fas 120, the provision for future policy benefits is made up of the net level premium reserve and liabilities for terminal dividends. The net level premium reserve is calculated from the present value of guaranteed policy benefits (including acquired bonuses but excluding claims adjustment expenses) less the present value of future net level premiums. The net level premium is the net premium less the portion of the premium envisaged for covering claims adjustment expenses. The actuarial assumptions are generally the same as those used for premium calculation. Provisions for terminal dividends are built up proportionally with a fixed share of the expected gross profit margins. The same method is used for this as for determining the amortisation of the deferred acquisition costs. The provision for outstanding claims is for payment obligations arising from insurance and reinsurance contracts where the size of the claim or the date of the payment is still uncertain at the balance sheet date. Part of the provision is for known claims for which individually calculated provisions are posted. Another part is for expenses for claims which are not yet known (e.g. because they have not been reported yet or have not yet manifested themselves). A third class of provisions covers claims which are basically known but whose extent has turned out to be greater than originally foreseen. All these provisions include expenses for internal and external loss adjustment expenses. The provision for outstanding claims is based on estimates: the actual payments may be higher or lower.
For determining the provision for outstanding claims, the Munich Re Group uses a range of actuarial projection methods. These include the chain ladder method and the Bornhuetter-Ferguson method. In applying the statistical methods, large exposures are regarded separately. The standard actuarial methods we use are applied both to the run-off triangles for the payments and to the run-off triangles for the reported claims, so that we obtain a range of estimates for the ultimate loss. Within this range, a realistic estimated value for the ultimate loss is determined for the balance sheet date. By deducting the payments already made, we arrive at the provision for outstanding claims recognised in balance sheet.
Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders This item comprises the provisions for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance). The value of the provisions for future policy benefits essentially corresponds to the market value of the relevant investments shown under assets item C. Besides this, as under the provisions for future policy benefits as per fas 97, they may include additional premium components; cf. the notes to assets item C. Changes in these provisions are fully recognised in the underwriting result. Insofar as these changes derive from unrealised gains and losses from alterations in the fair values of the related investments, they are mirrored by opposite changes of the same amount in the investment result.
Other accrued liabilities This item includes provisions for post-employment benefits. The companies in the Munich Re Group generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the staff member’s length of service and salary.
Under defined benefit plans the staff member is promised a particular level of retirement benefit either by the companies or by a pension fund. The companies’ contributions needed to finance this are not fixed in advance.
Other provisions are posted in the amount of the probable requirement; such amounts are not discounted if insignificant.
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 even themselves out again with impact on taxable income (temporary differences); cf. the notes on assets item H.
Munich Re’s presentation currency is the euro (€). The balance sheets of foreign subsidiaries whose national currency is not the euro are translated in accordance with the functional currency principle using the year-end exchange rates, and their income statements using quarterly average exchange rates; any exchange differences arising in the process are recognised in equity (other reserves) and excluded from earnings.
– its value in use (present value of the future cash flows expected to be derived from a cash-generating unit). The future cash flows used for determining the value in use are based on management’s most recent financial plans/forecasts. Beyond the period covered by these financial plans/forecasts, the future cash flows are estimated by extrapolating the prognoses on which the financial plans/forecasts are based, applying constant or declining growth rates for the subsequent years.
For impairment testing, the goodwill from the acquisition of American Re (carrying amount of €1,170m) and from the acquisition of shares in the ergo Insurance Group (carrying amount of €1,754m) was allocated to the cash-generating units “reinsurance property-casualty segment” and “ergo” respectively. The recoverable amount of these units was determined on the basis of the value in use. For the business year 2005, the impairment test did not give rise to any need for write-downs of goodwill for these cash-generating units.
Pricing and – Marginally declining premium income – Property-casualty insurance (including legal expenses contractual insurance): Slight premium growth conditions – Life insurance: Stable premium income
Notes to the consolidated balance sheet – Assets of American Re and from the acquisition of ergo was carried out on the basis of the current cash flow plans at the time of testing in the first quarter.
The impairment losses are distributed between the different Group segments as follows: In the reinsurance segment, €0m (20m) is apportionable to life and health and €1m (32m) to property-casualty; in the primary insurance segment, €3m (19m) is apportionable to life and health and €2m (–) to property-casualty. The remaining other intangible assets include land rights amounting to €1m (1m).
Gross carrying amount at 31.12. previous year 958 1,079 305 2,342 2,177
Accumulated amortisation and accumulated impairment losses at 31.12. previous year 497 371 231 1,099 805
Carrying amount at 31.12. previous year 461 708 74 1,243 1,372
Carrying amount at 1.1. business year 462 720 75 1,257 1,366
Gross carrying amount at 31.12. business year 843 1,097 298 2,238 2,342
In the business year 2005, owner-occupied property of €2,139m (683m) was reclassified to the item “other assets”. The useful lives of the buildings were adjusted in the business year, owing to the first-time application of the component approach, and are now between 40 and 55 years (previous year: max. 50 years). The overall change in depreciation volume resulting from this is insignificant.
The reduction under “change in consolidated group” is mainly due to the sale of the Karlsruher Insurance Group. Property pledged as security and other restrictions on title amount to €522m (688m). The expenditures recognised in the carrying amount for assets in the course of construction total €39m (71m) at the balance sheet date, and contractual commitments to acquire property amount to €25m (124m).
The fair value of land and buildings at the balance sheet date amounts to €7,132m (10,737m) and has been determined as follows: for directly held property, generally the capitalised earnings value is calculated by internal experts in accordance with the Statutory Order on Valuation. The valuation is performed for each site individually as at 31 December 2005 except where valuation units are formed. For developed and undeveloped property held through real estate companies, the fair values are determined in accordance with the statutory regulations by internal or external experts.
Accumulated depreciation and accumulated impairment losses at 31.12. previous year 1,460 1,125
Accumulated depreciation and accumulated impairment losses at 31.12. business year 1,220 1,460
The fair values of the loans at the balance sheet date amounted to €25,666m (21,259m).
Over one year and up to two years 39 164 40 171
Over two years and up to three years 61 41 65 44
Over three years and up to four years 43 66 45 71
Over five years and up to ten years 94 166 101 177
Items pledged as security and other restrictions on title amount to €4,399m (6,257m). €6,166m (3,477m) of the securities shown are loaned to third parties. Measurement at fair value results in valuation reserves
Carrying amounts Amortised cost All figures in €m 31.12.2005 Prev. year 31.12.2005 Prev. year
Over one year and up to two years 8,905 6,895 8,843 6,795
Over two years and up to three years 9,922 9,089 9,855 8,875
Over four years and up to five years 6,742 9,021 6,568 8,687
Positive No Investments, other securities held for trading 970 300 Yes Other assets 66 38
The following table shows the fair values and the related notional principal amounts of our open positions, broken down according to risk types and product categories. Positive and negative fair values have been netted. At 31 December 2005, the open positions amounted to €908m
(249m), i.e. less than 1% (1%) of the balance sheet total. The fair values shown are either quoted prices or values at the balance sheet date determined using recognised calculation models.
Fair values –1 – – – – – –1 –1 Futures
Notional principal amounts 130 – – – – – 130 90
Others Notional principal amounts – – – – – 244 244 –
Fair values –9 – – – – – –9 –3 Futures
Notional principal amounts 366 – – – – – 366 404
Options Notional principal amounts 1,716 – – – – – 1,716 1,209
Swaps Notional principal amounts – – – – 100 – 100 4
Others Fair values – – – – – 11 11 – Notional principal amounts – – 1 – – 9 10 –
Although the derivatives in the Munich Re Group essentially serve to hedge against risks, only an amount of €60m (35m) meets the strict requirements of ias 39 for hedge accounting.
The net fair value of the derivatives falling into this category amounted to €41m (37m) at the balance sheet date.
Fair values 5 – – – – – 5 – Options
Over-the-counter Fair values –1 – – – – – –1 –
Periods to maturity and amount of the hedged cash flows at the balance sheet date
Details of the ceded shares of underwriting provisions are shown in Notes (18), (19), (20) and (21).
(9) Deposits retained on assumed reinsurance Deposits retained on assumed reinsurance serve directly as collateral for underwriting provisions covering business assumed from cedants in reinsurance. The counterparty risk is therefore limited. The amount of and changes in deposits retained on assumed reinsurance in the balance sheet year generally derive from the values for the changes in the related underwriting provisions for the reinsured business.
(10) Other investments This item includes deposits with banks totalling €2,479m (2,829m).