Munich Re’s market capitalisation at 31 December2 €bn 30.8 28.7 28.7 24.4 17.0
1 Including Munich Health’s primary insurance and reinsurance activities in the health market as at 31 December 2015.
Europe Austria Belgium Belarus Croatia Cyprus Czech Republic Denmark Estonia France Germany Greece Hungary Ireland Italy Latvia Lithuania
Luxembourg Malta Netherlands Norway Poland Portugal Romania Russia Sweden Switzerland Slovakia Slovenia Spain Turkey United Kingdom Ukraine
Asia Bahrain China Hong Kong India Israel Japan Jordan Malaysia Qatar Saudi Arabia Singapore South Korea United Arab Emirates Vietnam
Munich Re at a glance Key figures Front cover flap Munich Re’s global presence Inside front cover flap Quarterly figures Inside back cover flap Our brands Back cover flap Important dates Back cover
To our shareholders 001 Letter to shareholders 003 Notable events in 2015 008 The Board of Management 010 Munich Re shares 012 Our strategy 017
Consolidated financial statements and notes 159 Consolidated balance sheet 162 Consolidated income statement 164 Statement of recognised income and expense 165 Group statement of changes in equity 166 Consolidated cash flow statement 168
General information 303 Glossary 304 Important addresses 311 Imprint/Service Inside back cover
Munich Re posted a profit of €3.1bn in 2015, significantly beating the announced target for the year. The Supervisory Board and Board of Management will thus propose to the Annual General Meeting to increase the dividend to €8.25 per share. This higher dividend is not only justified by the good result from the last financial year – we are also confident of our capacity, going forward, to sustainably generate the necessary funds for this level of dividend and for future share buy-backs. Our share price saw a pleasing improvement in 2015. It increased overall by a total of 11.3%, even though the withdrawal of our previous largest shareholder meant that more than 10% of the shares additionally came on to the market. This demonstrates the strength of our Group, and the trust investors have in its future.
But 2015 was not an easy year. The uncertainties plaguing our business and that of our clients have grown. The number of national and international conflicts multiplied once again, setting in motion a wave of refugees that has struck Europe in particular with full force. The European Union is faced with critical challenges from the refugee issue, the sovereign debt crisis that has still not entirely gone away, and now also the danger of Brexit. For the first time in many decades, it appears possible that the EU may fracture. Necessary steps towards integration and a further democratisation of the EU seem further
Dr. Nikolaus von Bomhard Chairman of Munich Reinsurance Company’s Board of Management
levels. We are therefore not only intensifying our innovation efforts, but also offering our clients more customised and individually negotiated solutions, which are naturally less exposed to competition. As a world-leading reinsurer with a diversified business model, we consider ourselves well placed to write profitable business even in a strained business environment.
17 March 2015 ERGO receives the TÜV certification for understandable communication for the second time. After several months of process testing and much random sampling of texts, TÜV Saarland awarded the rating “good” (1.90). ERGO is using the external assessments to continuously improve its internal processes for understandable communication.
In primary insurance, D.A.S. Allgemeine Rechtsschutz-Versicherungs-AG is merged with the property-casualty insurer ERGO Versicherung AG. This will become the new legal entity for D.A.S. legal protection insurance in Germany, although the brand will remain in use. The independent company D.A.S. Rechtsschutz LeistungsGmbH is responsible for claims settlement, allowing ERGO to reduce administrative costs.
The historians Johannes Bähr and Christopher Kopper present the first academic study on Munich Re’s history. Their book “Munich Re. Die Geschichte der Münchener Rück 1880–1980” details the Company’s rise to the ranks of the worldleading reinsurers and the setbacks it has faced as a result of the two World Wars and the era of National Socialism.
Munich Re has been incorporating riskbased corporate management for a long time. For around ten years, Munich Re has been drawing up and developing its own internal model. This model is approved by the German Federal Financial Supervisory Authority (BaFin) as part of the new Solvency II supervisory regime. Munich Re also regards Solvency II as opening up new business potential.
ERGO Direkt can now also be contacted via the mobile chat service WhatsApp, where it advises on products and services. In December, ERGO’s customer service department also expands its digital provision and is available via live chat to handle client questions and concerns. The aim is to open up the channels clients personally prefer.
Together with other investors, MEAG signs an agreement to acquire 100% of Autobahn Tank & Rast Holding GmbH. Tank & Rast is Germany’s leading operator and concessionaire of a network of German motorway service areas with 500 million visitors each year.
Torsten Jeworrek Chairman of the Reinsurance Committee Reinsurance Development Corporate Underwriting Corporate Claims Accounting, Controlling and Central Reserving for Reinsurance Information Technology Geo Risks Research/ Corporate Climate Centre
Nikolaus von Bomhard Chairman of the Board of Management, Chairman of the Group Committee Group Development Group Investments Group Communications Group Compliance Group Audit Group Human Resources
The investment year 2015 was marked by persistently low interest rates, global economic worries in the developed and emerging markets, and by uncertainty regarding the future course of Greece. On the other hand, the stock markets caught a tailwind from the continuation of the ECB’s cheap money policy.
The DAX presented a very mixed picture in the second quarter of 2015. It climbed to an all-time high of 12,390 points on 10 April, and then began to trend downwards in spasmodic bursts. The Dow Jones saw similar development. The reasons for these ups and downs were the crisis in the Ukraine, the sanctions against Russia, slowed growth, and turbulence on the Chinese stock markets. Europe was especially affected by uncertainty as to the future of Greece in the eurozone.
— Munich Re shares showed a solid performance: The share price increased by 11.3% in 2015, giving a total return (including dividends) of 15.8%
— Supervisory Board and Board of Management to again propose payment of an increased dividend of €8.25 per share at the Annual General Meeting
— In 2015, own shares were repurchased with a transaction value of €1.0bn
— Munich Re shares also continued to be attractive for investors in sustainability
The European insurance sector continued to perform well in 2015, surpassing the European share index1 for the fourth consecutive time. Once again, it outperformed the European bank index2 and the German DAX 30, mainly owing to robust business results, solid balance sheets and high dividends across the board. This makes the sector interesting for investors, particularly in volatile market phases. With the introduction of the new European supervisory regime for insurance undertakings on 1 January 2016, which caused considerable uncertainty in the preparatory phase, the industry should remain attractive for stability-oriented investors. By the end of the year, the pricing levels for insurance stocks were about the same as in the previous year.
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Share price performance 1.1.2015 = 100 1 European share index = DJ EURO STOXX 600 2 European bank index = DJ EURO STOXX Banks
Around 40 analysts from banks and brokerage houses regularly evaluate our shares. At the end of December 2015, some 33% of the analysts gave our shares a positive assessment, 53% a neutral one, and 14% a negative rating – the average price target being €186. The analysts’ current recommendations and result estimates can be found on our website.
In June 2015, we organised an Investor Briefing to inform our stakeholders about the opportunities for profitable growth in our reinsurance business in the Asia/Pacific region. At the end of November, we held another briefing for analysts and investors on the new Solvency II supervisory regime for insurance undertakings and on its consequences for Munich Re. The information material accompanying these events was simultaneously published on Munich Re’s website.
In October, Munich Re was identified as the most sustainable company in the DAX by STOXX and Sustainalytics and awarded the German ESG Award 2015. In their study, they highlighted the fact that Munich Re applies ecological, social and corporate governance criteria in its core business of primary insurance and reinsurance and in its investments.
For the financial year 2015, the Board of Management and the Supervisory Board intend to propose a dividend of €8.25 (previous year €7.75) at the Annual General Meeting on 27 April 2016. Altogether, this would mean a total payout of €1.3bn (previous year: €1.3bn). Subject to approval by the Annual General Meeting, the dividend will be paid on 28 April 2016. With an increase in the dividend, we are again underlining the profitability of our business model and the solidity of our capital position.
At around 64%, the percentage of international investors was slightly lower than in the previous year.
The remaining part of the share capital remains spread over many countries and different investor groups.
For many years, Munich Re has been awarded consistently excellent ratings at AA level by the leading rating agencies. In the year under review, Munich Re’s capital strength was again affirmed. In July 2015, the agency Fitch raised our financial strength rating to AA. The outlook for all Munich Re’s ratings remained stable.
DJ EURO STOXX 50 1.3 DJ EURO STOXX Insurance 11.2 MSCI EURO 1.1 FTSE EUROTOP 100 1.0 DJ Sustainability World 0.3
Share capital €m 587.7 587.7 Number of shares at 31 December m 166.8 172.9
Our business model is supported by disciplined financial management based on Group-wide integrated risk management, an investment policy geared to the structure of our liabilities, and active capital management. More details can be found in the section “Important tools of corporate management” starting on and on page 114 f. in the risk report.
— Innovative business ideas originating from digitalisation and modern data analysis lead to new insurance solutions that secure our competitive advantage, generate profitable growth and help to retain our clients’ long-term loyalty.
We go beyond what is required by law and have also committed ourselves to meeting more stringent standards. These include the UN Global Compact (UNGC), the Principles for Responsible Investment (PRI), and the Principles for Sustainable Insurance (PSI). More information about our Group-wide activities in the area of corporate responsibility can be found in the chapter “Stakeholders” and on our corporate responsibility portal.
Munich Re operates in virtually all classes of reinsurance. Our offering ranges from traditional reinsurance, comprehensive services and consultancy, to complex individual solutions for assuming risks and optimising our clients’ capital. In our business, we consistently pursue an underwriting policy based on risk-commensurate prices, terms and conditions. The transfer of risks to the capital markets is another service we offer our clients.
New, previously unknown risks pose a particular challenge in a dynamic global environment. We want to be the first to identify and evaluate these, with a view to maintaining our competitive advantage. In so doing, we aim to expand the boundaries of insurability and, at the same time, calculate technically adequate prices. With new insurance solutions, we aim to set ourselves clearly apart from the competition, win our clients’ long-term loyalty, and ultimately generate profitable growth overall. Essential prerequisites for this are our broad risk knowledge, our experience in all global markets and intensive dialogue with our clients.
The primary insurer is making targeted use of its competence in direct selling in order to meet the growing demand from consumers for needs-based digital offerings and services across all distribution channels. In addition, sales partnerships link ERGO with banks in Germany and in various international markets.
Our strategic focus in mature markets is on continually developing our local business models. In addition, we concentrate on emerging markets that are growing as a result of the creation and expansion of medical infrastructure – for instance, in numerous Asian and South American countries, and on the African continent.
The development and exploitation of innovative and digital business models in the area of health have cross-market relevance. We see an increasing strategic focus for Munich Health in the development of these business models, combined with the targeted utilisation of the business potential resulting from these models.
Our spectrum of clients ranges from governments, private and state health insurance companies to private clients – backed by various different sales and cooperation partners. By means of our set-up, which comprises vast parts of the healthcare value chain, we are in a position to provide this broad client spectrum with products and solutions consistently geared to their needs. Munich Health is thus active worldwide as a risk carrier and service provider, driving forward high-quality medical care and ensuring it remains financeable.
C or po ra te g ov er na nc e 21Corporate governance
Collaboration between Supervisory Board and Board of Management The Board of Management satisfied its reporting obligations towards the Supervisory Board in all respects, both verbally and in writing. The Supervisory Board was involved in all important business transactions and decisions of fundamental significance for the Group. During meetings, we held in-depth discussions with the Board of Management about the information provided to us. Cooperation with the Board of Management was characterised in every regard by targeted and responsible action aimed at promoting the successful development of Munich Re.
Outside of Supervisory Board meetings, the Board of Management informed us promptly about important events in the Group, including pending changes to the ERGO Board of Management, the reduction in the shareholding of Warren Buffett’s companies in Munich Reinsurance Company, and progress of the change of legal format and plans to transfer the registered office of the British subsidiary Great Lakes (UK) SE. The shareholder representatives and the employee representatives met with the Chairman of the Board of Management regularly before the meetings for separate discussions of strategic issues and other matters of essential importance.
Focal points of the meetings of the full Supervisory Board There were seven meetings of the Supervisory Board in the year under review. Two representatives of the German Federal Financial Supervisory Authority (BaFin) routinely attended one of the meetings as guests. We regularly held in-depth discussions with the Board of Management about Munich Re’s business performance and current topics, with a special focus on strategic considerations of the Board of Management with respect to the individual fields of business. The Board of Management reported regularly on the situation of Munich Re’s investments, addressing the development of the global economy and financial markets in detail, and their impact on the Group’s assets and earnings. The Board also kept us informed about developments regarding the European Solvency II supervisory regime, and explained progress concerning implementation of Solvency II requirements at Munich Re. We looked in detail at the importance for Munich Re of the internal model for calculating capital requirements. We also dealt with the following topics in the individual meetings in 2015: Dr. Bernd Pischetsrieder Chairman of the Supervisory Board
The meeting on 10 March focused on the Company and Group financial statements for 2014 and the motions for resolution by the 2015 Annual General Meeting. We conferred and took decisions regarding the extension of an appointment to the Board of Management, and established the personal objectives for the Board members’ variable remuneration for 2015. We also asked for an update about the Group-wide implementation of the compliance management system (CMS) begun in 2014. The meeting on 22 April was devoted solely to matters involving the Board of Management, specifically the evaluation of the individual Board members’ annual performance for 2014 and their multi-year performance for 2012–2014. On 23 April, directly prior to the Annual General Meeting, we heard the Board of Management’s report on the present status of business performance in 2015. We also used the meeting to make last-minute preparations for the impending Annual General Meeting.
Work of the committees There are five Supervisory Board committees. They prepare the topics to be addressed and decided on by the full Supervisory Board. At each Supervisory Board meeting, information about the work of the committees was provided to the full Board by the respective Chairs of the committees.
The Personnel Committee held seven meetings in the period under review. It essentially prepared the resolutions on matters involving the Board of Management already mentioned in the report on the work of the full Supervisory Board. It also dealt with fringe benefits for members of the Board of Management, with seats held by members of the Board of Management on supervisory, advisory and similar boards, and with Group-wide succession planning, especially with respect to Board-level appointments.
More details on the work of the Supervisory Board committees can be found in the Statement of Corporate Governance at www.munichre.com/cg-en. In the Statement, and on page 46 f., you will also find information on the composition of the committees.
The Nomination Committee met twice in 2015. In the first and fourth quarters of the reporting period, it discussed suitable candidates for election to the Supervisory Board. In making proposed nominations, the Committee took account of the objectives set by the Supervisory Board for composition of the Committee and the set of criteria as updated in the year under review.
There was also no need to convene the Conference Committee in 2015.
Corporate governance and Declaration of Conformity The Supervisory Board pays close attention to good corporate governance. Together with the Board of Management, we therefore published the mandatory annual Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG) in November 2015. We again complied with all recommendations of the German Corporate Governance Code, and intend to continue to comply with it in future. We confirmed the assessment we made in 2014 that all 20 members of the Supervisory Board are to be regarded as independent and that they do not have any relevant conflicts of interests.
Details can be found in the Corporate Governance Report on page 28 ff. and in the Statement on Corporate Governance available at www.munichre.com/cg-en.
Munich Re offered an internal information event to all members of the Supervisory Board in 2015. Nearly all the members took advantage of the opportunity to brief themselves about the current status and future effects of Solvency II, particularly with respect to the internal model of Munich Re. There were also discussions about possible effects of certain economic and political extreme scenarios and the options of reacting to such circumstances.
Words of thanks to the Board of Management and employees The Supervisory Board wishes to thank all members of the Board of Management and staff worldwide. With their work and commitment, they have once again contributed to another gratifying result for Munich Re.
Good corporate governance creates lasting value. We therefore apply the highest standards to our operations and activities, complying with all the recommendations and proposals of the German Corporate Governance Code. Beyond this, all our employees are bound to a corporate Code of Conduct.
Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. One of our aims in this context is to secure the confidence of investors, clients, employees and the general public in our corporate activities. Efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies and with the Group’s staff, and open and transparent corporate communications are also very important.
The benchmarks of good corporate governance are determined by national and international requirements, and by internal principles. As a result of our international organisation, we comply with corporate governance rules in different national legal systems, and with internationally recognised best practices.
Munich Reinsurance Company’s Board of Management and Supervisory Board make a declaration of how far they have complied, and are complying, with the Code’s recommendations.
The Board of Management is responsible for managing the Company, in particular for setting objectives and determining strategy. In doing so, it is obliged to safeguard Company interests and endeavour to achieve a sustainable long-term increase in the Company’s value. The Board of Management is responsible for effecting adequate risk management and risk control in the Company. It must ensure compliance with statutory requirements and internal company guidelines. The Group Compliance division (GComp) of Munich Reinsurance Company reports directly to the Chairman of the Board of Management. GComp manages the compliance activities of Munich Re (Group) through Group-wide terms of reference, monitoring their implementation on the basis of the compliance management system (CMS). At the instigation of the Board of Management, another channel has been established to complement the external independent ombudsman and thus strengthen compliance within the Group: the compliance whistleblowing portal. Employees and third parties can use this portal to anonymously report suspected criminal behaviour such as bribery and corruption, contraventions of antitrust, insider trading and data protection laws, and other activities causing damage to our reputation.
Objectives of the Supervisory Board for its composition, diversity and independence In accordance with Section 5.4.1 (2) of the German Corporate Governance Code, the Supervisory Board has set itself the following objectives for its composition, which were updated in the year under review: — The main criteria for selecting future members of the Supervisory Board are professional knowledge, personal abilities and experience (especially of an international nature), independence, commitment to sustained corporate profitability, and enterprise of the nominated persons.
— In selecting candidates for membership, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. The objective of having a female representation of at least 30% on the Supervisory Board by the start of the following term of office continues to apply. At present, this objective has already been surpassed, as women make up 40% of the members.
Governance and in the Report of the Supervisory Board on page 23 ff.
The Annual General Meeting regularly reaches a resolution on the appropriation of profits and approving the actions of the Board of Management and Supervisory Board. Besides this, the Annual General Meeting elects the shareholder representatives on the Supervisory Board and, in particular, votes on changes to the Articles of Association and individual capital measures. Certain corporate contracts also require the approval of the Annual General Meeting to become effective.
Business performance 070 Board of Management’s overall assessment of the business performance and situation of the Group 070 Munich Re’s business performance – Overview and key figures 070 Reinsurance – Life 074 Reinsurance – Property-casualty 077 ERGO Life and Health Germany 082 ERGO Property-casualty Germany 086 ERGO International 087 Munich Health 089 Investment performance 091
Financial position 097 Financial strength 097 Analysis of our capital structure 097 Asset-liability management 099 Capital management 099 Information in accordance with Section 315 (4) of the German Commercial Code (HGB) and explanatory report of the Board of Management 100 Group solvency 103 Analysis of the consolidated cash flow statement 104
Risk report 114 Risk governance and risk management system 114 Solvency capital requirement 122 Eligible own funds 129 Selected risk complexes 131 Summary 135
Opportunities report 136 Reinsurance 137 ERGO 138 Munich Health 139 Investments 140
As reinsurers, we write our business in direct collaboration with primary insurers, but also via brokers and increasingly within the framework of exclusive, strategic partnerships. In addition to traditional reinsurance business, we participate via our operating field Risk Solutions in the primary insurance business of industrial clients. An important initiative in reinsurance is aimed at promoting innovation to make new risks insurable and develop innovative products together with clients.
The reinsurance divisions Our international life business is written in the Life division. This is split into four geographical regions and one unit responsible for international activities in the area of risk and capital management, particularly the reinsurance of guarantees for savings products and transactions in the area of corporate financial management. In order to ensure proximity to our clients, we are represented in many markets with local subsidiaries and branches.
Four other divisions conduct property-casualty reinsurance: Global Clients and North America handles our accounts with major international insurance groups, globally operating Lloyd’s syndicates and Bermuda companies. It also pools our know-how in the North American market. It is responsible for our property-casualty subsidiaries there, and for international special lines business such as workers’ compensation.
Our Europe and Latin America division is responsible for property-casualty business with our clients from Europe (except Germany), Latin America and the Caribbean.
Europe and Latin America Munich Re do Brasil Resseguradora S.A., São Paulo3
Munich Re, Madrid3 Munich Re, Milan Munich Re, Paris Munich Re, London
We transact primary life and property-casualty insurance under the ERGO brand. This broad offering is supplemented by health insurance from DKV, travel protection insurance from ERV, ERGO Direkt, ERGO’s specialist for direct sales, and D.A.S. for legal protection insurance in Germany. D.A.S. Allgemeine Rechtsschutz-VersicherungsAG was merged with ERGO Versicherung AG in the year under review. ERGO’s many different sales channels include not only its companies’ own intermediary organisations and direct selling but also broker relationships and cooperations with banks and other marketing partners.
Germany, Asia Pacific and Africa Great Lakes, Sydney Calliden Insurance Ltd., Sydney Great Lakes, Auckland Munich Re, Auckland Munich Re, Beijing3
ERGO Insurance Group will be given a new organisational structure. German, international, and direct and digital business will in future be managed in three dedicated units under the umbrella of the newly named ERGO Group AG. In addition to the existing ERGO International AG, there will be two new holding companies. Traditional German business will be concentrated in ERGO Deutschland AG. The third pillar, ERGO Digital Ventures AG, will be responsible for all of the group’s digital and direct activities, including ERGO Direkt business.
The set-up of Munich Health Munich Health operates global health reinsurance business under the Munich Re brand and, in addition to assuming risks, also assists local insurance companies with customised cost and quality control services. In primary insurance, we are active in many international markets via subsidiaries, participations and joint ventures. We interact with our clients using proven local brands, e.g. DKV Seguros in Spain, DKV Belgium, or Daman National Health Insurance in Abu Dhabi.
International D.A.S. Rechtsschutz Aktiengesellschaft, Vienna D.A.S. Société anonyme belge d’assurances de Protection Juridique, Brussels DAS Legal Expenses Insurance Company Limited, Bristol DAS Nederlandse Rechtsbijstand Verzekeringmaatschappij N.V., Amsterdam ERGO General Insurance Company S.A., Athens ERGO Insurance N.V., Brussels ERGO Insurance SE, Tallinn ERGO Life Insurance SE, Vilnius ERGO Previdenza S.p.A., Milan ERGO Insurance Company, St. Petersburg ERGO SIGORTA A.S., Istanbul ERGO Versicherung Aktiengesellschaft, Vienna Sopockie Towarzystwo Ubezpieczen Ergo Hestia Spolka Akcyjna, Sopot Sopockie Towarzystwo Ubezpieczen na Zycie Ergo Hestia Spolka Akcyjna, Sopot 1 A detailed list of shareholdings can be found on page 291 ff. in the notes to the consolidated financial statements. 2 Only subsidiaries with premium volume exceeding €50m are listed.
— We clearly assign responsibilities and specify the levers for adding value for both management and staff.
Details of our risk strategy are available on page 115 ff.
In applying the uniform Group performance measurement model of economic earnings in the individual business fields, we use conceptually consistent measurement approaches that are individually geared to the characteristics of each of the respective businesses. They include the value added by property-casualty reinsurance and Munich Health, and the excess return from our investment activity (asset-liability management). In life reinsurance, the “value added by new business” and the “change in value of in-force business”, which are based on the Solvency II balance sheet, are applied. The perform- ance metric economic earnings is used directly for ERGO, as no adjustments for this field of business are necessary. Group corporate management is designed so that we are in a position to maximise value creation while observing subsidiary parameters.
RORAC is a mixture of accounting ratios and economic indicators. It relates the performance indicator customary in the capital markets (IFRS consolidated result), which we adjust to eliminate the risk-free return after tax on additional available economic equity, to the necessary capital requirement. The capital requirement corresponds to 1.75 times the solvency capital requirement under Solvency II, as determined on the basis of our certified internal risk model.
Although we emphasise risk-based perspectives, we always aspire to meet the high, but fair, expectations of our investors with regard to the return on the total capital placed at our disposal – the return on equity (RoE).
IFRS consolidated result The IFRS consolidated result is a performance measure derived from our external accounting. It serves as an important criterion for investors, analysts and the general public to assess corporate performance. With its standardised measurement basis, the IFRS consolidated result can be compared to the results of our market competitors and is thus an indicator used in Munich Re’s financial reporting.
Asset-liability management The economic value added by the investment result is calculated collectively for reinsurance and Munich Health due to their joint investment management. The main focus of Munich Re’s investment strategy is asset-liability management (ALM), which is a fundamental pillar of our value-based management system, and in which we take into account key characteristics of underwriting and other liabilities in structuring our investment portfolio. With ALM, we aim to ensure that changes in macroeconomic factors influence the value of our investments and that of our technical provisions and liabilities in the same way. For this purpose, we mirror important features of the liabilities – such as maturity patterns, currency structures and inflation sensitivities – on the assets side of the balance sheet by acquiring investments with similar characteristics where possible. This reduces our vulnerability to the effect of capital market fluctuations and stabilises our equity.
Dr. rer. pol. Thomas Blunck Special and Financial Risks Reinsurance Investments
Dr. rer. nat. Torsten Jeworrek (Chairman of the Reinsurance Committee) Reinsurance Development Corporate Underwriting Corporate Claims Accounting, Controlling and Central Reserving for Reinsurance Information Technology Global Business Architecture (until 30 June 2015) Geo Risks Research/ Corporate Climate Centre
Dr. rer. pol. Markus Rieß (since 16 September 2015) Primary Insurance/ERGO Third Party Asset Management
Dr. jur. Jörg Schneider (Chief Financial Officer) Financial and Regulatory Reporting Group Controlling Corporate Finance M&A Integrated Risk Management Group Legal Group Taxation Investor and Rating Agency Relations
Marco Nörenberg (Deputy Chairman) Member since 22 April 2009, last re-elected 30 April 2014 Employee of ERGO Versicherungsgruppe AG
Frank Fassin Member since 22 April 2009, last re-elected 30 April 2014 Regional Section Head Financial Services, ver.di North Rhine-Westphalia 1 Including responsibility for environmental, social and governance (ESG) issues
Beate Mensch Member since 30 April 2014 Trades Union Secretary, ver.di, Hessen
Personnel Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Wolfgang Mayrhuber Angelika Wirtz
Audit Committee Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann (Chair) Christian Fuhrmann Dr. iur. Anne Horstmann Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder Anton van Rossum
Nomination Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair)
Prof. Dr. oec. Dr. iur. Ann-Kristin Achleitner Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann
Conference Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Marco Nörenberg Angelika Wirtz
Board of Management1 Seats held on supervisory boards of other German companies
Dr. rer. pol. Markus Rieß ERGO Beratung und Vertrieb AG2 (Chair) ERGO International AG2 (Chair) ERGO Versicherung AG2 (Chair) ERGO Lebensversicherung AG2 (Chair) DKV Deutsche Kranken - versicherung AG2 (Chair)
Supervisory Board1 Seats held on supervisory boards Membership of comparable bodies of other German companies of German and foreign business enterprises
Dr. Ing. E.h. Dipl. Ing. Daimler AG Tetra-Laval International S.A. Bernd Pischetsrieder Group, Switzerland (Chairman)
Prof. Dr. rer. nat. Dr. Ing. E.h. Bayerische Motoren-Werke AG – Henning Kagermann Deutsche Bank AG Deutsche Post AG
The remuneration report is structured as follows: — Remuneration system for the Board of Management — Total remuneration of the Board of Management — Remuneration structure for senior executives — Total remuneration of the Supervisory Board
The remuneration system for the Board of Management focuses strongly on long- term objectives, and thus creates a pronounced incentive for sustainable corporate development. It complies with the recommendations of the German Corporate Governance Code applicable since 5 May 2015, and with the provisions of the German Remuneration Regulation for Insurance Companies (VersVergV) of 6 October 2010.
Fixed components The fixed components of remuneration comprise basic remuneration, plus remuneration in kind and fringe benefits.
Variable remuneration The variable remuneration component is geared to the overall performance of the Group, to the success of defined organisational units and to the personal performance of the individual members of the Board of Management. The amount depends on the extent to which the annually set objectives for annual and multi-year performance are met, and how the component “Evaluation of overall performance” is assessed.
Basic remuneration plus remuneration in kind/ fringe benefits 30% Function Responsibility Length of service on Board
Objectives for the fields of business – Reinsurance – ERGO – Munich Health Personal objectives Overall performance 0–200% (fully achieved = 100%)
– ERGO Value-based economic Economic earnings3 performance indicator Individual contribution 20%–55% to corporate success Divisional objectives Value-based economic Components of performance indicators: economic earnings:3
Other remuneration Remuneration for other board memberships In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular remuneration computation. Exempted from this is remuneration for memberships explicitly classified by the Supervisory Board as private.
– Munich Health3 Value-based economic Component of economic earnings:2 performance indicator – Value added
Munich Re Group Annual Report 2015 prematurely without good cause, payments due may not surpass the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29 (2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is based on the overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
The Supervisory Board determines the relevant target pension level for pension commitments from defined benefit plans and defined contribution plans – also considering length of service on the Board – and takes account of the resultant annual and long-term cost for the Company.
Reduced occupational pension on early retirement Board members are entitled to an occupational pension if the contract of employment is terminated as a result of non-extension or revocation of their appointment without the Board members having given cause for this through a gross violation of their duties, or at their own request. The precondition is that the Board members have already passed the age of 50, have been in the employment of the Company for more than ten years when the contract terminates, and have had their appointment to the Board of Management extended at least once.
Benefit: — In the case of defined contribution plans: Annuity based on the policy reserve or payment of the policy reserve as a lump sum at the date the insured event occurs.
Provision for surviving dependants In the event of the death of a Board member during active service, the surviving dependants receive the previous monthly basic remuneration for a period of six months if the deceased was appointed to the Board of Management before 2006. In the case of Board members appointed as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. If the Board member‘s death occurs after retirement, the surviving dependants receive the previous monthly occupational pension for a period of three months, provided the marriage/registration of the civil partnership took place and/or the child was born before the Board member started drawing the occupational pension. Surviving spouses and registered civil partners normally receive a pension amounting to 60% of the defined benefit or insured occupational pension; half orphans receive 20% and complete orphans 40%. The total amount may not exceed the occupational pension of the Board member. If the Board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
Munich Re Group Annual Report 2015 1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2015 annual performance. The amount shown for annual performance remuneration is based on estimates and the relevant provisions posted. For the 2014 annual performance, a total of €151,775 more was paid out than had been reserved in the 2014 financial year. The additional/reduced expenditure breaks down as follows: von Bomhard €44,599, Albo €4,205, Arnoldussen –€20,454, Blunck –€25,284, Höpke €51,869, Jeworrek €20,522, Röder €23,016, Schneider €32,764, Wenning €20,538. This results in the following actual bonus payments for 2014: von Bomhard €861,000, Albo €96,404, Arnoldussen €378,000, Blunck € 361,200, Höpke €236,600, Jeworrek €621,180, Röder €466,200, Schneider €633,360, Wenning €394,800. The amounts shown for the annual performance 2014 comprise the respective provision for 2014 and the relevant additional/ reduced expenditure for 2013.
thereof for Munich Reinsurance Company 236,250 551,250 787,500 thereof for Munich Reinsurance Company 65,844 153,635 219,479 1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for 2015. The amount shown for annual performance remuneration is based on estimates, i.e. the relevant provisions and the additional/reduced expenditure for 2014 posted in the table on page 57.
2 The remuneration set for multi-year performance for 2015 is payable in 2018, that for 2016 in 2019. 3 The information on the assessment bases and parameters on page 52 f. for the amounts set for 2015 also applies to the amounts set for 2016. 4 The compensation components that Markus Rieß received for his work at ERGO Versicherungsgruppe AG are included in the amounts payable.
The following tables show the benefits granted and the remuneration paid in accordance with the German Corporate Governance Code.
Defined contribution plan Pension Present contribution value of rate for target Entitlement entitlement Financial total direct as at as at Personnel Name year remuneration 31 December 31 December expenses thereof for Munich Reinsurance Company 25.50 2,261 –8 79,953 1 In the case of Board members with a combination between defined benefit plans and defined contribution plans, the amount corresponds to the value of the annual vested pension at 31 December 2008.
2 Expenses for defined benefit plan, including provision for continued payment of salary for surviving dependants. 3 Entitled to a reduced occupational pension on early retirement, and to an occupational pension in the event of regular termination of employment.
4 Entitled to an occupational pension in the event of termination of employment owing to incapacity to work. 5 Entitled to vested benefits under the Employers’ Retirement Benefits Act in the event of premature or regular termination of employment. 6 Entitled to a reduced occupational pension on early retirement in the event of premature or regular termination of employment.
7 The benefits that Markus Rieß received for his work at ERGO Versicherungsgruppe AG are included in the pension contributions. 8 Defined Contribution Plan within the meaning of IAS 19, Employee Benefits, so no present value shown. 9 Munich Reinsurance Company: see footnote 8; ERGO Versicherungsgruppe AG: No Defined Contribution Plan within the meaning of IAS 19, so present value shown.
Nikolaus von Bomhard Giuseppina Albo Chairman of the Board of Management Board member
Remuneration in kind/fringe benefits 33,564 33,564 33,564 31,669 96,010 96,010 96,010 61,323
Remuneration in kind/fringe benefits 34,932 34,932 34,932 134,808 34,627 34,627 34,627 36,180
Multi-year variable remuneration Multi-year performance 2014–2016 980,000 1 The compensation components and pension contributions that Markus Rieß received for his work at ERGO Versicherungsgruppe AG are included in the total remuneration.
2 Markus Rieß has been granted compensation, payable in four equal instalments, for the forfeited variable remuneration from his previous employer.
Remuneration table – Remuneration paid in accordance with the German Corporate Governance Code
Nikolaus von Bomhard Giuseppina Albo Ludger Arnoldussen Chairman of the Board member Board member
Multi-year variable remuneration Multi-year performance 2012–20141 2,214,800 – 1,163,750 Multi-year performance 2013–20153 1,958,138 – 974,943 Long-term Incentive Plan 20074 577,433 208,088 Long-term Incentive Plan 20094
Thomas Blunck Doris Höpke Torsten Jeworrek Board member Board member Board member
Multi-year variable remuneration Multi-year performance 2012–20141 1,592,010 1,093,680 Multi-year performance 2013–20153 1,395,173 974,943 Long-term Incentive Plan 20074 416,176 Long-term Incentive Plan 20094 586,057 1 In the Annual Report 2014, the amounts to be paid for the 2014 annual performance and multi-year performance 2012–2014 were recognised on the basis of the reserves, as no Supervisory Board resolution had yet been passed on the amounts to be paid for the actual bonus amounts. The Annual Report for 2015 shows the actual amounts set by the Supervisory Board and to be paid out for 2014. 2 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2015 annual performance. The amount shown for the 2015 annual performance remuneration is based on estimates and the relevant provisions posted. 3 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2013–2015 multi-year performance.
The amount shown for the 2013–2015 multi-year performance remuneration is based on estimates and the relevant provisions posted. 4 Disclosure of proceeds from the exercise of stock appreciation rights granted in 2007 and 2009. 5 The compensation components and pension contributions that Markus Rieß received for his work at ERGO Versicherungsgruppe AG are included in the total remuneration. 6 Markus Rieß has been granted compensation, payable in four equal instalments, for the forfeited variable remuneration from his previous employer.
Markus Rieß Peter Röder Board member (Joined: 16.9.2015) Board member thereof for Munich Total5 Reinsurance Company
The Mid-Term Incentive Plan, with a duration of three years, is based on the same quantitative targets as the multi-year bonus of Munich Reinsurance Company‘s Board of Management. In addition, the development of the total shareholder return is taken into account. Besides the senior executives in Munich, selected executives in Munich Reinsurance Company’s international organisation also participate in the Mid-Term Incentive Plan.
The individual variable components are granted – subject to different weightings – at all management levels. For the first management level below the Board of Management, the share of aggregate variable remuneration is more than 50% of total remuneration (fixed remuneration plus all variable components). Proceeding down the management hierarchy, this percentage decreases successively, making up around one-third at the lowest management level. There is a well-balanced combination of short and long-term components. At the first management level below the Board of Management, the Mid- Term Incentive Plan makes up around 25% of total remuneration or more than 50% of overall variable remuneration, so that there is provision for a longer-term incentive system. No guaranteed variable remuneration components are granted.
Gabriele Sinz-Toporzysek 2015 97,000 – 97,000 1 Plus turnover tax (USt) in each case, in accordance with Article 15 (6) of the Articles of Association. 2 Including attendance fees in each case, as per Article 15 (4) of the Articles of Association. 3 The figures for the previous year do not include remuneration for members who left the Board in the 2014 financial year.
Fixed remuneration For committee Name Financial year Annual2 work2 Total 2014 – – – Gabriele Sinz-Toporzysek 2015 15,000 – 15,000 1 Plus turnover tax (USt) in each case, in accordance with the relevant provisions of the respective Group companies’ articles of association. 2 Including attendance fees in each case insofar as provided for under the relevant provisions of the articles of association.
In 2015, the global economy continued to grow only moderately. The recovery in the eurozone gathered some speed, and the USA and the United Kingdom both showed solid growth. But weak economic conditions in many emerging markets and developments in Asia had a dampening effect: Japan’s economy expanded only slowly, while the structural slowdown of growth continued in China. Germany grew slightly more strongly than the eurozone average.
Uncertainty in the global capital and foreign exchange markets increased in 2015 compared with the previous year. Factors such as the upheaval in the Chinese stock markets, the vulnerability of some emerging markets and the resurfacing of the Greek debt crisis had knock-on effects on other markets.
Yields on German and US government bonds at year-end were slightly higher than at the beginning of the year, although in the second quarter German yields showed a marked reversal of the downward trend that had prevailed until then. As at 31 December 2015, yields on US and German bonds with periods to maturity of ten years were 2.3% and 0.6% respectively, compared with 2.2% and 0.5% at the end of 2014. Overall, the historically low interest-rate environment continued to present insurers with considerable challenges, especially since regular interest income saw a further decline.
We write a large portion of our business outside the eurozone. Appreciation of the euro has an adverse effect on premium income development posted in euros, while depreciation causes an increase. On average, the euro depreciated by 16.5% against the US dollar compared with the previous year. The average exchange rate of the euro was also lower against the Canadian dollar (–3.2%), the Japanese yen (–4.3%) and the British pound sterling (–9.9%). Therefore, currency translation effects have distorted premium income upwards compared with the previous year.
According to provisional estimates, in primary insurance global premium income in the property-casualty segment grew robustly in 2015 when adjusted for inflation. In particular, North America as the most important market again boasted solid growth rates. While the development in some European countries and especially in eastern Europe continued to be subdued, key Asian markets were seeing strong growth. Provisional estimates indicate that global premium income in life primary insurance grew significantly more slowly in 2015 than in the previous year when adjusted for inflation. In most industrialised countries in Asia and western Europe, growth rates slowed down. Among the emerging and developing countries, China in particular stood out with impressive growth rates in primary life insurance business.
Throughout 2015, renewal prices of property-casualty reinsurance business continued to fall, albeit at a slower pace than in the previous year. Alternative capital continued to add capacity to the reinsurance market. The more-than-adequate capital base of reinsurance companies – which benefited from low claims expenditure – further contributed to the difficult market environment. As a result, no reversal of the price trend was observed at the 1 January 2016 renewals.
Board of Management’s overall assessment of the business performance and situation of the Group
Dividend 2015 Prev. year Change % Total dividend payout €bn 1.3 1.3 3.2
1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 Excluding health insurance conducted like life insurance.
Investment result €m 7,536 8,002 –5.8 Results from insurance-related investments €m 140 414 –66.1
ERGO Life and Health Germany 19% (20%) ERGO Property-casualty Germany 6% (6%) ERGO International 8% (8%)
In the year under review, we posted an effective tax rate of 13.2% (–10.9%). This is attributable to the fact that Munich Re operates in many locations with lower tax rates than in Germany. In addition, tax income for prior years contributed to the low effective tax rate in 2015.
On 12 January 2016, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the wind park company Eolus Vindpark Tio AB, Hässleholm, Sweden, from Eolus Vindpark Nio AB, Hässleholm, Sweden. Eolus Vindpark Tio AB was renamed Wind Farms Västra Götaland AB immediately after the acquisition and owns wind power plants with an installed capacity of 12 megawatts.
— Technical result of €335m slightly weaker than expected — Investment result of €898m above previous year’s level — Satisfactory consolidated result of €345m
Besides assuming insurance risks, we offer our clients a wide range of services, from medical expertise to automated risk assessment processes. For the latter, we offer software solutions available worldwide through our subsidiary Munich Re Automation Solutions Limited.
Demand for reinsurance is growing also with regard to capital market risks such as those embedded in unit-linked life insurance products. We provide our clients with comprehensive advice on product design while offering hedging for embedded options and guarantees linked to the capital markets. Our own exposure is transferred back to the capital markets.
Based on premium volume, over half (approx. 60%) of our global life reinsurance business is written in North America, where Canada (approx. 35%) continues to rank before the USA (approx. 25%). Around a fifth (approx. 20%) of our premium comes from Europe, of which approx. 10% is from the United Kingdom and approx. 5% from Germany. Further substantial shares are contributed by Asia (approx. 10%) and Australia/New Zealand (approx. 5%). We are also well positioned in Africa and Latin America, but due to the size of the markets their share of our global business is small (approx. 5%).
Our Canadian branch, Munich Re, Toronto (Life), generated premium income of €3.7bn (3.5bn) in the life reinsurance segment, the increase being partly due to currency translation effects. The unit maintained its leading market position and again posted a very good technical result. It accounts for an over-proportionate contribution to the overall result. The favourable development of basic losses was able to almost fully compensate for the expenditure for a major loss in the two-digit-million-euro range.
In the USA, our subsidiary Munich American Reassurance Company posted an increase in gross premium income to €2.5bn (2.1bn), also influenced by currency translation effects. We thus continue to be one of the leading reinsurers in this largest market worldwide. The technical result largely developed as we expected, apart from expenditure for a randomly very high mortality claim. As a result of this special situation, we posted a loss in 2015.
The increase in premium income is attributable to the fact that the foreign currencies pertinent for Munich Re’s business operations were up against the euro. Approximately 11% of the portfolio is written in euros and 89% in foreign currency, of which 51 percentage points is in US dollars and 14 percentage points in pounds sterling. Compared with the previous year, changes in exchange rates had a positive effect of €1,916m on our premium income.
If exchange rates had remained unchanged, premium volume would have decreased by 5.8%. We reduced our portfolio in areas in which risk-adequate prices, terms and conditions could no longer be realised. This mainly related to property and marine business, which are under particular pricing pressure at present. In the specialty class of agriculture, premium income and the risks insured are linked to the development of strongly eroding commodity prices for agricultural products. Higher client retentions – for example in credit insurance – also reduced premium income. However, our longterm client relationships and comprehensive expertise enabled organic growth with major business partners, which enabled us to mitigate the fall in premium income. The relatively stable business of our specialty primary insurers operating in niche segments also played a role in this.
Global Clients and North America 39% (40%) Special and Financial Risks 22% (18%) Germany, Asia Pacific and Africa 20% (21%) Europe and Latin America 19% (21%)
Major-loss expenditure totalling €1,046m (1,162m) after retrocession and before tax was lower than in the previous year and below expectations. As in the previous years, 2015 was marked by a large number of major losses, but there were once again no exceptional individual events. Run-off profits were somewhat higher than the reserve strengthening for major losses from previous years.
Aggregate losses from natural catastrophes were randomly very low once more and came to €149m (538m). This is equivalent to 0.9% (3.3%) of net earned premiums, i.e. far below the level to be expected. Heavy rainfall in northern Chile, which triggered considerable flooding, was the largest loss event of the year at €47m. A severe earthquake off the coast of Chile gave rise to expenditure of €45m. In December, Storm Desmond caused heavy rainfall in northern England, for which we reserved €43m. Storm Niklas, which swept across Europe in March, caused losses totalling €40m.
The environment of the renewal rounds was highly competitive in 2015
Adjusted for exchange rates, the division’s premium volume sank compared with the previous year. This was due particularly to the planned reduction of a large customised motor reinsurance treaty in Australia in 2014. The strong pricing pressure in various markets also led to business attrition, for example in Japan and Greater China. By contrast, we successfully expanded our business in India and South Korea.
China is one of the markets from which we expect considerable growth potential in the long term, irrespective of subdued development in 2015. Consequently, we have again strengthened our local presence in order to remain in a very good position under the new solvency regulations applicable in China from 2016, and to be able to exploit the opportunities arising for profitable growth.
The division’s premium volume was down because we have consciously reduced our portfolio. We kept constant the capacity we provide for the coverage of natural hazards, particularly windstorm and earthquake, and successfully defended our strong market position in the Caribbean, Latin America and Europe with margins still remaining adequate.
The division’s combined ratio was again at a very low level. We benefited from an extremely low incidence of major losses and from positive loss reserve releases for prior years.
The Global Clients and North America Division writes the international business of defined global clients (approx. 25%), worldwide Lloyd’s business (approx. 10%) and property-casualty business in the USA and Canada (approx. 65%). The share of global Lloyd’s business is lower than in the previous year because the Special and Financial Risks Division is now responsible for the Watkins Syndicate.
The division’s premium volume rose compared with the previous year, largely backed by currency translation effects. We saw slight growth in liability reinsurance and were able to selectively write profitable business, particularly in the USA. As pressure on reinsurance prices, particularly for natural hazards covers, persisted, we made a deliberate decision to reduce our business in the areas especially affected. By contrast, the premium income of Hartford Steam Boiler Group (HSB Group) improved to €968m (752m). Overall, our primary insurers HSB Group and American Modern Insurance Group (American Modern) contribute almost 50% to our premium in North America. Moreover, Munich Reinsurance America accounted for €2,463m (2,239m).
The results of our subsidiaries in the USA were again very pleasing. In 2015, they paid dividends totalling US$ 915m to the Group parent Munich Reinsurance Company.
The division’s combined ratio was again gratifying, even if it had deteriorated slightly year on year. We benefited from a very low incidence of major losses and from positive loss reserve releases for prior years.
The Special and Financial Risks Division writes business in the specialty classes of agriculture (around 25%), credit and bond (around 15%), and aviation and space (around 10%). This division also comprises Corporate Insurance Partner (around 15%) and our Swiss subsidiary New Reinsurance Company Ltd. (around 15%). Since 2015, we have also bundled marine underwriting (including the Watkins Syndicate) in this division for strategic reasons (approx. 20%). In order to support global business activities, we have renamed the Watkins Syndicate “Munich Re Syndicate Ltd.” with effect from 1 January 2016.
The Capital Partners unit also belongs to this division. It offers our clients a broad spectrum of structured, individual reinsurance and capital market solutions. We also use this unit’s services for our own purposes in order to buy retrocession cover on the basis of our defined risk strategy. We placed six transactions with investors in 2015: two client transactions worth €200m and US$ 100m, two of our own securitisations, each worth US$ 100m (Queenstreet X and Queenstreet XI), and two sidecar transactions worth US$ 75m and US$ 290m (Eden Re I Ltd. and Eden Re II Ltd 2015).
— Overall premium income down to €10.3bn, gross premiums written decreased to €9.4bn
— Technical result increased to €383m — Reduced investment result of €3.8bn — Consolidated result of –€329m impacted by impairment of goodwill
The technical result in the ERGO Life and Health Germany segment was €383m (144m). The increase is mainly due to lower benefits in life and health insurance. At €3,841m, the investment result was down on the previous year (€4,453m), mainly due to an expected reduction in net gains on derivatives. In view of the decline in interest rates, in 2014 we had posted high gains on our interest-rate hedges. In 2015, long-term interest rates increased slightly, however, resulting in write-downs on our interest-rate hedging instruments. The improved technical result was the main reason for the enhanced operating result. The decrease in the consolidated result is due to the write-down of €429m on goodwill.
Key figures 2015 Prev. year Change % Total premium income1 €m 10,322 10,730 –3.8 Gross premiums written €m 9,426 9,812 –3.9 Share of gross premiums written by ERGO % 57.0 58.6 Operating result €m 311 44 607.5 Consolidated result €m –329 269 –
The decrease in premium income was due in particular to lower single-premium business. Overall, new business volume in 2015 was down by 12.2% year on year in terms of annual premium equivalent (APE, i.e. regular premium income plus one-tenth of single-premium volume), which is the performance measure customary among investors. The new generation of life insurance products accounted for just under one-fourth of total new business.
At the end of 2015, we largely stopped underwriting new business that provides traditional guarantees for private provision for old age. This excludes business in force and all term insurance products – including death benefits – and immediate annuities. In future, we will focus on our new products for unsponsored deferred annuities for old age. These are a combination of traditional and unit-linked life insurance that can be customised to the individual needs of the customer if required.
The technical result increased compared with the previous year. The main reason for this positive development was the year-on-year reduction in expenses for premium refunds, aided by a decrease in acquisition costs. The investment result for the past financial year was €2,377m (2,896m). This deterioration was largely attributable to lower net gains on derivatives, mainly due to write-downs of interest-rate derivatives. The development of the investment result was one of the reasons for the decreased operating result.
In supplementary health insurance business, premium income remained stable year on year, while it declined by 1.7% in comprehensive health business. New business increased by 5.3% in comprehensive health insurance, and by 14.9% in supplementary health insurance. Nevertheless, premium income was down overall because the number of policyholders withdrawing from our comprehensive health cover was greater than the number of new policies we concluded.
In travel insurance, which we account for in our Health Germany field of business and write in Germany and abroad, premium volume totalled €449m (433m) and was thus above the level of the previous year (+3.8%). German business expanded, whilst international business decreased.
At 87.8%, the combined ratio for property-casualty business was higher than last year’s (86.3%), but remained at a very good level.
— Slight increase in premium income to €3.2bn — Higher combined ratio of 97.9% — Investment result of €187m down on previous year — Good consolidated result of €214m
In the ERGO Property-casualty Germany segment, we report on property-casualty insurance business in Germany, with the exception of ERGO Direkt business. Our main classes of business include personal accident and motor insurance, each of which accounts for approximately 21% of the segment’s premium income.
The technical result in the ERGO Property-casualty Germany segment decreased to €122m (214m). The decline in 2015 was mainly due to higher major-loss expenditure in fire insurance and greater losses from natural hazards in houseowners’ comprehensive insurance and other property business. The decline in the investment result to €187m (204m) was largely attributable to write-downs on equities. Overall, the operating result was down on the previous year, while the consolidated result increased due to the reversal of a tax provision.
The combined ratio was higher than in the previous year. Flooding caused by the lowpressure systems Eva and Frank in the fourth quarter was the largest loss event of the year. In addition, we were impacted by a number of major man-made losses. Paid claims and the change in claims provisions totalling €1,981m (1,942m), along with net operating expenses of €1,015m (994m) compared with net earned premiums of €3,059m (3,080m).
Key figures 2015 Prev. year Change % Gross premiums written €m 3,162 3,115 1.5 Share of gross premiums written by ERGO % 19.1 18.6 Loss ratio % 64.7 63.1 Expense ratio % 33.2 32.2 Combined ratio % 97.9 95.3 Operating result €m 219 304 –28.1
In the ERGO International segment, we bundle our life and property-casualty insurance business outside Germany. Approximately 45% of the segment’s premium income derives from life insurance, and around 55% from property-casualty insurance. Our biggest markets include Poland, accounting for approximately 30% of the premium volume, Austria (approx. 17%) and Belgium (approx. 14%).
The increase in premium income is attributable to good organic growth in Poland and Turkey. In the United Kingdom, positive currency translation effects led to premium growth. Adjusted to eliminate currency translation effects, gross premiums written in the ERGO International segment would have increased by 4.1% compared with the previous year.
New business Life International 2015 Prev. year Change €m €m % Regular premiums 146 194 –25.0 Single premiums 856 857 –0.2
Annual premium equivalent1 231 280 –17.5 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
With the exception of the German health insurers belonging to ERGO, our global healthcare insurance and reinsurance business is combined under the Munich Health brand. We offer our international clients across the world innovative insurance solutions and individual consultancy and services.
Gross premiums written were slightly higher than in the previous year.
In reinsurance, positive currency translation effects from Canadian and US dollars, which more than offset the reduction of our share in a large treaty in North America, resulted in an increase in gross premium volume of 6.8% to €4.3bn (4.1bn). In primary insurance, premium volume grew slightly by 0.5% to €1.3bn (1.3bn) despite the sale of DKV Luxembourg. Our companies in Belgium and Spain in particular increased their premium income. If exchange rates had remained unchanged, and adjusted for the sale of DKV Luxembourg, Munich Health’s gross premiums would have increased by 0.5% year on year.
Reinsurance North America 54% (55%) Europe and Latin America 10% (12%) Middle East/Africa 9% (7%) Asia-Pacific 4% (2%)
The Munich Health combined ratio, which relates only to short-term health business and not to business conducted like life insurance, was up on the previous year. Business conducted like life insurance accounted for 9.0% (9.9%) of gross premiums written in the year under review. In reinsurance, the combined ratio amounted to 101.1% (99.4%); in primary insurance, it was 93.2% (95.5%).
— Investment result of €7.5bn — Return on investment (RoI) of 3.2% for the year as a whole
Capital-market interest rates in the established markets increased slightly in 2015, but developments in the course of the year were marked by significant volatility. The further relaxation of ECB monetary policy and the end of the US zero-interest-rate policy played a key role in this regard. As a consequence, the euro depreciated appreciably against the US dollar. During the year, stock markets were also subject to increased fluctuations, but overall they showed moderately positive development. In the period under review, the EURO STOXX 50 up by about 4%, the Dow Jones fell by about 2% and the DAX 30 climbed by around 10%. In the first quarter of 2015, yields on ten-year German government bonds fell to a historic low; in the second quarter, they climbed markedly and fell again marginally in the third quarter. Yields were slightly higher at the end of the year than at the beginning.
We select our investments according to economic criteria and gear them to the characteristics of our technical provisions and liabilities. In addition, we use derivative financial instruments for portfolio management (especially for acquisition preparation) to hedge against fluctuations and protect against inflationary developments on the interest-rate, equity and currency markets. Volatilities on the capital markets result in changes in the values of derivatives, which under IFRS accounting we recognise in profit or loss.
The carrying amount of our investment portfolio – which continues to be dominated by fixed-interest securities, loans and short-term fixed-interest investments – saw a reduction, largely due to ERGO Italia being posted as a disposal group. At 31 December 2015, the carrying amount of our investments amounted to €215.1bn (218.9bn).
Our on- and off-balance-sheet unrealised gains and losses (including owner-occupied property), which could be turned into realised gains upon disposal of the relevant investments, fell from €32.0bn to €26.5bn. This decrease was mainly owing to gains on disposals of fixed-interest securities and equities, and to the slight increase in longterm interest rates.
In the period under review, we increased our portfolio of government bonds, but reduced our investments in covered bonds and structured credit products.
Off-balance-sheet Fair values unrealised gains and losses Carrying amounts €m 31.12.2015 Prev. year 31.12.2015 Prev. year 31.12.2015 Prev. year 1 Including owner-occupied property.
An overview of the on-balancesheet unrealised gains/losses is available in the notes to the consolidated financial statements on page 221 1 Presentation essentially shows fixed-interest securities and loans, including deposits and cash at banks, at market value. The approximation is not fully comparable with IFRS figures.
Government bonds1, covered bonds and corporate bonds by country2 according to fair values3 €bn 31.12.2015 Prev. year Change Government bonds Germany 29.0 30.6 –1.6
Our investment in bank bonds is limited and at the reporting date amounted to 3% of our portfolio of fixed-interest securities. Financial instruments from states in southern Europe and Ireland make up 7% of the portfolio. Most of our bank bonds (79%) are senior bonds, i.e. bonds that are not subordinated or subject to loss participation. Subordinated bonds and loss-bearing bonds made up 21% of our bank bond holdings.
1 Presentation based on approximation and not fully comparable with IFRS figures.
Periods to maturity of government bonds, covered bonds and corporate bonds1 according to carrying amounts €bn Carrying amounts Up to one year 13.0 Over one year and up to two years 11.1 Over two years and up to three years 10.7 Over three years and up to four years 11.4 Over four years and up to five years 13.0 Over five years and up to ten years 45.2 Over ten years 59.8 Total 164.2 1 Presentation based on approximation and not fully comparable with IFRS figures.
Following disposals, our portfolio of structured credit products at market value fell to €4.7bn (6.0bn). This asset class involves securitised receivables (asset-backed securities or mortgage-backed securities), e.g. securitisations of real estate finance, consumer credit or student loans. Around 56% of our portfolio of asset- and mortgage-backed securities have a rating of AAA.
Due to interest rates remaining low, in reinsurance we brought the duration of our fixed-interest investments down closer to the lower duration of our underwriting liabilities, thereby further decreasing our interest position on the assets side. At the end of the year, the interest-rate sensitivity of fixed-interest investments in reinsurance was slightly below the duration of the underwriting liabilities.
In the ERGO field of business, the durations of fixed-interest investments have also come into somewhat closer alignment with those of the underwriting liabilities. The durations of underwriting liabilities decreased while those of fixed-interest investments increased. The interest-rate sensitivity of fixed-interest investments in reinsurance remained below that of the underwriting liabilities at the end of the year.
Together with the duration position at ERGO, the reduced interest position in reinsurance leads to a slight year-on-year increase in exposure to falling interest rates at Group level.
The carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies, associates and joint ventures at market value) fell marginally in the course of the year. Our equity-backing ratio still amounted to 5.2% (5.2%). Including derivatives, our equity-backing ratio was 4.8% (4.3%). Besides this, we are protecting ourselves against accelerated inflation in an environment of continuing low interest rates. For this, we hold inflation-linked bonds with a market value of €8.9bn (8.5bn) and inflation-linked swaps with an exposure of €3.8bn (5.9bn). We are suffering losses of market value here due to particularly low inflation rates. Real assets like shares, property, commodities, and investments in infrastructure, renewable energies and new technologies also serve as protection against inflation. Additionally, our investments in real assets have a positive diversification effect on the overall portfolio.
We posted net write-downs of €754m (234m) on non-derivative investments, particularly on our share portfolio.
Write-ups/write-downs of non-derivative investments –754 –0.3 –234 –0.1 Gains/losses on the disposal of non-derivative investments 2,693 1.1 2,629 1.2 Net gains on derivatives –1,226 –0.5 –1,068 –0.5 Other income/expenses –548 –0.2 –528 –0.2
— Lower debt leverage — Group capital more than three times the legal solvency requirement
Financial strength Munich Re’s financial strength continues to be assigned the second-highest rating category by each of the leading rating agencies.
Our primary insurance and reinsurance operations have a significant influence on our balance sheet: as we have consistently geared our Group towards value creation in its core business, investments serve to cover technical provisions (73% of the balance sheet total). Equity (11% of the balance sheet total) and bonds classified as strategic debt (2% of the balance sheet total) are the most important sources of funds.
Rating agency Rating Outlook A.M. Best A+ (Superior) Stable Fitch AA (Very strong) Stable Moody’s Aa3 (Excellent) Stable Standard & Poor’s AA– (Very strong) Stable
The increase in equity was attributable not only to the consolidated result but also to a rise in the reserve for currency translation adjustments. Equity was reduced by the dividend payment, the share buy-back programme, and a negative balance in terms of unrealised gains and losses, which derived mainly from our fixed-interest securities available for sale.
Our subordinated bonds are recognised in part as own funds by the German Federal Financial Supervisory Authority (BaFin). When this is considered in calculating the strategic debt, the latter is reduced to €833m and the debt leverage amounts to only 2.6%.
In this approach, any deviations from the structure of our liabilities are made consciously, taking due account of our risk tolerance and the achievable risk spreads. These have the purpose of generating income in excess of the expected return on funds required to meet the liabilities. Therefore, we measure investment risks incurred not only in absolute terms, but also in relation to changes of values in our liabilities. In terms of currency positioning, exchange-rate fluctuations thus affect assets and liabilities in equal measure as a result of this approach. Currency translation losses on assets are largely offset economically by currency translation gains on underwriting liabilities, although due to accounting regulations that are imperfect from an economic perspective, this relationship is not always adequately reflected in the financial statements. To a limited extent, we also align our investment portfolio in such a way that it increases in value in line with rising inflation rates. To achieve this, we invest in inflation-sensitive asset classes such as inflation-linked bonds and inflation-linked swaps, as well as in real assets.
Information on the revenue reserves and claims equalisation provision of Munich Reinsurance Company is available on page 155 ff.
Munich Re Group Annual Report 2015 2006 to 2015. In March 2015, we announced a further share buy-back programme of a maximum of €1bn up to the 2016 Annual General Meeting. By the end of February 2016, we had bought back shares with a volume of €867m.
As at 31 December 2015, Munich Reinsurance Company’s share capital of €587,725,396.48 was divided into 166,843,961 registered, no-par-value, fully paid shares. The rights and obligations deriving from these shares follow from the applicable statutory requirements and the Company’s Articles of Association. With respect to the Company, the only parties deemed shareholders in accordance with Section 67 of the Stock Corporation Act (AktG) are those entered as such in the Company’s register of shareholders.
The listed registered shares are subject to transfer restrictions. The issuing of restrictedly transferable registered shares by Munich Reinsurance Company dates back to the Company’s foundation in 1880. Restricted transferability means that these shares may be transferred to another holder only with the Company’s consent, which, according to Article 3 (2) of Munich Reinsurance Company’s Articles of Association, is granted at the Company’s discretion. Since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. In recent decades, it has been granted without exception. Contractual agreements are in place with the members of the Board of Management providing for two- or four-year minimum holding periods for the shares of the Company they have to purchase as part of share-based remuneration programmes.
Each share carries one vote at the Annual General Meeting and determines the shareholders ’ participation in the Company’s profit. This excludes own shares held by the Company, from which it enjoys no rights. In the cases specified in Section 136 of the Stock Corporation Act (AktG), voting rights from the shares concerned are excluded by law. If shareholders are entered under their own name for shares which belong to a third party and exceed at this time the upper limit of 2% of the share capital as stated in the Articles of Association, pursuant to Article 3 (5) of the Articles of Association the shares entered shall not carry any voting rights.
Warren E. Buffett and two companies in his group (Berkshire Hathaway Inc. and National Indemnity Company) notified us pursuant to Section 21 of the German Securities Trading Act (WpHG) that on 28 September 2015 their shareholdings in Munich Reinsurance Company had fallen below the 10% threshold, that on 10 December 2015 the shareholding had fallen below the 5% threshold, and that on 16 December 2015 the shareholding had fallen below the 3% threshold to around 2.5%. Warren E. Buffett and the aforementioned companies had held more than 10% of the Company since October 2010. When they bought the shares, we were informed that the objective of the investment was to generate trading profits and not to implement strategic objectives. Before the notification of 28 September 2015, they held shares totalling around 12% of the share capital of Munich Reinsurance Company.
The complete text of the authorisations is provided in the agenda of the Annual General Meetings mentioned on our website at www.munichre.com/agm/archive
Significant agreements which take effect, alter or terminate upon a change of control following a takeover bid, and resultant implications Based on our underwriting guidelines, our reinsurance agreements generally include a clause that grants both parties to the agreement a right of extraordinary cancellation in the event that “the other party merges with another company or its ownership and control undergoes a material change”. Such or similar clauses are typical of the industry. Munich Reinsurance Company’s Long-Term Incentive Plan also provides for special exercise options in the event of a change of control.
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. The aim of the “adjusted solvency” rules is to prevent the 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. To determine the eligible capital elements, the IFRS equity is adjusted; in particular, it is increased by portions of the subordinated liabilities and reduced by intangible assets. Munich Re’s eligible capital is 3.2 times higher than the legal requirement.
The increase in the adjusted solvency ratio is mainly due to higher IFRS Group equity.
Solvency capital requirements, eligible own funds, and the adjusted solvency ratio were calculated in accordance with Solvency II for the first time at year-end 2015. For further details, see the risk report on
Our primary insurance and reinsurance operations have a significant influence on Munich Re’s cash flow. We generally first collect the premiums for the risks assumed and do not make payments until later, when claims need to be settled. Cash flow statements of insurance companies are therefore of limited relevance. The cash flow statement is adjusted to eliminate the effects of fluctuations in exchange rates and changes in the entities consolidated.
In the consolidated cash flow statement, the consolidated profit of €3,122m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is also adjusted by €3,798m to take account of the higher technical provisions. The net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows – are essentially attributable to the disposal of securities available for sale.
In the 2015 financial year, Munich Re acquired an additional 18% of the shares in the capital of 13th & F Associates Limited Partnership Columbia Square, Washington D.C. (13th & F). In the cash flow statement, we have reduced the purchase price by the cash held by the company acquired. Furthermore, Munich Health Holding AG, Munich, sold its shares in the fully consolidated company DKV Luxembourg S.A., Luxembourg. We have reduced the purchase price by the cash held by the company sold.
The cash outflows for financing activities stem mainly from the dividend payment in 2015 and the share buy-back programme.
— Client orientation offers both traditional and innovative solutions — Constant, open communication with all stakeholders — Targeted development of our staff in light of changing markets and conditions — Expansion of Group-wide environmental management
We want to have the best possible understanding of our clients and their risks, and to develop customised insurance solutions for them. Therefore, we need to be close to our clients to understand their needs, give them comprehensive advice and provide optimal solutions. Our objective is to be a competent, reliable and transparent partner, whom clients can trust.
As reinsurers, we apply our extensive risk knowledge to find individual solutions that meet our clients’ diverse requirements and to add value. We know our cedants’ needs, develop innovative risk transfer solutions with them, and aim to continue driving forward the expansion of risk competence through strategic cooperations, thus providing our clients with the full range of underwriting products and a wide variety of services. As well as our own client platform (connect) and special product publications, these services include tools to improve business processes, individual consulting services and client seminars on many aspects of the insurance business.
Client managers are responsible for determining clients’ needs as precisely as possible and offering tailor-made solutions and support. To this end, we bring all our knowledge and innovative strength to bear and do not shy away from taking unusual approaches – true to our claim NOT IF, BUT HOW. We regularly assume a pioneering role in new coverage concepts, such as preparing European cedants for Solvency II. We reach new client groups through our operating field Risk Solutions, where we provide customised solutions for corporate clients and industrial firms. Predominantly in North America, but also in the Asia-Pacific region, we generate business via managing general agencies (MGAs). Beyond this, our target groups include public-private partnerships and insurance pools. With branches and subsidiaries around the world, we ensure that our clients can always find us where they need us.
Changed parameters generate demand for new insurance solutions Economic growth and changes in the areas of technology, climate, society and politics mean that entirely new areas of risk are arising worldwide, and these can be covered with the help of innovative insurance concepts. We develop complex customised solutions together with our clients, and extend the frontiers of insurability with innovative products, such as coverage for cyber risks, business interruption, and reputational risk.
ERGO relies on feedback from consumers in order to constantly optimise its products. Listening to their opinions is an integral part of the product development process. The ERGO Customer Advisory Board and ERGO’s Customer Workshop on the internet are also ways of maintaining ongoing dialogue with its customers.
In 2011, ERGO responded to consumer demand for clear and comprehensible communication with its “clear language” initiative. Insurance conditions and product information were simplified and shortened, texts and letters are prepared according to binding writing rules and checked by special software for comprehensibility. After extensive testing, in February 2015 TÜV Saarland awarded the primary insurer its certification for understandable communication with the rating “good” (1.90). The TÜV experts will continue to monitor and evaluate these activities in the future.
In primary insurance, we offer individual policies (for private individuals) and group policies (e.g. for companies, employees or public servants). For providers that do not operate their own health business, such as banks, Munich Health develops health insurance products and handles their administration.
We provide our reinsurance clients with market-specific data models, reinsurance models and capital management solutions. Alongside specialised client managers, further specialists are available to advise our clients directly on business development and offer specific service packages. Feedback from our clients plays a major role in the further development of our range of products.
The talent and performance of our staff are the cornerstones of our success. Their professional expertise, commitment and readiness to embrace innovation are the factors that drive our business forward. We create attractive conditions for nurturing and enhancing their personal development and performance in all areas. Developing and keeping this comprehensive expertise and broad experience for the benefit of the Group is one of our most important objectives.
Consequently, a Group-wide emphasis of human resources work in 2015 was the focusing of the Group Human Resources (Group HR) unit with the objective of making the identification and development of high potentials for management functions in the Group as uniform as possible. Existing measures for the identification of high potentials and succession planning are being further optimised and additional new formats and concepts implemented. Group HR’s core activity is management development for the current and future generations of managers. We support managers in expanding their personal Group-wide networks and offer them a learning environment with challenging content.
In the medium term, we aim to achieve further integration of HR systems and processes in the fields of business for effective holistic control of HR work.
We are exploring new avenues in the training of managers and key persons, and thus promoting change and innovation capacity within the Group. In doing so, we rely on programmes and methods with direct relevance to our business.
The establishment of new units is a reaction to market challenges. For example, the Cyber Support Unit founded in Munich in July 2015 reflects the increasing demand for cyber insurance and reinsurance solutions. This unit supports operational units on all topics relating to cyber risks, such as accumulation control, treaty wording and the development of new cyber products, as well as – together with the HSB Loss Control Engineering unit – the evaluation of risks.
The extensive development of the management culture and competencies is the aim of the initiative “ERGO – Focus on Leadership”, launched in the autumn of 2013. Approximately 2,300 ERGO managers in Germany are currently completing this “manager triathlon” – a mandatory, multi-stage development programme. The goals here are imparting up-to-date methodical knowledge and training for job-related situations.
Developing and keeping com prehensive expertise and broad experience for the benefit of the Group is one of our most important objectives.
Furthermore, in 2015 we invested in management development: the values and competences for managers were adjusted in line with Group standards and events held on topics such as “appreciative management” and “innovation”.
Internationality is a key focus of our diversity management. This also includes the establishment of international talent pools. In this context, the number of international staff members in Munich who do not speak German increased in 2015.
The quota is also to be expanded further internationally. Worldwide, the percentage of women in leading positions in our Group is already 30.8%. We are realising numerous activities to help us accomplish our goals, and we measure our progress regularly.
Improving opportunities for women across the board throughout our organisation is the key prerequisite to raising the percentage of women at the top management levels.
Our largest shareholder at the end of 2015 was the asset management firm BlackRock, with around 6.6% of voting rights according to the most recent notification.
Our investor relations work continues to meet with a positive response. In several crosssector analyses of the quality of investor dialogue, Munich Re once more achieved leading positions, with our business partners particularly appreciating the consistency and transparency of our reporting. All the presentations we use in our meetings with analysts and investors, and in our conferences and roadshows, are published on the internet, and are also sent to interested private investors on request. Many of these events are transmitted live via webstreaming. Enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team for private investors. Additionally, the service pages of our shareholder portal on the internet provide our registered shareholders with a wide range of information and communication options.
Around 4,500 shareholders and shareholder representatives participated in the 128th Annual General Meeting on 23 April 2015. Some 44.9% of the voting share capital was represented in the votes. All the motions were adopted with a clear majority in each case. With online participation in the Annual General Meeting and (electronic) postal voting, Munich Reinsurance Company again offered its shareholders all the facilities for casting their votes on agenda items.
Detailed information on Munich Re’s investor relations can be found at www.munichre.com/ir-en
One of the defined objectives of Munich Re (Group) is to minimise the environmental and climate impact of its business operations while preserving resources.
In September 2015, the Board of Management adopted the new environmental and climate protection strategy for the period 2016–2020. This is based in essence on the successes of the strategy to date and comprises the following elements: — Munich Re (Group) will remain carbon-neutral and invest in further climate- protection projects
— We will raise our CO2 reduction target to 35% per staff member for the period 2009–2020
— By 2020, almost 100% of the electricity we purchase will come from renewable sources
— Managers and staff members with significant responsibilities relevant to environmental and climate protection will be set corresponding performance objectives
As part of Impact Hub Munich and Munich Re’s Eight Billion Lives fellowship programme, young entrepreneurial teams in start-ups developed selected social and sustainable business ideas for handling the challenges of a steadily increasing global population. The objective of the one-year programme is to cultivate new methods and tools to make social processes more sustainable in the future. Its focus is on urbanisation, the production and consumption of food, and the opportunities offered by digitalisation.
The Group Compliance Committee deals with compliance risks and reputation issues and risks that have arisen in the business units. This ensures that we address those risks in a uniform way throughout the Group.
Field-of-business level We have created further committees with risk governance responsibilities in our fields of business. The Group CRO is also a member of these committees, notably the Global Underwriting and Risk Committee, which is responsible for setting up appropriate risk management processes in the reinsurance field of business and ensuring that they are followed, the Munich Health Risk Committee and the ERGO Risk Committee.
Our business essentially comprises the assumption of risks. The risk strategy, which is derived from the business strategy, defines where, how and to what extent we are prepared to incur risks. The further development of the risk strategy is embedded in the annual planning cycle, and hence in our business strategy. It is approved by the Board of Management and discussed regularly with the Supervisory Board.
We determine our risk strategy by defining risk appetites for a series of risk criteria
Risk analysis and assessment are carried out at the highest level in IRM on the basis of a consolidated Group view
Quantitative risk monitoring based on indicators is carried out both centrally and within units, for example at MEAG for investments and at ERGO IRM, and then collated centrally. We monitor risks that cannot be expressed directly as an amount either centrally or in our units, depending on their materiality and allocation.
The risk management system is audited by Group Audit, which carries out audits of various functions in accordance with its audit plan.
Our internal control system (ICS) is an integrated system for managing operational risks that covers all risk dimensions and areas of the Group. It addresses Group management requirements and local regulations.
However, notwithstanding the careful design and diligent use of our ICS, which is a high-quality system, it cannot provide total certainty that all operational risks have been covered. We are nevertheless certain that the controls and documentation requirements in place justify confidence on the part of our stakeholders.
The Audit Committee of the Supervisory Board regularly calls for reports on the effectiveness of the ICS and changes to the risk and control landscape from the previous year. They describe the controls applied and state whether all controls considered necessary have been correctly performed. The reports of our external auditors and Group Audit support this.
Financial accounting and reporting are subject to carefully defined materiality thresholds to ensure that the cost of the internal controls performed is proportionate to the benefits derived. Significance, risk experience and compliance with legal provisions and internal regulations are taken into account in determining the thresholds. All risks significant for financial reporting from a Group perspective are integrated into the ICS in accordance with uniform criteria. The ICS risk map is checked annually by the risk carriers, and updated and amended as necessary.
By means of an accounting manual and regular circulation of information on changes required, Munich Re ensures that uniform rules are applied throughout the Group for the treatment, valuation and disclosure of all items in the balance sheet, income statement and other components of the financial statements
Internal risk reporting provides the Board of Management with regular information on the risk situation in the individual risk categories and the Group as a whole. Early-warning mechanisms thus ensure that negative trends are identified in sufficient time for countermeasures to be taken.
The purpose of our external risk reporting is to provide clients and shareholders with a clear overview of the Group’s risk situation. This includes information on our risk management methods and processes, our risk governance, and the individual risks to which Munich Re is exposed.
Premium risk: Property-casualty Management in the fields of business have primary responsibility for controlling the premium risk, taking account of both the specific exposures in their business and the knowledge and experience of their staff.
The purpose of our external risk reporting is to provide clients and shareholders with a clear overview of the Group’s risk situation
Due to the diversity and extensive ramifications of the business, it is not possible to produce a set of rules for acceptance that would fully cover relevant risks. The expertise of our underwriters on the ground is therefore of prime importance, particularly in reinsurance. We recognise this by providing advanced training and IT systems for risk assessment and pricing, and publishing internal information sheets and underwriting recommendations.
Reserve risk: Property-casualty The estimation of reserves is subject to uncertainty due to the fact that the settlement of claims that have arisen before the balance sheet date is dependent on future events and developments. Unforeseen loss trends can arise for a variety of reasons, for example court rulings, changes in the law, differences in loss adjustment practice or medical and long-term care, or economic factors such as inflation. They can have a significant impact on run-off results.
We calculate the reserves for losses and claims settlement costs in accordance with actuarial practice based on substantiated assumptions, methods and assessments. The assumptions are regularly reviewed and updated. Application of Group-wide reserving rules guarantees that the process is reliable and consistent. In addition, internal audits are carried out Group-wide to verify compliance with these rules and the appropriateness of the reserves, and the actuarial function provides an annual assessment of the appropriateness of the methods and assumptions applied to determine the technical provisions.
Underwriting risk: Life and health The underwriting risk is defined as the risk of insured benefits payable in life or health insurance business being higher than expected. Of particular relevance are the biometric risks and the customer behaviour risks, for example lapses and lump-sum options. We differentiate between risks that have a short-term or a long-term effect on our portfolio.
Changes in customer biometrics or lapse behaviour are risks that have a long-term effect on the value of a portfolio, making it necessary to adjust the actuarial assumptions. Important in health insurance are morbidity risks and risks linked to changes in the cost of treatment, whereas mortality, longevity and disability risks are the most significant in life insurance. Limits are laid down for the pandemic scenarios, which affect the portfolio in the shorter-term, and the longevity scenarios with their longer-term effect in conformity with the risk strategy.
The information provided on underwriting guidelines and limits for property-casualty insurance also applies to life and health reinsurance. Regular reviews of the actuarial assumptions by actuaries and amendment of rating rules where necessary generally ensure that risks are effectively controlled. If there is a lasting change in the actuarial assumptions applied in health primary insurance, it is generally possible to adjust the premiums for long-term contracts.
Further information on risks in life and health insurance can be found in the notes to the consolidated financial statements on page 273 ff.
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. It includes equity risk, general interest-rate risk, specific interestrate risk, property-price risk and currency risk. The general interest-rate risk relates to changes in the basic yield curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, for example on government or corporate bonds. We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options).
Credit risk We define credit risk as the risk of economic losses that Munich Re could incur as a result of a change in the financial situation of a counterparty, such as an issuer of securities or other debtor with liabilities to our Group.
Information on derivative financial instruments can be found on page 222 ff., and sensitivity analyses of the market-price risks associated with financial instruments on page 279 f.
Munich Re Group Annual Report 2015 or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations, and disagreements with business partners.
Operational risks are managed via our ICS, complemented by the results of scenario analyses. In addition, our Security and Continuity Risk Management Framework (SCRM) defines the rules for a standard Group-wide procedure for, in particular, identifying, assessing and managing security risks for people, information and property.
Appropriate measures – up to and including larger projects and separate business units – are used to reduce operational risks and to correct identified weaknesses or errors.
Liquidity risk We manage liquidity risk through our holistic risk strategy, with the Board of Manage- ment defining limits on which minimum liquidity requirements for our operations are based. These risk limits are reviewed annually and compliance with the minimum requirements is continuously monitored.
Reputational risk Reputational risk is the risk of a loss resulting from damage to the Group’s public image (for example with clients, shareholders or other parties).
Further information on the liquidity risks in life and health insurance business and in property-casualty business can be found in the notes to the consolidated financial statements on pages 275 and 278
We use our risk management to assess our risk situation on the basis of qualitative and quantitative factors. Throughout the entire period under review, the risk situation was manageable and under control. In addition to the underwriting and capital market risks inherent in our business model, there are inevitably a large number of other risks to which Munich Re – like every other undertaking – is exposed. The incidence of these risks is random and their occurrence probability and impact are generally very difficult to estimate. We therefore closely monitor our business and the environment we operate in to identify even these risks in good time and to take suitable measures to avert loss or damage.
We then determine the effect of the loss absorbency of deferred taxes. This generally leads to a reduction in the negative impact of large loss scenarios on Munich Re’s economic balance sheet and thus to lower solvency capital requirements, as the occurrence of large loss scenarios generally entails lower tax liabilities.
The table shows the solvency capital requirement for Munich Re and its risk categories as at 31 December 2015. The solvency capital requirement was €0.3bn lower than for the previous year. The change in the solvency capital requirement for the categories
Reinsurance ERGO Munich Health 31.12.2015 Prev. year 31.12.2015 Prev. year 31.12.2015 Prev. year €bn €bn €bn €bn €bn €bn
Diversification effect – – –9.2 –9.1 –0.1 1.1 Tax – – –2.3 –2.2 –0.1 4.5 1 Capital requirements for other financial sectors, e.g. institutions for occupational retirement provisions.
— The main reason for the €0.6bn rise in the solvency capital requirement for the property-casualty category was currency translation effects, which affected both the basic loss risk and the large and accumulation loss risk. The depreciation of the euro against most of the main currencies resulted in an increase in the solvency capital requirement expressed in euros.
— There was virtually no change in the solvency capital requirement for the life and health category. The solvency capital requirement for the reinsurance field of business rose slightly by €0.2bn, due mainly to the depreciation of the euro against the US dollar. The decrease of around €0.8bn in the solvency capital requirement in the ERGO field of business was due in almost equal measure to two factors: the final implementation of the remaining model changes in accordance with the application for certification and the favourable development of the investment portfolio, with higher risk-mitigating items in the solvency balance sheet reducing the underwriting solvency capital requirement.
— The diversification effect between the risk categories property-casualty, life and health, market, credit and operational risks increased by €0.1bn and stood at 36.9%, the sum of the solvency capital requirements for the individual risk categories (without Other) remaining the same.
Property-casualty Losses with a potential cost exceeding €10m within a field of business are classified as large losses. Accumulation losses are losses affecting more than one risk (or more than one line of business). We classify all other losses as basic losses. For basic losses, we calculate the risk of subsequent reserving being required for existing risks within a year (reserve risk) and the risk of under-rating (premium risk). To achieve this, we use explicit analytical methods (in the reinsurance field of business) and simulation-based approaches (in the ERGO field of business) that are based on standard reserving procedures, but take into account the one-year time horizon. The calibration for these methodologies is based on our own historical loss and run-off data. Appropriate homogeneous segments of our property-casualty portfolio are used for the calculation of the reserve and premium risks. To aggregate the risk to whole-portfolio level, we apply correlations that take account of our own historical loss experience.
The up-to-date exposure figures for each scenario are used for the quarterly SCR calculations, and the data are used to adjust the stochastic models for the natural hazards. The current limit utilisation is determined by a bottom-up process. As ERGO’s portfolio is more stable, its exposure is only updated annually.
The underwriting solvency capital requirement for property-casualty is made up as follows: The depreciation of the euro against most of the main currencies led to a higher solvency capital requirement for the basic losses than in the previous year. In addition, weatherrisk exposure increased.
The solvency capital requirement for large and accumulation losses was also higher. This was due mainly to the appreciation of the US dollar against the euro, which led to an increase in the risk in euro terms for some major natural hazard scenarios. As in 2014, the largest natural catastrophe exposure for Munich Re is the €3.9bn currently retained for the “Atlantic Hurricane” scenario (value at risk for a 200-year return period). The second-largest scenario is “Storm Europe” with a retention of €2.3bn, followed by the “Los Angeles earthquake“ scenario with a retention of €2.2bn.
As a risk carrier operating worldwide, we can achieve a broad mix and spread of individual risks, which enables us to reduce the volatility of total insurance payments considerably and significantly increase value creation in all areas of our business.
Life and health In life and health business, the risk modelling takes account of both short and long-term developments in risk drivers that influence the value of our business.
To enable us to define appropriate parameters for the modelling of the range of areas in which we operate, portfolios with a homogeneous risk structure are grouped together. We then aggregate the individual profit and loss distributions taking account of the dependency structure to obtain an overall distribution, ensuring in particular that we do not underestimate the effect of large losses that would affect various parts of the portfolio simultaneously, as would be the case for a pandemic, for example.
Storm Europe Aggregate VaR (return period: 200 years) €bn (before tax), retained
In the ERGO field of business, the market value of interest-sensitive investments as at 31 December 2015 was €130.5bn (135.2bn). The modified duration was 8.4 (8.3) for interest-sensitive investments and 9.1 (9.2) for liabilities. This means exposure to falling interest rates, which arises mainly out of the long-term options and guarantees in life insurance business. A decrease in interest rates of one basis point would have reduced the freely available financial resources by approximately €15.4m (16.8m).
The moderate changes in the general and specific interest-rate risks in the reinsurance field of business are attributable to minor investment allocation adjustments.
General interest-rate risk 1.9 1.8 2.2 3.9 –1.0 –1.9 Specific interest-rate risk 1.6 1.7 2.8 2.0 –0.9 –0.6
Property risk The rise in the property risk was substantially due to increases in the market values of properties in the portfolio.
Currency risk Despite the changes in exchange rates observed, the currency risk remained constant year on year thanks to our active management of foreign currency exposure.
Credit risks Munich Re determines credit risks using a portfolio model, which takes into account both changes in market value caused by rating migrations and debtor default. The model is calibrated over a credit cycle. The credit risk arising out of investments (including deposits retained on assumed reinsurance and CDSs) and reinsurers’ shares in technical provisions is calculated by individual debtor. We use historical capital- market data to determine the associated migration and default probabilities. Correlation effects between debtors are derived from the sectors and countries in which they operate, and sector and country correlations are based on the interdependencies between the relevant stock indices. We use our own historical company loss experience to calibrate the credit risk arising out of receivables. For life and health primary insurance business, we also take account of the share of the mitigating effect on the credit risk resulting from policyholders’ participation in profits.
The market value of our investments in fixed-interest securities and loans as at 31 December 2015 was €194.6bn (199.7bn), representing 84.4% (84.7%) of the total market value of Munich Re’s investments. These securities thus made up the bulk of our portfolio.
In our internal risk model, we calculate and allocate solvency capital requirements even for highly rated government bonds.
Operational risks We use scenario analyses to quantify operational risks. The analyses are produced or updated annually by experienced staff from the fields of business and affected companies. The results are fed into the modelling of the solvency capital requirement for operational risks and are validated using various sources of information, such as the ICS and internal and external loss data.
Information on the ratings of the securities can be found in the notes to the consolidated financial statements on page 220 ff.
Further information on receiv ables relating to insurance business can be found in the notes to the consolidated financial statements on page 227 ff.
The main differences between the IFRS equity of Munich Re and the excess of assets over liabilities in the solvency balance sheet are due to the differing rules for recognition and valuation. The Solvency II methodology makes more extensive use of market values in the balance sheet than IFRS. For example, investments are recognised in the solvency balance sheet at market value, whereas under IFRS this applies only to securities available for sale. The valuation methodology for underwriting items in accordance with Solvency II differs significantly from the valuation in our consolidated financial statements. The value of the underwriting provisions in accordance with Solvency II corresponds to the current amount that insurance and reinsurance under- takings would have to pay if they were to transfer their insurance and reinsurance liabilities immediately to another insurance or reinsurance undertaking.
The starting point for the calculation of the eligible own funds is the excess of assets over liabilities. The previous year’s figure (€34.8bn) has not been adjusted for methodology and valuation changes relating to the previous year. These adjustments (€0.3bn) relate to issues including the BaFin’s recent interpretative decision on deferred taxes.
We provide additional infor mation on underwriting items in accordance with IFRS in our notes to the consolidated financial statements. Information on the underwriting assets is avail able under (G) on page 190 and details on the underwriting liabil ities can be found under (C) and (D) on page 192 ff.
1 The capital measures included in the eligible own funds amount to –€2.5bn in the year under review and mainly concern the dividend payment and share buy-backs.
Eligible own funds €bn 31.12.2015 Prev. year Change Excess of assets over liabilities 37.3 34.8 2.5 Subordinated liabilities 4.9 5.0 –0.1 Share buy-backs –1.1 –1.0 –0.1 Restrictions on eligible own funds –0.8 –0.8 0.0 Basic own funds 40.3 38.0 2.3 Own funds allocated to other areas of finance 0.4 0.2 0.2 Eligible own funds1 40.7 38.2 2.5
First, the basic own funds are calculated by adjusting the excess of assets over liabilities according to Solvency II for the factors relevant to Munich Re.
Subordinated liabilities should be added provided that they are available at all times to cover losses on a going-concern basis. Munich Re’s subordinated liabilities meet this requirement. Share buy-backs that have been announced but not completed as at the balance sheet date and own shares held must be deducted. The planned dividend for the 2015 financial year is still included in the eligible own funds as at 31 December 2015. The eligibility of certain own-fund items, such as surplus funds and minority interests in Group equity, is subject to restrictions, and they must be deducted. The carrying amounts of shareholdings in companies in other financial sectors such as banks and investment firms must also be deducted.
For Solvency II, own funds are divided into levels of quality, known as tiers, depending on their loss absorbency. Tier 1 unrestricted, which is not subject to a limit, is of the highest quality, Tier 3 the lowest. Munich Re’s own funds are of very high quality.
Munich Re’s eligible own funds were allocated to the tiers as follows: The solvency ratio under Solvency II is the ratio of the eligible own funds to the solvency capital requirement.
Solvency II ratio 31.12.2015 Prev. year Change Eligible own funds €bn 40.7 38.2 2.5 Solvency capital requirement €bn 13.5 13.8 –0.3
Global and regional economic and financial crises Munich Re has substantial investments in the eurozone. We attach importance to maintaining a correspondingly broad diversification of investments to cover our technical provisions and liabilities in euros. We use government bonds to match our underwriting liabilities in terms of currency and duration, especially for life and health primary insurance. Growth in the eurozone stabilised further in 2015, though the sovereign debt crisis dominated the capital markets around the middle of the year due to developments in Greece, with the risk premiums for government bonds issued by other peripheral countries also widening considerably for a time. Notwithstanding agreement with Greece’s European partners on a third aid programme, significant political risks remain, with a potential impact on the eurozone. In addition, the refugee crisis and the planned referendum in the United Kingdom on continuing EU membership has created a risk of further European disintegration.
The low-interest-rate environment continues to present life insurance companies in the eurozone in particular with major challenges. The fluctuations in the capital markets give rise to considerable volatility in our investments and liabilities at the valuation dates. We counter these risks with various risk management measures.
Legal risks Legal disputes Munich Re (Group) companies are involved in court, regulatory and arbitration proceedings in various countries in the normal course of business. The outcome of pending or impending proceedings is neither certain nor predictable. However, the management of Munich Re is of the opinion that none of these proceedings, including those mentioned below, will have a significant negative impact on Munich Re’s financial situation.
Former minority shareholders of ERGO Versicherungsgruppe AG are seeking to gain increased squeeze-out cash compensation by way of shareholder compensation complaint proceedings. The material risk is limited by the number of shares eligible for compensation (approximately 237,000) and the upper end of the scale within which the corporate value of ERGO Versicherungsgruppe AG as at the date of valuation can be set.
A number of cases are pending before courts against various companies in the Ideenkapital Group, which developed closed-end funds that it marketed in particular to private investors via banks. Its portfolio includes media, property, life insurance and shipping funds. The claimants are fund investors, who for the most part are filing claims in respect of defects in prospectuses and products. The possibility of other claims being filed and the resultant reputational risks cannot be excluded.
Munich Re Group Annual Report 2015 confirmed the ruling, according to which customers may still have a right to withdraw from an insurance contract more than a year after it has been concluded if they have not received proper instruction on that right. The same applies if they have not received the insurance terms and conditions or pertinent consumer information. Affected are life insurance policies using the “policy model” issued between 1995 and 2007. On 17 December 2014, the Federal Court of Justice extended its ruling to cover contracts based on the “proposal model”, so that customers now have a right of withdrawal more than one month after payment of the first premium if they have not received proper instruction on that right. Affected are life insurance policies based on the proposal model or the invitation model issued from 29 July 1994 to 31 December 2007. The Federal Court of Justice has not reached a definitive decision on the legal consequences of the rulings dated 7 May 2014 and 17 December 2014. We await further rulings. The rulings cannot be applied to classes of business other than life insurance.
Supervisory risks The entry into force of Solvency II, currently the most important insurance supervision project in the European Union, will profoundly change the supervision of insurers and reinsurers. The changes were translated into German law with effect from 1 January 2016, notably through the Insurance Supervision Act (VAG). The new Insurance Supervision Act will be complemented by directly applicable EU regulations and various communications from the supervisory authorities. We are applying proportionality in our interpretation and implementation of the new principle-based requirements. However, it is evident from practice that there are still numerous uncertainties.
If interest rates decline further, the solvency requirements will increase for a number of life insurance companies in our Group. We are closely monitoring the situation and will take the necessary steps to ensure that the solvency requirements are duly met.
Information on the treatment of goodwill can be found in the notes to the consolidated financial statements on page 184, and the results of the impairment tests on page 206 ff.
Munich Re’s business model combines primary insurance and reinsurance under one roof. We are convinced of the future viability of traditional reinsurance. With the primary insurance activities we operate out of the reinsurance field of business, and with our ERGO and Munich Health fields of business, we have tapped further profitable growth opportunities. We assume risks from many different areas of private and economic life, and provide financial protection and risk management. However, surprising and unforeseen developments can never be ruled out entirely. To protect ourselves against resultant risks, we have established a sophisticated risk management system, which is described in detail in our risk report. Overall, we are well prepared to seize new opportunities for the benefit of our Group.
Expanded business avenues will open up for Munich Re if key macroeconomic parameters develop better than expected. Stronger economic growth in the USA or Germany – fueled for instance by the positive effects of low energy prices on private consumption – and a more rapid economic recovery in the eurozone or in major emerging markets would have a positive impact on demand for insurance cover, and trigger higher premium volume in most classes of insurance. In addition, such a development (and a presumably less expansive monetary policy) could lead to a normalisation of the bond markets and thus to a gradual increase in yields, including those on US and German government bonds. This would have a negative impact in the short term on our investment result, but it would bring higher returns in the long run, thus benefiting our long-term insurance business.
We provide active and forward-looking support through public-private partnerships in the area of sustainable disaster management. We can increase risk awareness and develop risk-transfer solutions that are politically and economically sustainable, and we can guarantee these solutions are implemented thanks to our strong capital base. In this way, we can support a paradigm change from retroactive claims financing to risk prevention (for example via reinsurance solutions), thus helping countries to better handle the costs of natural catastrophes in future.
In primary insurance, ERGO consistently focuses on the needs of its customers. This is an important differential factor in the market, as it is a competitive advantage that opens up growth opportunities for us. We aim to cater to our clients and sales partners with a comprehensive, attractive and modern product spectrum. We want to take advantage of the opportunities resulting from the digital revolution more quickly and consistently than others, and to further develop and complement our traditional business model.
Munich Re Group Annual Report 2015 continue to consistently follow our chosen path of using external and internal innovation resources more broadly. In 2015, we continued to strengthen our activities to promote digital innovation. Besides collaborating closely with the accelerator Axel Springer Plug & Play and with start-ups in Berlin, we have extended our external focus to include two other locations – in Silicon Valley and in London. Our internal innovation projects are also on track for success: ERGO’s homeowners’ comprehensive insurance product was awarded the quality seal "Best Service Innovation" for the insurance sector by the British opinion-research institute YouGov.
Outside Germany, ERGO will continue to concentrate on growth markets whilst looking into the possibility of also entering new markets in new regions as an additional source of growth. In this regard, the systematic utilisation of synergies between business in Germany and companies outside Germany offers additional potential.
The global health market is one of the highest-earning and fastest-growing sectors of the economy. The main reasons for this include worldwide population growth and increasing life expectancy, combined with the rising prosperity of broad sectors of the population and an enhanced medical infrastructure, particularly in developing and emerging economies. These trends are being accelerated not only by advances in medicine, and the increasing significance of prevention and disease management programmes, but also by the global increase in lifestyle diseases such as obesity and diabetes.
As a global health primary insurer and reinsurer – and as a service provider – we have a variety of opportunities for servicing many different client needs and expanding our business, depending on the level of development in the international health markets. Our broad set-up and the primary insurance and reinsurance know-how we combine in Munich Health stand us in good stead in this regard.
The pressure on historically grown healthcare and social systems in the industrial nations has been ramped up by recent global economic turmoil. In addition to increasing control and limitations in the public sector, health services are consequently shifting to the privately funded sector. This will open up opportunities in retail health insurance business in highly developed markets. For the analysis of health risks, for example, we provide our reinsurance clients with modern programmes and tools for standardised medical risk assessment. In the private client segment, we aim to unlock new business potential by developing innovative products. The spread of digitalisation provides us with the opportunity to offer individually tailored products. Our aim is to strengthen customer ties even further and to make our spectrum of services more comprehensive by offering digital solutions. These will allow for new and greater activities, specifically in the area of prevention. In the case of chronic diseases or patients with certain risk factors, for instance, digital monitoring techniques can help to optimally adapt ongoing
Munich Re Group Annual Report 2015 treatment methods to individual patients’ needs and to identify acute deteriorations in a person’s health at an early stage. Overall, the new digital technologies may contribute to intensifying the cooperation between doctors and patients, allow patients to take more responsibility for their health and tailor treatment methods to an individual’s needs.
The developing and emerging markets are faced with the challenge of creating sustainable healthcare systems that offer the largest possible share of the population access to adequate, affordable medical care. Private-sector insurance products, which may be closely intermeshed with state schemes, can play a valuable part here. We have come up with successful ideas for expanding internationally, and these are continually being improved and are transferable to new markets.
The prolonged period of low interest rates is challenging our asset management to achieve returns with manageable risks. MEAG only takes advantage of higher-interest bond opportunities if the risks can be kept within reasonable bounds. On this basis, MEAG is continually expanding its competence in the assessment of credit risks, in order to be able to seize opportunities in investing in bonds increasingly being traded in illiquid markets. We take a very selective approach to investing in infrastructure credits, including renewable energies, and ensure that they are of the highest quality. In addition, there are improved return opportunities available for equity investors in asset classes such as infrastructure and renewable energies.
With a consolidated result of €3.1bn, we beat our original target of €2.5–3bn, in part because expenditure for major natural catastrophe losses in property-casualty reinsurance was lower than expected. We were also able to release claims reserves for basic losses from prior years. Comparatively low tax expenditure – due to adjustments for prior years – also had a positive effect, while a negative impact derived in particular from impairments of goodwill in the ERGO Life and Health Germany segment.
Information on the special features of IFRS accounting can be found on page 99 1 Excluding insurance-related investments.
Comparison of prospects for Munich Re (Group) for 2015 with results achieved
Gross premiums written €bn 47–49 50.4 Consolidated result €bn 2.5–3 3.1 Technical result €bn almost 3 4.0 Return on investment1 % at least 3 3.2 Return on risk-adjusted capital (RORAC) % 15 11.5
In 2015, the reinsurance field of business posted gross premiums of €28.2bn – a figure that significantly surpassed the target corridor of €26–27bn – driven by the development of the euro against other currencies. Gross premiums in life reinsurance totalled €10.5bn, thus equally coming in above expectations, which had been in the €9–10bn range. At €17.7bn, property-casualty reinsurance also surpassed the original forecast of around €17bn.
At €3.3bn, the consolidated result for 2015 in the reinsurance segment significantly surpassed our original expectations of at least €2bn.
At €17.9bn, overall premium income in the ERGO field of business was in the upper range of our €17.5–18bn target corridor for 2015. The same applies to gross premiums written, which came to €16.5bn, against a projected range of €16–16.5bn. ERGO Life and Health Germany posted total premium income of €10.3bn, whereas our outlook had been slightly higher at “around €10.5bn”. At €9.4bn, gross premiums written were within the €9–9.5bn range envisaged. ERGO International posted gross premiums written of €3.9bn. At the beginning of the year, our expectation had been between €3.5 and €4bn. The combined ratio of 104.7% for this segment was significantly higher than the expected value of around 97%, mainly owing to the increase in provisions. ERGO Property-casualty Germany posted gross premiums written of €3.2bn, surpassing the 2015 target of “somewhat over €3bn”. The combined ratio of 97.9% in the ERGO Property-casualty Germany segment was significantly higher than the target figure of around 93%, owing to higher expenditure for major losses.
Reinsurance Reinsurance continues to hold considerable promise for the future, as it offers a wide variety of earnings opportunities in the long term owing to business potential that has not yet been utilised. Although weather-related natural hazard exposure is showing an increasing trend as the climate changes and the concentration of values in exposed regions becomes greater, a large share of the losses from severe natural catastrophes are still uninsured. In addition, the demand for insurance remains high for protecting the large centres of high-quality industrial manufacturing and the rising prosperity of the population. Moreover, generally only a small portion of the risks from potential liability claims by third parties are insured, particularly in the area of complex technologies.
As a well-diversified reinsurer with extensive know-how, Munich Re is able to offer its cedants specialist consulting services and customised solutions. Reinsurance provides primary insurers with efficient and flexible protection against major claims and accumulation losses, and strengthens their capital base. In addition to this, we devise innovative coverage concepts with which we intend to tap profitable business opportunities and balance out some of the reductions in traditional business. Apart from securitising insurance risks and transferring risks to the capital markets, we also partner our clients in adjusting to changes in regulatory requirements, which are currently being revised in many countries.
Munich Re Group Annual Report 2015 for 2016 should be in the order of €1.9–2.4bn. Compared with the excellent result in 2015, this would be a reduction by as much as €1.4bn, attributable over the rest of the year to normal major- loss expenditure, the absence of one-off tax effects, the reduction in prices in property- casualty reinsurance, and the pressure on our investment income owing to continuing low market interest rates.
On balance, we had to accept a slight reduction of 1.0% in the price level for the renewed portfolio as a whole. On an international scale, price reductions were seen mainly in natural catastrophe business – with the downward momentum slowing in North America – and in marine and aviation business. By contrast, price levels in liability and in credit and bond business declined only marginally. The fact that the price erosion for
Munich Re was comparatively moderate underscores the importance of our consistently profit-oriented underwriting policy, and recognises the importance that individual clients are attaching to stable reinsurance relationships. Munich Re’s comprehensive service and financial strength are valued more highly than an ever lower price.
Total premium income in 2016 in the ERGO field of business should be in the range of €17–18bn, with gross premiums written of €15.5–16bn, and therefore below the levels of last year. We project a consolidated result for 2016 of around €250–350m for the ERGO field of business, a significant increase on the 2015 result, which was above all impacted by impairment of goodwill in the Life and Health Germany segment. The target figures already reflect the sale of ERGO Italia, but do not include major expenditure for implementing the strategy currently being developed under a new management.
In the Life and Health Germany segment, our total premium income should amount to slightly more than €10bn, and gross premiums written are expected to be in the range of €9–9.5bn.
In German life business, the economic market environment remains challenging. We will therefore follow the path we chose in 2013 towards a modern product world geared to grasping opportunities even more consistently in future. Our new product family now includes both private pension products and direct insurance solutions. We also expect positive momentum from the new ERGO disability insurance product launched at the beginning of the year. For 2016, we anticipate a decline in single- premium volume and an increase in regular-premium new business. Nevertheless, we expect overall premium volume in the Life Germany field of business to decrease to a figure between €3.5bn and €4bn in 2016 owing to the shrinking old portfolio.
We aim to achieve gross premiums written in the range of €3–3.5bn for the ERGO International segment in 2016, and generate overall premium volume of €3.5–4bn, with uncertainty concerning the demand for single-premium business in life insurance. The target figures already reflect the sale of ERGO Italia. We should see premium income at around the same level as last year in property-casualty business, provided there are no economic setbacks or exchange-rate losses. Provided that major losses remain within normal bounds, we expect the combined ratio to significantly improve to around 99%.
Owing to medical advances, generally higher life expectancies and the increasing prosperity of broad sectors of the population, the international healthcare market offers diverse growth opportunities for Munich Health. We intend to utilise these opportunities even better in future, following some individual adjustments to our strategic orientation. In reinsurance, we see avenues for growth from our clients’ increasing numbers of insureds and a strong demand for customised solutions. We have introduced stabilisation and result-improvement measures above all in the USA, our most important market. We expect stable growth of our primary insurance business.
Gross premiums written should be almost €5bn in 2016, below the level of 2015. The combined ratio is likely to be around 99%. Overall, we anticipate a profit in the range of €50–100m for 2016.
As in the previous year, in 2016 we intend to moderately increase our investments and investment commitments in infrastructure (including renewable energies and new technologies), provided that the parameters are reliable and we can generate an appropriate return. We continue to rely heavily on a regional, and technology- and infrastructure-specific diversification of these investments, thus spreading the risk of the portfolio. In 2016, we will continue to focus in particular on bonds and loans for infrastructure projects. We plan to slightly expand our real estate portfolio over the next few years, subject to market developments.
We expect that the Group’s gross premiums written for 2016 will be in the range of €47–49bn; the median value is around €2.4bn lower than in the previous year. We are adhering to our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets. In the long term, we want to grow profitably with innovative business. However, in the current environment of very low interest rates on low-risk investments, this target will be difficult to achieve.
The consolidated profit is likely to fall short of the good result in 2015, mainly due to falling prices in reinsurance and randomly very low major-loss expenditure in the previous year, a decreased investment result, and the absence of one-off tax effects. Added to this, there is exceptionally high political and macroeconomic uncertainty overall, in all markets relevant to us. Nevertheless, we envisage a consolidated result for 2016 of €2.3–2.8bn. The effective tax rate should be higher than in 2015 and reach 20–25%, which is the generally expected range for our Group. This profit guidance is subject to claims experience with regard to major losses being within normal bounds, to claims provisions remaining unchanged and to our income statement not being impacted by severe currency or capital market movements, significant changes in fiscal parameters, special restructuring expenses, or other special factors.
For the 2015 financial year, Munich Re is for the first time utilising the option of publishing a combined management report in accordance with Section 315 (3) in conjunction with Section 298 (3) of the German Commercial Code (HGB). Supplementary to our Munich Re (Group) reporting, this section provides details on the performance of Munich Reinsurance Company.
In the 2015 financial year, Munich Reinsurance Company’s business performance was very good overall. Major-loss expenditure remained well below the volume to be expected. Moreover, the release of loss reserves for prior accident years, which we were able to make following a review of our reserving position, made a positive contribution to the technical result before claims equalisation provisions.
In the financial year 2015, Munich Reinsurance Company’s gross premium income totalled €24,234m (22,491m), a year-on-year increase of 7.7% mainly owing to changes in the value of the euro as against other currencies.
In 2015, gross premium volume in life reinsurance was higher than in the previous year. Gross premiums written were up slightly by 2.5% to €8,021m (7,822m). In health reinsurance, we posted premium totalling €3,567m (3,348m), which represents an increase of 6.5%. The higher amounts were largely attributable to positive currency translation effects. If exchange rates had remained unchanged, our premium income would have decreased by 3.4%. A large part of the decline in premium concerned largevolume treaties written in recent years where reinsurance primarily serves as a capital substitute. As expected, the conclusion of new treaties was insufficient to compensate for the non-renewal or reductions of our share in several particularly large-volume treaties in 2015.
Investment expenses –3,390,482 –2,022,967 –67.6 Interest income on technical provisions –505,631 –466,524 –8.4
151Combined management report Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
Our technical result before claims equalisation provisions amounted to €1,194m in the 2015 financial year, compared with €607m in the previous year. This result improvement largely derived from the below-average random incidence of major losses. A routine review of reserves also caused a reduction in the provisions for claims from prior years. Over the years, the safety margin in the reserves has remained unchanged at a high level, as Munich Re has adhered to its careful approach to determining and adjusting loss reserves. Major-loss expenditure totalling €903m (1,085m) after retrocession and before tax was lower than in the previous year, and below expectations. As in the previous year, 2015 was marked by a large number of major losses, but there were no exceptional individual events.
At €93m, aggregate losses from natural catastrophes were significantly lower than in the previous year (€513m), accounting for only 0.6 (3.6) percentage points of net earned premiums.
Life 2015 Prev. year Change % Gross premium written €m 8,021 7,822 2.5 Underwriting result before claims equalisation provision and similar provisions €m –59 31 –
In health reinsurance, premium income in the year under review showed an increase essentially attributable to positive currency translation effects. The result declined slightly compared with the previous year owing to losses and a change in the allocation of administrative expenses.
In accident reinsurance, the premium level fell slightly in the reporting year. On account of losses, the result before claims equalisation provisions was somewhat lower than in the previous year. Nevertheless, we again posted a gratifying result for the 2015 financial year.
Casualty 2015 Prev. year Change % Gross premium written €m 183 201 –9.0 Combined ratio % 72.3 35.3 Underwriting result before claims equalisation provision and similar provisions €m 42 97 –56.7
Motor 2015 Prev. year Change % Gross premium written €m 3,130 2,505 25.0 Combined ratio % 97.4 107.0 Underwriting result before claims equalisation provision and similar provisions €m 62 –177 –
In marine reinsurance, the premium level was down slightly compared with the pre vious year. The positive technical result before claims equalisations saw an appre ciable improvement, above all owing to higher loss reserve releases compared with the previous year.
The increase in premium income is essentially attributable to positive currency trans lation effects and to the conclusion of the large-volume intra-Group reinsurance treaty with Munich Re America. Where prices, terms and conditions were no longer commensurate with the risk, portfolios were reduced. We again posted a pleasing profit before claims equalisation provisions in the year under review. The increase in the result also benefited from lower major-loss expenditure and higher loss reserve releases compared with the previous year.
Aviation 2015 Prev. year Change % Gross premium written €m 454 384 18.2 Combined ratio % 75.9 88.7 Underwriting result before claims equalisation provision and similar provisions €m 106 43 146.5
In the 2015 financial year, Munich Reinsurance Company’s return on investment (including deposits retained on assumed reinsurance) totalled 3.1% (4.3%).
Other classes 2015 Prev. year Change % Gross premium written €m 2,033 1,915 6.2 Combined ratio % 99.4 103.1 Underwriting result before claims equalisation provision and similar provisions €m 10 –60 –
In the 2015 financial year, Munich Reinsurance Company generated net retained profits of €1,376m (1,340m) according to German GAAP accounting (HGB). Including these net retained profits, the Company’s revenue reserves amounted to €3,460m (3,179m) as at the balance sheet date, of which €142m (297m) are subject to a restriction on distribution. The distributable funds thus amount to €3,318m (2,882m).
Balance sheet structure of Munich Reinsurance Company 2015 Previous year Change €k €k % Intangible assets 18,713 21,689 –13.7
Deferred items 419,890 460,545 –8.8 Excess of plan assets over pension liabilities 346,395 396,927 –12.7
Other accrued liabilities 1,919,638 3,035,013 –36.8 Deposits retained on retroceded business 2,728,421 1,785,470 52.8
The carrying amount of Munich Reinsurance Company’s investments (excluding deposits retained on assumed reinsurance) rose by €1,352m to €65,448m (64,096m) in the 2015 financial year. Investments in fixed-interest securities showed a rise of €2,389m owing to new investments – especially in US, UK and Canadian government bonds. An opposite effect derived from write-offs totalling €1,071m for shares held directly and indirectly in ERGO Versicherungsgruppe AG.
As at 31 December 2015, 96% of our fixed-interest securities were investment-grade and around 87% were rated “A” or better.
If, in a given financial year, loss ratios in individual classes of business are significantly in excess of the long-term average (which amounts to 15 years in most classes), the claims equalisation provision is reduced and the above-average loss expenditure is largely offset. According to current calculations, it is expected that – given normal claims expenditure – allocations to the claims equalisation provision with an adverse impact on our result will, at the very least, decline significantly as from the 2016 financial year. In 2017, it is likely that there will be a major release, as from that year on the very poor 2001 claims year (when the World Trade Center loss occurred) no longer needs to be taken into consideration in the averaging.
The target or maximum amount allowed for the claims equalisation provision, which is essentially calculated on the basis of earned premiums and the standard deviation of the loss ratio in the respective class of insurance, determines the amount of the annual non-performance-related allocation to the claims equalisation provision. The performance-related change in the claims equalisation provision is added to this figure in years in which claims experience is favourable (i.e. when the random occurrence of claims is below average), whereas amounts are withdrawn in years in which claims experience is adverse (i.e. the random occurrence of claims is above average).
Equity €m 2015 Prev. year Issued capital 573 573 Capital reserve 6,845 6,845 Revenue reserve 2,084 1,839 Net retained profits 1,376 1,340
Claims equalisation provision a significant influence on dividends and capital management at Munich Reinsurance Company
157Combined management report Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
The current level of the claims equalisation provision is 100% of the legally stipulated maximum amount in the motor, marine and accident classes of business, and more than 50% in fire, liability, credit, aviation and engineering.
Combined management report Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
Munich Reinsurance Company has branches in Australia, China, France, the United Kingdom, Hong Kong, Italy, Japan, Canada, Malaysia, New Zealand, Singapore, Spain and South Korea.
Against this background, Munich Reinsurance Company should post gross premium of around €24,000m in 2016 – assuming that exchange rates remain constant. We expect the combined ratio to be around 98% of net earned premium. An accurate forecast is only possible to a limited degree, partly due to the obvious fluctuations in the incidence of major losses. Taking the preceding financial year as a basis and assuming average claims experience for 2016, we project that the technical result before claims equalisation provisions will be at a slightly lower level than in the year under review.
Given the ongoing low-interest-rate environment, Munich Reinsurance Company’s return on investment is likely to continue to fall. As things stand at present, we expect to achieve a good German GAAP result in 2016, although it is likely to be lower than in the year under review.
Notes to the consolidated financial statements Application of International Financial Reporting Standards (IFRSs) 169 Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG) 169 Recognition and measurement 169 Consolidation 176
Equity and liabilities A Equity 192 B Subordinated liabilities 192 C Gross technical provisions 192 D Gross technical provisions for unit-linked life insurance 195 E Other accrued liabilities 196 F Liabilities 196 G Deferred tax liabilities 197 H Liabilities related to assets held for sale 197
11 Ceded share of technical provisions 227 12 Other receivables 227 13 Deferred acquisition costs 229 14 Deferred tax 231 15 Other assets 232 16 Non-current assets and disposal groups held for sale and sold during the reporting period 234
Notes to the consolidated balance sheet – Equity and liabilities 18 Fair value hierarchy of liabilities 238 19 Subordinated liabilities 240 20 Unearned premiums 241 21 Provision for future policy benefits 243 22 Provision for outstanding claims 244 23 Other technical provisions 248 24 Gross technical provisions for unit-linked life insurance 249 25 Other accrued liabilities 250 26 Bonds and notes issued 256 27 Deposits retained on ceded business 256 28 Other liabilities 256
Notes to the consolidated income statement 30 Income from technical interest 259 31 Expenses for claims and benefits 260 32 Operating expenses 262 33 Investment result 264 34 Insurance-related investment result 268 35 Other operating result 268 36 Other non-operating result, impairment losses of goodwill and net finance costs 269 37 Taxes on income 270
Disclosures on risks from insurance contracts and financial instruments 38 Risks from life and health insurance business 273 39 Risks from property-casualty insurance business 276 40 Market risks from financing instruments – Sensitivity analysis 279
Notes 31.12.2015 Prev. year Change €m €m €m €m €m %
D. Ceded share of technical provisions (11) 4,327 5,328 –1,001 –18.8 E. Receivables
F. Cash at banks, cheques and cash in hand 3,955 2,912 1,043 35.8 G. Deferred acquisition costs (13)
A. Equity (17) I. Issued capital and capital reserve 7,418 7,417 1 0.0
III. Other reserves 6,032 6,458 –426 –6.6 IV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,107 3,152 –45 –1.4
II. Provision for future policy benefits (21) 108,572 112,648 –4,076 –3.6 III. Provision for outstanding claims (22) 59,756 56,362 3,394 6.0 IV. Other technical provisions (23) 17,413 18,492 –1,079 –5.8
D. Gross technical provisions for unit-linked life insurance (24) 8,201 7,837 364 4.6 E. Other accrued liabilities (25) 4,145 4,473 –328 –7.3 F. Liabilities
Notes 2015 Prev. year Change €m €m €m €m €m %
Thereof: Attributable to Munich Reinsurance Company equity holders 3,107 3,152 –45 –1.4
Statement of recognised income and expense for the financial year 2015 €m 2015 Prev. year Consolidated result 3,122 3,170
Currency translation Gains (losses) recognised in equity 1,420 1,428 Recognised in the consolidated income statement 0 0
Change resulting from cash flow hedges Gains (losses) recognised in equity 1 1 Recognised in the consolidated income statement 0 0
Other changes 25 23 I. Items where income and expenses recognised directly in equity are reallocated to the consolidated income statement –416 4,122 Remeasurements of defined benefit plans 266 –521 Other changes 0 0
Income and expense recognised directly in equity (I + II) –150 3,601 Total recognised income and expense 2,972 6,771 Thereof: Attributable to Munich Reinsurance Company equity holders 2,947 6,731 Attributable to non-controlling interests 24 40
Retained earnings before Unrealised Reserve from Valuation result deduction of Own shares gains and currency from cash flow €m own shares held losses translation hedges
Unrealised gains and losses on investments 0 0 0 0 –1,817 0 0 0 –5 –1,821 Change resulting from valuation at equity 0 0 –15 0 –25 0 0 0 0 –40 Change resulting from cash flow hedges 0 0 0 0 0 0 1 0 0 1 Remeasurements of defined benefit plans 0 0 258 0 0 0 0 0 8 266
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Issued Consolidated capital Capital reserve Retained earnings Other reserves result Retained earnings before Unrealised Reserve from Valuation result deduction of Own shares gains and currency from cash flow €m own shares held losses translation hedges 31.12.2013 as originally recognised 581 6,845 13,136 –295 3,368 –997 3 3,304 243 26,188
Income and expense recognised directly in equity 0 0 –505 0 2,658 1,431 –5 0 22 3,601
Unrealised gains and losses on investments 0 0 0 0 2,645 0 0 0 16 2,661 Change resulting from valuation at equity 0 0 2 0 13 0 –6 0 0 9 Change resulting from cash flow hedges 0 0 0 0 0 0 1 0 0 1 Remeasurements of defined benefit plans 0 0 –523 0 0 0 0 0 2 –521
III. Cash flows from financing activities –2,337 –2,694 Cash flows for the financial year (I + II + III) 960 –106
Effect of exchange-rate changes on cash 169 198 Cash at the beginning of the financial year 2,912 2,820 Cash at the end of the financial year 4,041 2,912
Additional information Income tax paid (net) – included in the cash inflows from operating activities –117 45 Dividends received 660 511 Interest received 6,138 6,256 Interest paid –455 –479
Consolidated financial statements Consolidated cash flow statement 1 For a definition of the disposal group, see Assets – J Assets held for sale.
Munich Re’s consolidated financial statements have been prepared on the basis of Section 315a (1) of the German Commercial Code (HGB) in conjunction with Article 4 of Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with Articles 2, 3 and 6 of the aforementioned Regulation and with the rules designated in Section 315a (1) of the German Commercial Code.
Changes in accordance with the rules of IAS 8 necessitated the retrospective adjust- ment of the figures from the consolidated balance sheet for the financial years 2013 and 2014, and of the consolidated income statement and relevant items of the notes to the consolidated financial statements for the year 2014 (see section “Changes in accounting policies and other adjustments”). The other previous-year figures have been calculated on the same basis as the figures for the financial year 2015.
In the 2015 financial year, the following new or amended IFRSs had to be applied for the first time: The IASB concluded the project Annual Improvement to IFRSs 2011–2013 Cycle in December 2013 with the publication of the revised standards. These amendments affect IFRS 1, First-time Adoption of International Financial Reporting Standards; IFRS 3, Business Combinations; IFRS 13, Fair Value Measurement; and IAS 40, Investment Property Measured at Fair Value. Clarifications were made to these standards concerning individual provisions that have turned out to be unclear in practice; they are not relevant for Munich Re.
IFRIC Interpretation 21 (05/2013), Levies, clarifies the point of recognition of a liability within the scope of IAS 37 for levies imposed by governments, other than income taxes, that do not fall within the scope of application of other IFRSs. As well as determining the point of recognition, the Interpretation clarifies how to interpret the definition of “present obligation” within the meaning of IAS 37 with respect to such levies. It has no material effects on Munich Re.
In valuing the provision for outstanding claims, the time value of money and the specific risk for the provision were not calculated correctly for one portfolio of the life reinsurance segment. In the first quarter, the items concerned were corrected retrospectively in line with IAS 8.41. The adjustments had the following effects: Consolidated balance sheet 31.12.2013 Changes due as originally to adjustments recognised in 2013 31.12.2013 €m Assets H. Deferred tax assets 6,995 4 6,999 Equity and liabilities A. II. Retained earnings 12,841 –8 12,833 A. IV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,304 –6 3,298 C. IV. Provision for outstanding claims 53,061 18 53,079
Consolidated income statement 2014 Changes due as originally to adjustments recognised in 2014 2014 €m 3. Expenses for claims and benefits Gross –40,415 –1 –40,416 Net –39,693 –1 –39,694
Unless otherwise stated, all standards or amendments to standards that have not yet entered into force will be applied by Munich Re for the first time as from the mandatory effective date for entities with their registered office in the European Union.
In November 2013, the IASB published an amendment to IAS 19 (rev. 11/2013), Employee Benefits, which aims to clarify the allocation of contributions from employees or third parties that are linked to the employee’s service rendered in the same period in which they are payable. This amendment will not have any material effects on Munich Re.
The amendments published in December 2013 under the project Annual Improve- ments to IFRSs 2010–2012 Cycle refer to: IFRS 2, Share-based Payment; IFRS 3, Business Combinations; IFRS 8, Operating Segments; IFRS 13, Fair Value Measurement; IAS 16, Property, Plant and Equipment; IAS 24, Related Party Disclosures; and IAS 38, Intangible Assets. The amendments mainly concern clarifications of individual provisions that have turned out to be unclear in practice; they are unlikely to be relevant for Munich Re.
As mandated by the IASB, application of the above amendments to IAS 19 and the Annual Amendments to IFRSs 2010–2012 Cycle have been mandatory as from the financial year 2015. However, as they were not adopted into European law until December 2014, application of the two shall not be mandatory for companies registered in the European Union until financial years beginning on or after 1 February 2015. Voluntary application before that date is permitted, but they are of little relevance for Munich Re.
The publication of the IFRS Clarification of Acceptable Methods of Depreciation and Amortisation (Amendments to IAS 16 and IAS 38) (05/2014), provides guidance on issues, including that revenue-based depreciation and amortisation of real estate, other assets and intangible assets is not permissible, or is only permissible under specified circumstances. The clarifications do not have any material effects for Munich Re.
The possibility of voluntary measurement at fair value (fair value option) remains. However, the requirement for separate accounting of the component parts of certain structured products is no longer mandatory; under IFRS 9 they must be measured in their entirety at fair value through profit or loss. For financial liabilities, there are no changes in the measurement rules except that if the fair value option is applied, value changes attributable to a change in the entity’s credit risk must in future be recognised without impact on profit or loss.
IFRS 9 envisages an expected loss model for recognising impairments, by which – unlike under the current incurred loss model of IAS 39 – expected losses are anticipated before they arise and must be accounted for in the balance sheet as an expense. There is to be only one model for recognising impairments that is to be used for all financial assets falling under the impairment rules of IFRS 9.
IFRS 15 (05/2014), Revenue from Contracts with Customers, governs the timing and amount of revenue to be recognised by an entity. As the recognition of revenue from insurance contracts and financial instruments does not fall within the scope of the new standard, it is not material for the accounting of our core business. Originally, the standard was to be mandatory for financial years beginning on or after 1 January 2017. However, due to the current discussion about clarifications – in particular with respect to the implementation process, the IASB decided in July 2015 to defer the date of mandatory application. The provisions of IFRS 15 will now be mandatory for financial years beginning on or after 1 January 2018. Even if the discussed clarifications are taken into account in the revised standard, we do not expect the revision to have any material effects on Munich Re.
Also in January 2016, the IASB published the IFRS Disclosure Initiative – Amendments to IAS 7. The changes to IAS 7 are intended to improve the quality of information provided in the cash flow statement of a company’s financial report about the company’s financing activities. The provisions will be effective for financial years beginning on or after 1 January 2017. We will evaluate their impact on Munich Re in due course.
Cash flows and net assets from obtaining and losing control of consolidated subsidiaries or other operations are shown below: Number of consolidated subsidiaries1
Reductions –3 –18 –21 1 In addition, 54 German and 6 non-German investment funds were included in the consolidated group.
Cash flows arising from obtaining control €m 2015 Prev. year Total consideration for obtaining control –81 –134 Non-cash consideration for obtaining control –1 0 Cash consideration for obtaining control –80 –134 Cash over which control was obtained 13 21 Total –67 –113
Net assets obtained €m 2015 Prev. year Goodwill/gain from bargain purchase –1 28 Other intangible assets 8 40
Other intangible assets –1 0 Investments –79 0 Cash –1 0 Other assets –16 0 Technical provisions (net) 59 0 Other liabilities 9 0 Total –30 0
Intangible assets 0 Investments 452 Receivables1 1 Cash at bank, cheques and cash in hand 10 Deferred tax assets 0 Other assets 0
Revenue included in the consolidated income statement since the acquisition date 15 Result included in the consolidated income statement since the acquisition date 4 Contributions to the consolidated revenues as if the acquisition date for the business combination had been 1 January 20153 27 1 The fair value of the receivables acquired as part of the transactions corresponds to the carrying amount. No defaults were expected at the acquisition date.
In the case of some investment funds whose relevant activities are largely predetermined, we do not exercise a significant influence, even if Munich Re holds a stake of over 20%.
We classify a small number of entities as associates even though we hold less than 20% of the voting rights, mainly because we are represented on their supervisory boards and/or have significant business relations with those entities.
We measure joint operations on the basis of the corresponding attributable assets, liabilities, income and expenses in accordance with the relevant IFRS.
Consolidated structured entities In 2015, Munich Re provided no financial or other support to consolidated structured entities, or intended to do so in future, without having a contractual obligation to do so.
Size of structured entities For investment funds, including investments in infra structure (including renewable energies and new technologies) and private equity and investment funds for policyholders under unit-linked life insurance, the carrying amount gives an indication of the size of the structured entity. For debt securities and the securitisation of underwriting risks, the emission volume (nominal value) is used as an indicator for the valuation of the size of the structured entity. The size of the funds refers to both the issued volume of the securitisation vehicles set up by Munich Re and that of those securitisation vehicles in which Munich Re has invested. For debt securities in the previous year, the carrying amount gives an indication of the size.
Normally, the maximum exposure to loss for investments for unit-linked life insurance contracts is also the carrying amount of the interests. However, the investment is held for the benefit of policyholders who bear the investment risk.
Deposits retained on assumed reinsurance 0 0 0 418 418 Investments for unit-linked life insurance contracts 0 6,536 0 0 6,536 Ceded share of technical provisions 0 0 0 0 0
At fair value through profit or loss 0 0 0 2 2
Deposits retained on assumed reinsurance 0 0 0 343 343 Investments for unit-linked life insurance contracts 0 7,395 0 0 7,395 Ceded share of technical provisions 0 0 0 0 0
Sponsored unconsolidated structured entities Munich Re provides structuring and consultancy services for clients within the context of the foundation and structuring of third-party securitisation vehicles. As at 31 December 2015, Munich Re did not have any interests in these structured entities.
Self-developed and other software, acquired sales networks, client bases and brand names are carried at cost. Self-developed and other software is amortised on a straightline basis at a rate of 20–33% over its useful life – three to five years – or in exceptional circumstances at a rate of 10% over a period of up to ten years. The useful lives and depreciation rates of the acquired sales networks and client bases are as a rule 2–17 years or 6–50% respectively, and those of the brand names 1–30 years or 3–100%; the items in question are generally amortised on a straight-line basis. Recognised impairments are distributed in the consolidated income statement between investment expenses, expenses for claims and benefits and operating expenses. If it is not possible to allocate impairments to the functional areas, they are shown under “other non- operating result”. Impairments or impairment losses reversed are recognised if required.
Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated
Munich Re Group Annual Report 2015 they include all derivative financial instruments with positive fair values which we have acquired to manage and hedge risks, but which do not meet the requirements of IAS 39 for hedge accounting. Securities designated as at fair value through profit or loss comprise structured securities. This designation may only be made at the time of acquisition; reallocation to this category in later periods is not permitted.
Other investments comprise deposits with banks and tangible assets in renewable energies, physical gold, and forestry investments. Deposits with banks are measured at cost in accordance with the effective interest method. Tangible assets in renewable energies are generally accounted for at amortised cost. The items in question are amortised on a straight-line basis at a rate of at least 4%, but for the most part at 5%, over a useful life of 20–25 years. In addition, these items are tested for impairment at each balance sheet date and write-downs or reversals of impairment made if required. We measure physical gold at the acquisition cost; if the recoverable amount is lower than the carrying amount, a write-down for impairment is made. If there is a subsequent recovery in value, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the amortised cost. Forestry investments are measured at fair value less estimated costs to sell.
The allocation reflects which of the fair values derive from transactions in the market and where valuation is based on models because market transactions are lacking. If market prices are available, these are an objective yardstick for recognition at fair value. If no market prices are available and valuation is based on models, there is a certain amount of scope for applying such methods. The greater the number of inputs used that are not observable on the market but are based on internal estimates, the greater the amount of discretionary scope available to Munich Re. Information on the valuation models and processes can be found in the Notes to the consolidated balance sheet – Assets (4) Hierarchy for the fair value measurement of investments. An internal process ensures that the valuation basis at every reporting date results in the correct allocation to the individual levels of the fair value hierarchy according to IFRS 13.
Assets allocated to Level 2 are valued using models based on observable market data. For this, we use inputs directly or indirectly observable in the market, other than quoted prices. If the financial instrument concerned has a fixed contract period, the inputs used for valuation must be observable for the whole of this period. Moreover, we have allocated to this level such investments for which prices are provided by price quoters but for which there is no proof that these were based on actual market transactions. The financial instruments we have allocated to this level mainly comprise bearer bonds and bond funds, borrowers’ note loans, covered bonds, subordinated securities, derivatives not traded on the stock market, and physical gas.
IAS 39.59 contains a list providing evidence of impairment of financial assets. In addition, IAS 39.61 states that for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. These rules are given more concrete form by means of internal guidelines. For equities quoted on the stock exchange, we assume a significant decline in fair value if the market value at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. In the case of fixed-interest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.
Net insurance-related investment result The net result from insurance-related investments comprises regular income, income from write-ups, gains and losses on the disposal of insurance-related investments, other income, write-downs of insurance-related investments, management expenses, interest charges and other expenses.
Assets held for sale are assets that can be sold in their current condition and whose sale is highly probable. This sale is expected to be completed within one year from the time of reclassification. The item may comprise individual assets or groups of assets. If a group of assets, including the matching liabilities, is sold in a single transaction, this is referred to as a disposal group. With regard to the liabilities of the disposal group, see Liabilities – H Liabilities related to assets held for sale. We account for assets held for sale at fair value less sales cost, provided the fair value is lower than the carrying amount. A write-down for impairment is no longer made. Excepted from this measurement requirement are items recognised in accordance with IAS 12, Income Taxes, IAS 19, Employee Benefits, IAS 39, Financial Instruments, IAS 41, Agriculture, and IFRS 4, Insurance Contracts. These are measured in accordance with the relevant IFRSs.
The item issued capital and capital reserve contains the amounts that the equity holders of Munich Reinsurance Company have paid in on shares. The issued capital comprises the subscribed capital less the accounting value of own shares held by Munich Reinsurance Company at the balance sheet date. Acquisition costs exceeding the accounting value are deducted from retained earnings. The capital reserve contains gains from the sale of own shares by Munich Reinsurance Company.
For life insurance companies, health insurance companies and pension funds subject to supervision by the German Federal Financial Supervisory Authority (BaFin), the supervisory rules in accordance with the German Insurance Supervision Act (VAG) and with the respective regulations must be observed.
This item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance). The value of the provision for future policy benefits essentially corresponds to the market value of the relevant investments shown under Assets – C Insurance-related investments – Investments for policyholders under unit-linked life insurance contracts. Besides this, as with the provision for future policy benefits in accordance with FAS 97, they may include additional premium components; see the notes on Equity and liabilities – C Gross technical provisions. Changes in this provision are fully recognised in the technical result. Insofar as these changes derive from unrealised gains and losses from alterations in the market values of the related investments, they are matched by opposite changes of the same amount in the insurance-related investment result. Recognising these provisions at market value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding investments.
Pension obligations are recognised in accordance with IAS 19, using the projected unit credit method and based on actuarial studies. The calculation includes not only the pension entitlements and current pensions known on the balance sheet date but also their expected future development. The assumptions for the future development are determined on the basis of the circumstances in the individual countries.
Revaluations of pension obligations can result from changes in demographic or financial assumptions or from the change in the effect of the asset ceiling. They are recognised in equity, without impact on profit or loss.
The other provisions included in this item are established in the amount of the probable requirement. Such amounts are not discounted if the interest-rate effect is insignificant.
Deferred tax liabilities are shown under Equity and liabilities – G.
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 (reserve for currency translation adjustments).
Certain primary insurers whose business requires special solution-finding competence are coupled to reinsurance as the risk carrier. We therefore transact their business from within reinsurance and consequently allocate them to the reinsurance segment.
The segments reported under IFRS 8 are shown after elimination of all intra-Group transactions (mainly dividend payments, sales, reinsurance transactions, receivables and corresponding interest income). Our segment reporting has no consolidation column. In the case of intra-Group sales of assets where a provision for premium refunds has to be posted, the latter always has to be shown by the selling segment. Intra-Group loans are completely eliminated in the balance sheet through consolid- ation. By contrast, the expenditure for the borrowers and income for the lenders is shown unconsolidated under “Other non-operating result, impairment losses of goodwill and net finance costs” for the segments concerned. All intra-Group share- holdings are consolidated, and all earnings and expenditure of the subsidiaries are shown in their segments.
Thereof: Associates and joint ventures accounted for using the equity method 0 6 635 774 226 272 22 35 137 105 105 88 1,125 1,280
IV. Other securities 2. At fair value through profit or loss 59 77 340 481 1,519 1,159 63 32 531 416 39 4 2,551 2,169
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. €m 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year
B. Investments I. Land and buildings, including buildings on third-party land 281 252 1,699 1,204 2,081 2,016 155 140 93 110 9 10 4,317 3,732 II. Investments in affiliated companies, associates and joint ventures 7 30 667 892 261 335 54 70 173 143 116 89 1,278 1,559 Thereof: Associates and joint ventures accounted for using the equity method 0 6 635 774 226 272 22 35 137 105 105 88 1,125 1,280
Life Property-casualty Germany Germany national €m 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 3. Net expenses for claims and benefits –8,025 –7,896 –9,631 –9,728 –11,654 –12,923 –2,009 –1,971 –2,811 –2,816 –4,601 –4,360 –38,731 –39,694 4. Net operating expenses –2,367 –2,135 –5,510 –5,239 –1,449 –1,517 –1,015 –994 –1,189 –1,179 –838 –887 –12,367 –11,951 8. Other operating result 59 53 –73 –67 –11 –50 –3 –15 –15 –40 –24 –9 –68 –128 9. Deduction of income from technical interest –749 –683 –1,373 –1,209 –4,103 –4,823 –87 –99 –452 –652 –39 –37 –6,803 –7,503 12. Other non-operating result, net finance costs and impairment losses of goodwill –98 –95 –299 –235 –631 –188 –64 –94 –129 –553 –1 –4 –1,222 –1,169 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national €m 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year 3. Net expenses for claims and benefits –8,025 –7,896 –9,631 –9,728 –11,654 –12,923 –2,009 –1,971 –2,811 –2,816 –4,601 –4,360 –38,731 –39,694 4. Net operating expenses –2,367 –2,135 –5,510 –5,239 –1,449 –1,517 –1,015 –994 –1,189 –1,179 –838 –887 –12,367 –11,951 8. Other operating result 59 53 –73 –67 –11 –50 –3 –15 –15 –40 –24 –9 –68 –128 9. Deduction of income from technical interest –749 –683 –1,373 –1,209 –4,103 –4,823 –87 –99 –452 –652 –39 –37 –6,803 –7,503 12. Other non-operating result, net finance costs and impairment losses of goodwill –98 –95 –299 –235 –631 –188 –64 –94 –129 –553 –1 –4 –1,222 –1,169
Reinsurance ERGO Munich Health Total €m 2015 Prev. year 2015 Prev. year 2015 Prev. year 2015 Prev. year Europe
Africa, Middle East 1 The premiums are generally allocated according to the location of the risks insured.
Allocation of goodwill to cash-generating units For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units that derive benefit from the synergies of the business combination. At the same time, the unit or group of units to which the goodwill is allocated represents the lowest level at which goodwill is monitored for internal management purposes. After recognising the “Amount of impairment losses
Reinsurance Goodwill from the acquisition of Munich Re America Other €m 2015 Prev. year 2015 Prev. year Gross carrying amount at 31 Dec. previous year 1,140 1,001 493 440 Accumulated impairment losses at 31 Dec. previous year 0 0 –51 –51 Carrying amount at 31 Dec. previous year 1,140 1,001 442 389
ERGO Goodwill from the acquisition of ERGO Insurance Group Other €m 2015 Prev. year 2015 Prev. year Gross carrying amount at 31 Dec. previous year 1,754 1,754 581 557 Accumulated impairment losses at 31 Dec. previous year –440 0 –414 –409 Carrying amount at 31 Dec. previous year 1,314 1,754 167 148 Currency translation differences 0 0 1 –2
Munich Health Total Goodwill from the acquisition of Other €m 2015 Prev. year 2015 Prev. year Gross carrying amount at 31 Dec. previous year 156 156 4,124 3,908 Accumulated impairment losses at 31 Dec. previous year –156 –156 –1,061 –616 Carrying amount at 31 Dec. previous year 0 0 3,063 3,292
Impairment losses 0 0 –452 –445 Carrying amount at 31 Dec. financial year 0 0 2,790 3,063 Accumulated impairment losses at 31 Dec. financial year –156 –156 –1,513 –1,061 Gross carrying amount at 31 Dec. financial year 156 156 4,303 4,124
Goodwill allocated across other multiple cash-generating units or groups of cash- generating units is not significant in comparison with the total goodwill, either individually or in total. We regard amounts of 10% or more of total Group goodwill as “significant” within the meaning of IAS 36.134 and IAS 36.135.
Significant assumptions for determining the recoverable amount in impairment testing Impairment tests for cash-generating units to which a significant portion of the goodwill is allocated are based on the following assumptions: Allocation of goodwill to cash-generating units
Our general assumption was that there will Our general assumption was that there will be moderate upward movement on the equity be moderate upward movement on the equity markets and a stable interest-rate level. markets and a stable interest-rate level. Growth rates after the detailed 1.5% 1.5% planning phase Discount rates 8.4% 9.6%
The goodwill from the acquisition of ERGO Insurance Pte. Ltd., Singapore was written down by €23m in the fourth quarter of 2015. This is largely due to the lower-thanexpected growth rate and diminished profitability as a consequence of increased competitive pressure. The impairment in value was recognised in the ERGO International segment.
Carrying amount at 31 Dec. financial year 294 318 62 82 295 279 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year –1,035 –1,002 –326 –285 –811 –770 Gross carrying amount at 31 Dec. financial year 1,329 1,320 388 367 1,106 1,049
Acquired Acquired distribution Acquired licences/ brand names networks/client bases patents €m 2015 Prev. year 2015 Prev. year 2015 Prev. year Gross carrying amount at 31 Dec. previous year 232 223 680 613 300 289 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year –196 –192 –468 –317 –47 –36 Carrying amount at 31 Dec. previous year 36 31 212 296 253 253
Carrying amount at 31 Dec. financial year 38 36 192 212 258 253 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year –196 –196 –534 –468 –60 –47 Gross carrying amount at 31 Dec. financial year 234 232 726 680 318 300 8006 C
Carrying amount at 31 Dec. financial year 0 0 33 40 1,171 1,220 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 0 0 –55 –47 –3,018 –2,815 Gross carrying amount at 31 Dec. financial year 0 0 88 87 4,189 4,035
Intangible assets from the purchase of distribution networks/client bases were written down by €12m, mainly owing to reduced business prospects. The impairment losses are recognised in the ERGO International segment.
Assets pledged as security and other restrictions on title amount to €156m (159m). Commitments to acquire other intangible assets total €8m (8m). Costs of €4m (4m) for research and development incurred in connection with software projects were not capitalised, but recognised as expenses.
Reversed impairment losses are distributed between the following: In reinsurance, €5m (2m) is apportionable to life and €21m (8m) to property-casualty; in the ERGO field of business, €22m (22m) is apportionable to Life and Health Germany and €1m (1m) to Property-casualty Germany.
The fair value of investment property at the balance sheet date amounted to €6,590m (5,738m). Valuations for the directly held portfolio are performed by valuers within the Group, and those for the indirectly held portfolio by external valuers. Property is allocated to Level 3 of the fair value hierarchy; see Assets – B Investments – Determining fair values. Determining the sustainability of cash inflows and outflows, taking into account the market conditions at the property location, is material for the valuation. The fair
Development of investments in land and buildings, including buildings on third-party land €m 2015 Prev. year Gross carrying amount at 31 Dec. previous year 4,929 4,892 Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year –1,197 –1,130 Carrying amount at 31 Dec. previous year 3,732 3,762 Currency translation differences 11 –13 Additions
All investments recognised at fair value are allocated to one of the fair value hierarchy levels of IFRS 13, as are those investments which are not recognised at fair value in the balance sheet but for which a fair value has to be disclosed in the notes. Information on the criteria for allocation to the individual levels of the fair value hierarchy can be found under Assets – B Investments, Determining fair values. Regularly, at each reporting date, we assess whether the allocation of our investments to the levels of the fair value hierarchy is still appropriate. If changes in the basis of valuation have occurred – for instance, if a market is no longer active or the valuation was performed using inputs requiring another allocation – we make the necessary adjustments.
Bonds with embedded Pricing method Parameters Pricing model derivatives Callable bonds Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix CMS floaters Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix Zero-to-coupon switchable bonds Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix Zero-to-CMS switchable bonds Theoretical price Money-market/swap interest-rate curve LIBOR market model Issuer-specific spreads Volatility matrix Volatility bonds Theoretical price Money-market/swap interest-rate curve LIBOR market model Issuer-specific spreads Volatility matrix CMS floaters with variable cap Theoretical price Money-market/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility matrix Inverse CMS floaters Theoretical price Money-market/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility matrix CMS steepeners Theoretical price Money-market/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility matrix Correlation matrix Dax-Cliquet Theoretical price Listing of underlying shares Black-Scholes (European) Volatilities Present value method Issuer-specific spreads Money-market/swap interest-rate curve Convergence bonds Theoretical price Money-market/swap interest-rate curves LIBOR market model Issuer-specific spreads Volatility matrix Correlation matrix Multi-tranches Theoretical price At-the-money volatility index and Bachelier/ skew swap curve Normal Black, Money-market interest-rate curve Present value method Sector-, rating- or issuer-specific yield curve FIS loans against borrower’s note Theoretical price At-the-money volatility index and Bachelier/ skew swap curve Normal Black, Money-market interest-rate curve Present value method Sector-, rating- or issuer-specific yield curve Swaption notes Theoretical price At-the-money volatility index and Bachelier/ skew swap curve Normal Black, Money-market interest-rate curve Present value method Sector-, rating- or issuer-specific yield rate curve
The other investments allocated to Level 3 are mainly external fund units (in particular, private equity and real estate) and funds that invest in a variety of assets that are subject to theoretical valuation), as well as relatively illiquid credit structures (especially collateralised mortgage-backed securities and credit-linked obligations). In the case of external fund units, market data are not available on a regular basis; rather, net asset values (NAVs) are provided by the asset managers. With regard to relatively illiquid credit structures, the quality of the market quotes available from market data providers is insufficient, so we resort to broker valuations. With these investments, we thus do not perform our own valuations using inputs not based on observable market data, but rely on what is supplied by the brokers. We regularly subject the valuations supplied to plausibility tests on the basis of comparable investments.
At 31 December 2015, around 10% (11%) of the investments measured at fair value were allocated to Level 1 of the fair value hierarchy, 85% (86%) to Level 2 and 4% (3%) to Level 3.
In the financial year, we reallocated portions of the investment funds that invest in a variety of assets from Level 1 to Level 3. This particularly concerned fund units held in connection with unit-linked life insurance and, to a lesser extent, also private equity funds which were reassessed as a result of the change in liquidity and new findings with regard to the composition of the funds. The transfers out of Level 3 in the case of investments in affiliated companies, recognised at fair value, derive mainly from the first-time consolidation of companies, which are consequently no longer shown in the reconciliation. Apart from this, we made no changes to the allocation to the individual levels of the fair value hierarchy.
Other securities at fair value through profit or loss Held for trading, and hedging derivatives1 252 1,916 0 2,168 Designated as at fair value through profit or loss 0 205 0 205
Allocation of investments (including insurance-related investments) to levels of the fair value hierarchy €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 145 145 Investments in associates and joint ventures measured at fair value 0 0 8 8 Other securities available for sale
Investments not measured at fair value Loans 0 65,335 781 66,116
Investments in affiliated Investments in associates companies measured at and joint ventures fair value measured at fair value €m 2015 Prev. year 2015 Prev. year Carrying amount at 31 Dec. previous year 274 176 5 9 Gains and losses 3 14 2 –1
Gains (losses) recognised in the income statement 1 –4 0 0 Gains (losses) recognised in equity 3 18 2 –1
Transfer out of Level 3 –107 0 0 –2 Changes in the market value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 145 274 8 5 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year –1 –6 0 0
Insurance-related investments Total €m 2015 Prev. year 2015 Prev. year Carrying amount at 31 Dec. previous year 109 77 5,330 5,146
Breakdown of investments in affiliated companies, associates and joint ventures €m 31.12.2015 Prev. year Investments in affiliated companies
Accounted for using the equity method 1,125 1,280 Accounted for at fair value 8 5
Gains (losses) recognised in the income statement 0 0 0 0 Gains (losses) recognised in equity 0 0 0 0
Reversed impairment losses with respect to associates and joint ventures amounted to €7m (22m). They are distributed between the following different Group segments: in reinsurance, €6m (16m) is apportionable to property-casualty; in the ERGO field of business, €1m (5m) is apportionable to Life and Health Germany and €0m (1m) to Property-casualty Germany.
Write-downs with respect to these companies amounted to €22m (34m). They are distributed between the following different Group segments: in reinsurance, €11m (16m) is apportionable to property-casualty; in the ERGO field of business, €1m (1m) is apportionable to Life and Health Germany, €0m (2m) to Property-casualty Germany and €10m (0m) to ERGO International. For Munich Health, the apportionable amount is €0m (15m).
Rating of “other loans” according to carrying amounts €m 31.12.2015 Prev. year
Munich Re Group Annual Report 2015 7 Other securities available for sale
Carrying amounts Unrealised gains/losses Amortised cost €m 31.12.2015 Prev. year 31.12.2015 Prev. year 31.12.2015 Prev. year Fixed-interest securities Government bonds
The securities held for trading are made up of fixed-interest securities totalling €30m (45m), non-fixed-interest securities totalling €56m (45m) and derivatives held for trading amounting to €2,107m (1,874m). The securities designated as at fair value through profit or loss comprise €165m (204m) assignable to fixed-interest securities and €193m (1m) to non-fixed interest securities. Some €12m of the securities at fair value through profit or loss is due within one year.
Carrying amounts Amortised cost €m 31.12.2015 Prev. year 31.12.2015 Prev. year Up to one year 11,374 8,634 11,323 8,570 Over one year and up to two years 9,728 10,384 9,587 10,146 Over two years and up to three years 10,854 11,449 10,590 11,034 Over three years and up to four years 9,776 9,884 9,385 9,381 Over four years and up to five years 11,407 11,571 10,871 10,825 Over five years and up to ten years 35,094 38,566 33,294 35,323
Rating of fixed-interest securities according to fair values €m 31.12.2015 Prev. year
The insurance-related investments include investments for unit-linked life insurance contracts of €8,229m (7,592m) and other insurance-related investments of €934m (869m).
8048Rating of fixed-interest securities according to fair values €m 31.12.2015 Prev. year
Disclosure of derivatives by balance sheet item €m 31.12.2015 Prev. year Qualifying for Fair value hedge accounting Balance sheet item No Investments, other securities, designated as at fair value through profit or loss 2,107 1,874 Positive
Total interest-rate risks Fair values 54 146 17 –18 87 603 888 693
Although the derivatives used by Munich Re essentially serve to manage and hedge against risks, only an amount of €130m (190m) meets the requirements of IAS 39 for hedge accounting.
Only when the actual cash inflow or outflow takes place, as a result of the hedged circumstance, is the relevant equity item reversed with recognition in profit or loss.
At the balance sheet date, there is an equity item of –€1m (–2m) from cash flow hedges. The net fair value of the derivatives falling into this category amounted to €36m (37m) at the balance sheet date.
Deposits retained on assumed reinsurance serve directly as collateral for technical provisions covering business assumed and may not be used by cedants independently. The credit risk is therefore limited. The amount of (and changes in) deposits retained on assumed reinsurance in the financial year generally derive from the values for the changes in the related technical provisions for the reinsured business. Deposits retained on assumed reinsurance business thus do not have a fixed maturity date, and their release is generally dependent on the run-off of the corresponding provisions.
The impairment losses reversed are distributed between the following different Group segments: in reinsurance, €1m (1m) is apportionable to life and €5m (4m) to propertycasualty.
The impairment losses are distributed between the following different Group segments: in reinsurance, €0m (1m) is apportionable to life and €0m (6m) to property-casualty.
Carrying amount at 31 Dec. financial year 496 470 Accumulated depreciation and accumulated impairment losses at 31 Dec. financial year –148 –119 Gross carrying amount at 31 Dec. financial year 645 589
Of the amounts receivable on primary insurance business, €477m (549m) is apportionable to receivables from insurance agents. The miscellaneous receivables include receivables of €587m (1,079m) resulting from contracts without significant risk transfer, which do not fall within the scope of IFRS 4.
Provision for future policy benefits 1,028 775 0 0 Provision for outstanding claims 454 351 1,827 1,802
Provision for future policy benefits 13 7 1,176 2,355 Provision for outstanding claims 114 131 2,807 2,636
Provision for future policy benefits 3 3 0 0 132 1,570
Carrying amounts €m 31.12.2015 Prev. year Up to one year 10,677 10,246 Over one year and up to two years 52 128 Over two years and up to three years 58 74 Over three years and up to four years 23 269 Over four years and up to five years 107 31 Over five years and up to ten years 349 539 Over ten years 556 182