Reinsurance 2020 2019 2018 2017 2016 Gross premiums written €m 37,321 33,807 31,286 31,569 31,463 Investments (incl. insurance-related investments) €m 94,631 92,429 85,605 85,804 91,928 Net technical provisions €m 78,190 77,166 72,407 68,109 67,067 Major losses (net) €m –4,689 –3,124 –2,152 –4,314 –1,542
Thereof: Life and Health Germany €m 130 187 264 175 114 Thereof: Property-casualty Germany €m 157 148 45 57 –72 Thereof: International €m 230 105 103 40 –1
Munich Re at a glance Key figures (IFRS) Inside front cover Quarterly figures Inside back cover Important dates Back cover
Corporate governance 7 Report of the Supervisory Board 9 Statement on Corporate Governance 16
Combined management report 31 Group 34 Macroeconomic and industry environment 56 Combined non-financial statement 57 Tools of corporate management and strategic financial objectives 68 Business performance 71 Financial position 84 Risk report 88 Opportunities report 99 Prospects 101 Munich Reinsurance Company (information reported on the basis of German accountancy rules) 105
As Munich Re shareholders, you have been able to count on our robust financial substance and a high dividend, even in turbulent times. COVID-19 has not changed that. Between 2018 and 2020, our total shareholder return advanced to number one among the eight leading reinsurers worldwide and primary insurers in Europe. We want you, our shareholders, to benefit once again from our ongoing success through a stable dividend – and so we are proposing that the Annual General Meeting approve a dividend of €9.80 per share, the same as last year.
We neither applied for government aid nor used the instrument of reduced working hours. And we will not reduce our dividend. Munich Re continued doing business despite the pandemic; our operations were in no way limited. We managed to transition very quickly to working almost exclusively from home, without hampering our productivity. Our staff were able to count on
Munich Re Group Annual Report 2020 their employer. Against the backdrop of the coronavirus pandemic, we made our rules on working hours as flexible as we could, in turn enabling our staff to better balance family and work responsibilities.
The time to act is now. Experts in politics, business and science – as well as society as a whole – must become more determined and assertive in combating climate change. In this context, market leaders and players that influence public opinion need to lead the way by setting good examples. To this end, Munich Re launched very ambitious and specific climate protection targets at the end of last year for its investments, its insurance business and its own operations for the period between 2021 and 2050.
This also means that we will withdraw from insurance business and insurance income associated with fossil fuels. Conversely, we anticipate new business from covering risks in the renewable energy sector. Our innovative insurance solutions facilitate the market entry and affordability of key new technologies. In recent years, we have become a market leader in performance-guarantee insurance for wind turbines, photovoltaic facilities and energy storage systems.
Especially in (re)insurance business, which is characterised by long time horizons, yesterday’s strategic decisions blaze trails to tomorrow’s success. As 2020 ended, we simultaneously concluded three projects: the three-year
Munich Re Group Ambition, the three-year reinsurance strategy and the five-year ERGO Strategy Programme. The overarching objective of our strategic orientation was to make Munich Re more profitable, more digital and leaner. We have succeeded. When adjusted for special effects and major losses, our operating earnings have risen considerably over the past three years. The intelligent use of data and technology has accelerated the automation, advancement and disruption of products and services throughout the Group. In addition, our strict focus on markets and clients has appreciably improved our organisation’s efficiency and propelled our business forward.
To help make that happen, we will reinforce the growth factors of our proven strategies in reinsurance and at ERGO, while also boosting the earnings power of our investments. ERGO will further increase profitability in Germany and in its international business by focusing on the expansion of cutting-edge IT architecture for sales; accelerating international growth, particularly in India and China; and systematically catering to the hybrid customer. In property-casualty reinsurance, the current market hardening points to rising prices in the years to come, in turn creating favourable conditions for organic growth. We want to profit here by purposefully leveraging our underwriting excellence. We perceive sustained opportunities for good growth in life and health reinsurance – especially in North America and Asia, and particularly as regards digital services and transactions that provide financing or capital relief for our clients’ lines of business. Following significant recent investments designed to transform Risk Solutions, we expect disproportionately high growth in this operating field. As for investments, we are seeking to improve our return on investment in the long term by specialising – without increasing our appetite for market risk.
This will make investing in our Group even more appealing for you, our shareholders, in coming years. As part of our Ambition 2025, we have defined an industry-leading target return of 12–14% on invested capital in 2025. Continued earnings growth will translate into higher earnings per share, which are set to increase annually by at least 5% on average by 2025. Similarly to the increase in earnings per share, the dividend per share is to likewise rise by at least 5% on average – at a somewhat higher rate than in recent years. As in the past, it is expected that the dividend per share will at least remain the same following years with unusually high claims burden.
Success in business is of paramount importance for Munich Re; it lays the foundation for our role in helping society. But, as a conscientious business, we can never allow ourselves to measure success only in terms of economic indicators. That is why a certain pillar of our Ambition 2025 is especially important to me: our belief in and our commitment to diversity and inclusion.
In the 2020 financial year, the Supervisory Board fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association and the rules of procedure. The overall attendance of members at meetings of the Supervisory Board and its committees was 99.2% (an overview of attendance can be found at the end of the Report of the Supervisory Board and at www.munichre.com/supervisory-board). In light of the coronavirus pandemic, increased use was made of the option to take part in meetings electronically from March 2020 onwards.
Munich Re Group Annual Report 2020 and sustainability strategies. Besides the above-mentioned issues, we dealt with the following topics at the individual meetings in 2020: The meeting on 26 February, which took the form of a telephone conference, focused on the preliminary figures for the 2019 Company and Group financial statements and the Board of Management’s dividend proposal.
The meeting on 17 March focused among other things on the Company and Group financial statements for 2019, the combined management report, the separate non-financial (Group) statement for 2019 and the Supervisory Board’s motions for resolution by the 2020 Annual General Meeting. Furthermore, we conferred and took decisions regarding the evaluation of the 2019 annual bonuses and the consequent bonus payments to the individual members of the Board of Management. We also adopted an update to the list of business transactions requiring approval of the Supervisory Board found in the rules of procedure of the Board of Management. In addition, we received information about the impact of the coronavirus pandemic on Munich Re and the measures taken around the world to protect staff and maintain business operations.
The meeting on 28 April dealt with matters involving the Board of Management, specifically the evaluation of the bonus payments to the individual members of the Board of Management and their multi-year performance for 2017–2019. We also undertook a self-assessment of the members of the Supervisory Board concerning their knowledge of specific fields that are important for providing advice and supervision to the Munich Re Board of Management. The good level of collective expertise on the Supervisory Board was maintained. The Supervisory Board thus possesses the appropriate diversity of qualifications, knowledge and experience to provide advice and supervision to proficiently monitor and accompany the business performance of Munich Re, taking account of the characteristics specific to the Company and the Group. We also received the Board of Management’s report on the status of business performance in 2020. We used the meeting to make last-minute preparations for the Annual General Meeting, which took place the next day and – as a result of the coronavirus pandemic – took the form of an online event for the first time.
On 15 October we approved the appointment of Stefan Golling to the Board of Management. We also adapted the rules on fringe benefits, remuneration in kind and other regulations concerning members of the Board of Management and discussed proposals to modify the remuneration system for the members of the Board of Management as of 1 January 2021, taking into account ARUG II, the German Corporate Governance Code and the requirements of our investors and other stakeholders. Topics related to corporate governance were regularly on the agenda: the resolution regarding the Declaration of Conformity with the German Corporate Governance Code and the discussion of the self-assessment findings of the Supervisory Board and its committees in 2020. In addition, we adopted resolutions concerning changes to the allocation of responsibilities within the Supervisory Board. In light of the integration of the non-financial statement into the combined management report, for example, the responsibility for preparing the audit of the combined nonfinancial statement was reallocated from the Standing Committee to the Audit Committee. Furthermore, the objectives concerning the composition of the Supervisory Board and the competence profile for the Supervisory Board as a whole were updated. The set of criteria for the selection of shareholder representatives was updated. Further topics included the implementation of the Munich Re investment strategy, and the setting of a target in accordance with which 25% of
By way of a resolution adopted by written consent, we approved the proposals of the Board of Management regarding the online execution of the 2020 Annual General Meeting in April.
Also by way of a resolution adopted by written consent, at the beginning of May we elected Maximilian Zimmerer to succeed Kurt Wilhelm Bock on the Nomination Committee, the Standing Committee and the Conference Committee.
Details of the tasks of the committees and their composition are included in the Statement on Corporate Governance and on our website at www.munichre.com/supervisory-board.
The Personnel Committee held six meetings in the reporting period. The Committee essentially prepared the resolutions on matters involving the Board of Management already mentioned in the report on the work of the full Supervisory Board, unless these fell under the remit of the Remuneration Committee. One focus of the Personnel Committee’s work was the assessment of the fitness and propriety of new members of the Board of Management. In addition, the Personnel Committee approved the assumption of mandates on supervisory, advisory and similar boards by members of the Board of Management. Taking into account diversity aspects, it also dealt with the Group-wide succession planning – in particular as regards Board members.
At its six meetings, the Standing Committee dealt with the preparation of the respective Supervisory Board meetings and, in particular, with topics of corporate governance. It prepared the assessment of the effectiveness of the Supervisory Board as a whole and its individual committees on the basis of a comprehensive self-assessment form. Furthermore, it approved
Munich Re Group Annual Report 2020 proposals by the Board of Management concerning the share buy-back programme and the procedure regarding answering questions at the virtual Annual General Meeting. In deliberations spanning a number of meetings, the Standing Committee also discussed the internal procedure set up to assess whether related-party transactions are entered into in the ordinary course of business and concluded on normal market terms. The Chairman of the Board of Management gave the Standing Committee regular updates on the shareholder structure.
The Audit Committee also held six meetings in the reporting period. All of these meetings were attended by the external auditors. In its meetings in February and March 2020, the Audit Committee discussed the Munich Reinsurance Company and Group financial statements, the combined management report, the auditor’s reports and the Board of Management’s proposal for the appropriation of the net retained profits for the 2019 financial year. The Committee also discussed in detail the quarterly statements for Q1 and Q3 2020 and, together with the auditors, examined in detail the 2020 Half-Year Financial Report. The Committee heard regular reports on the key Solvency II figures and discussed the quarterly reporting to the supervisory authority in these meetings. Another key task of the Committee consisted in monitoring the Group’s risk situation and risk management on an ongoing basis, and discussing its risk strategy: the Group Chief Risk Officer provided detailed verbal input at several meetings of the Committee in addition to the quarterly written reports submitted. In one meeting, the Head of the Actuarial Function gave a report on significant developments at Munich Re. The internal control system and compliance topics were discussed regularly. The Group Chief Auditor informed the members of the Committee in full about the outcome of the audits for 2019 and the audit planning for 2020. The Committee received updates on the current status of individual compliance issues and the progress of audits. Without the Board of Management being present, the members of the Committee took the opportunity to confer amongst themselves or with the Group Chief Auditor, the Group Chief Compliance Officer, the Group Chief Risk Officer and the external auditors on a regular basis. In addition, the Audit Committee and the external auditors exchanged views on selected topics on an ad-hoc basis between meetings. Furthermore, the Audit Committee closely reviewed and monitored the auditor’s independence. It regularly called for reports on the auditor’s additional activities beyond the auditing of the annual financial statements and on the utilisation of the statutory limit for awarding such contracts. The auditors presented the Audit Committee with explanations of the key audit matters for the 2020 financial year. The quality of the audit was regularly assessed by the Audit Committee. The Audit Committee also prepared a report for the full Supervisory Board on the appointment of the external auditors for the 2020 financial year, determined the main points of the audits, and set the auditor’s fees. Following a resolution by the full Supervisory Board, the Chair of the Audit Committee commissioned Ernst & Young GmbH Wirtschaftsprüfungsgesellschaft (EY), Munich, with the audit for the 2020 financial year, and also commissioned the auditor’s review of the 2020 Half-Year Financial Report.
The Nomination Committee held two meetings in the reporting period. It discussed the mediumterm succession planning of the Supervisory Board and deliberated on suitable candidates for nomination to the Supervisory Board. When making proposals for nomination, the Committee took into account the objectives approved by the Supervisory Board regarding its composition, the competence profile for the Supervisory Board as a whole, and the set of criteria for the selection of shareholder representatives.
There was again no need to convene the Conference Committee in the 2020 financial year.
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 Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG) in November 2020. Since issuing its last Declaration of Conformity in November 2019, Munich Re has complied with all of the recommendations of the German Corporate Governance Code as amended on 7 February 2017 (published on 24 April 2017). Munich Re also fulfils all the recommendations of the German Corporate Governance Code of 16 December 2019 (published on 20 March 2020) and will continue to do so in future. In accordance with their own assessment, all ten shareholder representatives may be considered independent within the meaning of the German Corporate Governance Code.
Board member Peter Röder retired on 31 December 2020. Stefan Golling was appointed his successor with effect from 1 January 2021. In addition to the Global Clients and North America division, he is also responsible for the US subsidiaries HSB and AMIG, and the Lloyd’s and Bermuda markets.
Changes on the Supervisory Board Kurt Wilhelm Bock resigned from the Supervisory Board with effect from the end of the 2020 Annual General Meeting. On 29 April 2020, the Annual General Meeting elected Carsten Spohr for the remainder of Kurt Wilhelm Bock’s term of office.
Further general information on corporate governance can be found in the Statement of Corporate Governance.
On the basis of this comprehensive examination, the Supervisory Board raised no objections concerning the outcome of the external audit. It approved the Company and Group financial statements on 16 March 2021. The financial statements were thus adopted. Having carefully weighed all relevant aspects, the Supervisory Board followed the proposal of the Board of Management for appropriation of the net retained profits.
Declaration of Conformity by the Board of Management and Supervisory Board of Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG)
Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München fulfils all the recommendations of the German Corporate Governance Code of 16 December 2019 (published on 20 March 2020) and will continue to do so in future.
Since issuing its last Declaration of Conformity in November 2019, Münchener Rückversicherungs-Gesellschaft Aktien- gesellschaft in München has complied with all of the recommendations of the German Corporate Governance Code as amended on 7 February 2017 (published on 24 April 2017).
In 2020, the Board of Management of Munich Reinsurance Company comprised nine members, including one woman.
Group Strategy and M&A Group Communications Group Audit Economics, Sustainability & Public Affairs3 Group Human Resources Group Executive Affairs Group Compliance and Legal
Dr. Torsten Jeworrek ERGO Digital Ventures AG2 – Reinsurance Development Internet of Things Corporate Underwriting Claims Accounting, Controlling and Central Reserving for Reinsurance Information Technology
Hermann Pohlchristoph (until 30 April 2020) – – Asia Pacific and Africa Central Procurement Services
1 As at 31 December 2020. 2 Mandate within the Munich Re Group. 3 Including responsibility for environmental, social and governance (ESG) issues.
Munich Re has a Group-wide system for reporting contraventions of laws and regulations, and for monitoring enquiries and changes with regard to legal and regulatory requirements. The system allows for ongoing documentation and rapid reporting up to the Board of Management.
Group Committee The Group Committee (GC) is the central management committee of the Group. It decides in particular on fundamental issues concerning the strategic and financial management of the Group for all fields of business, and on the principles of general business policy and organisation within the Group. The Committee also makes decisions on all matters of fundamental importance relating to the divisions headed by its voting members. In addition, it serves as an executive committee with responsibility for important ongoing issues, in particular the approval of significant individual transactions.
Board Committee IT Investments Dr. Torsten Jeworrek (Chair) Dr. Thomas Blunck Dr. Achim Kassow (from 1.5.2020) Hermann Pohlchristoph (until 30.4.2020) Chief Financial Officer for the reinsurance field of business2 1 As at 31 December 2020. 2 No voting rights.
Member of the Supervisory Board Seats held on statutory supervisory boards Membership of comparable bodies of German and foreign business enterprises
Clement B. Booth Euroassekuranz Versicherungs- Howden Group Holdings Limited, Member of the Board of Directors of Howden Group Holdings Limited, United Kingdom Member since 27 April 2016 makler AG (Chair)6 United Kingdom
Dr. Benita Ferrero-Waldner – Santander Consumer Finance S.A., Spain Member of the Board of Directors of Santander Consumer Finance S.A., Spain Member since 12 February 2010
Gerd Häusler Auto1 Group SE4 – Member of the Supervisory Board of Auto1 Group SE, Munich Member since 30 April 2014
Eva-Maria Haiduk2 – – Employee of ITERGO Informationstechnologie GmbH Member since 30 April 2019
Stefan Kaindl2 – – Head of Department at Munich Reinsurance Company Member since 30 April 2019
Manfred Rassy2 – – Exempted member of the Staff Council of Munich Reinsurance Company Member since 30 April 2019
Gabriele Sinz-Toporzysek2 – – Employee of ERGO Beratung und Vertrieb AG Member since 30 April 2014
Karl-Heinz Streibich Software AG (Chair)4 – Co-President of acatech – German Academy of Science and Engineering Member since 30 April 2019
The Supervisory Board advises the Board of Management and monitors the management of the Company, but it is not authorised to take management action in place of the Board of Management. In accordance with a special rule applicable to (re)insurance companies, the Supervisory Board in particular also appoints the external auditor for the Company and Group financial statements and for the Half-Year Financial Report.
The Supervisory Board has its own rules of procedure, which specify responsibilities, work processes and further modalities for the adoption of resolutions. The Audit Committee also has its own rules of procedure, which have been adopted by the full Supervisory Board.
The Supervisory Board is quorate if all its members have been invited to the meeting or called upon to vote, and if fifteen members – or ten members including the Chairman – participate in the vote. Alternatively, it is quorate if fifteen members participate in the vote. Supervisory Board resolutions are adopted by a majority of votes cast, unless the law or the Articles of Association require otherwise. In the event of a Supervisory Board vote being tied, should a second vote on the same motion also result in a tie, the Chairman of the Supervisory Board has a casting vote. The Chairman is authorised to make declarations for the Supervisory Board based on resolutions.
The Supervisory Board has set up six committees from among its members – the Standing Committee, the Personnel Committee, the Remuneration Committee, the Audit Committee, the Nomination Committee and the Conference Committee.
The committees adopt decisions by the majority of votes cast. With the exception of the Conference Committee, the chair of the committee has a casting vote in case of a tie. The full Supervisory Board is regularly informed about the work of the committees by their respective chairs.
Personnel Committee Dr. Nikolaus von Bomhard (Chair) Stephan Eberl Renata Jungo Brüngger
Remuneration Committee Prof. Dr. Dr. Dr. h.c. Ann-Kristin Achleitner (Chair) Stephan Eberl Renata Jungo Brüngger
Audit Committee Dr. Maximilian Zimmerer (Chair) Prof. Dr. Dr. Dr. h.c. Ann-Kristin Achleitner Dr. Nikolaus von Bomhard Stefan Kaindl Ulrich Plottke
Further details of the work of the Supervisory Board committees can be found in the report of the Supervisory Board and at www.munichre.com/supervisory-board.
Meeting, the Declaration of Conformity with the German Corporate Governance Code pursuant to Section 161 of the Stock Corporation Act (AktG), and the Statement on Corporate Governance for the Supervisory Board. Moreover, the Standing Committee prepares the annual selfassessment of the effectiveness of the Supervisory Board as a whole and its individual committees with regard to the performance of their duties. Further details about the selfassessment in the past financial year are provided in the Self-assessment section and in the Report of the Supervisory Board.
Audit Committee The Audit Committee prepares Supervisory Board resolutions on the adoption of the Company’s annual financial statements and approval of the Group financial statements. It discusses the Half-Year Financial Report and the material information underlying the quarterly reports, and receives the audit reports, other reports and statements by the external auditor. The Audit Committee also discusses the essential components of the Solvency II reporting with the Board of Management.
We report annually on the implementation of these principles in our Communication on Progress for the UN Global Compact.
Principles for Responsible Investment In 2006, we became the first German company to sign the Principles for Responsible Investment (PRI). We implement the principles for sustainable investment through our asset manager MEAG, for example, and we report annually on adherence to these principles.
Principles for Sustainable Insurance The Principles for Sustainable Insurance (PSI) – which Munich Re played an active role in formulating and which we signed in 2012 as one of the first signatories – serve as a guide for anchoring environmental, social and governance (ESG) aspects along the value chain in our core business.
As part of implementing the Act on Equal Participation of Men and Women in Private-Sector and Public-Sector Management Positions (FüPoG), the Supervisory Board and Board of Management of Munich Reinsurance Company set the following targets and deadlines to achieve these targets: As at 1 January 2016, the Supervisory Board set a target quota to be achieved by 31 December 2020 that at least 20% of the members of the Board of Management should be women. As at the deadline of 31 December 2020, the percentage of women on the Board of Management was 11.1%, thus falling short of the target quota.
Munich Re Group Annual Report 2020 level. For these purposes, only staff members with disciplinary responsibility are categorised as managers.
On 31 December 2020, 55% of seats on the Supervisory Board of Munich Reinsurance Company were occupied by men and 45% by women, of which four women were shareholder representatives and five were employee representatives. The minimum requirements are thus met by both sets of representatives on the Supervisory Board.
Diversity concept for the Board of Management When appointing members of the Board of Management, the Supervisory Board is mindful of diversity in terms of professional and educational background, internationality, age, and gender. The aim is to ensure that the Board’s composition is as diverse as possible, complementary, and strong as a whole. Gender diversity is described in the section entitled Equal participation of men and women in management positions.
The internationality of the Board is also taken into account. The global business activities of Munich Re mean that all members of the Board of Management have international management experience.
First-time appointments of members of the Board of Management are as a rule for a period of three years. A reappointment more than one year before the end of the appointment period with simultaneous cancellation of the current appointment will only be made in special circumstances. With the exception of aspects relating to remuneration, which are dealt with by the Remuneration Committee, preparation for the appointment of members of the Board of Management is the responsibility of the Personnel Committee of the Supervisory Board, which provides suggestions for suitable candidates to the full Supervisory Board. The Personnel Committee is guided by the Fit and Proper Policy, the specific requirements of the relevant function, and the above-mentioned diversity considerations. In conjunction with the Board of Management, the Personnel Committee is also responsible for succession planning. Succession planning for the Board of Management is systematic and long-term. Some candidates are drawn from the Group’s top talent pool, called the Group Management Platform. Care is taken to make sure that there is a balanced composition of experience, gender and internationality. The succession plan is continually updated at the annual Group Career Session by the participating heads of the fields of business.
When proposing candidates for election to the Supervisory Board, the Supervisory Board generally only considers nominees aged 70 or under (age limit). The Supervisory Board has deliberately opted for a flexible target age limit, which provides sufficient room for manoeuvre for assessing the circumstances of the individual case. This expands the pool of potential candidates and allows in particular for the re-election of members of the Supervisory Board with many years of experience. Future nominations of candidates for election to the Supervisory Board should also take into account that at the time of election no candidate should already have been on the Supervisory Board for a continuous period of more than ten years. Normally, Supervisory Board members should not serve on the Board for a continuous period of more than twelve years.
– Maximilian Zimmerer – and the members of the Audit Committee – Ann-Kristin Achleitner and Nikolaus von Bomhard – possess recognised expertise in accounting and auditing. In particular Maximilian Zimmerer and AnnKristin Achleitner are also ESG experts. The different CVs and personalities within the Supervisory Board reflect the wide range of duties of the Board and meet the associated requirements.
Most of the members of the Supervisory Board also have international experience. The members of the Supervisory Board come from a number of different countries, and this reflects the Company’s international activities.
The CVs of the members of the Supervisory Board can be found at www.munichre.com/supervisory-board.
Independence The shareholder representatives on the Supervisory Board aim to ensure that, as far as possible, all candidates whom they propose to the Annual General Meeting for election are independent.
In implementing the German Corporate Governance Code, the shareholder representatives have set themselves the objective of having at least eight independent shareholder representatives on the Supervisory Board.
Combined non-financial statement 57 Corporate responsibility strategy and governance 57 Corporate responsibility in insurance and investment 60 Munich Re as a preferred employer and diversity as a strategic success factor 63 Fighting corruption and bribery 65 Data protection 66
Financial position 84 Analysis of our capital structure 84 Technical provisions 84 Restraints on disposal 85 Capital position 85 Information in accordance with Sections 315a(1) and 289a(1) of the German Commercial Code (HGB) and explanatory report of the Board of Management 85 Analysis of the consolidated cash flow statement 87
Risk report 88 Risk governance and risk management system 88 Significant risks 88 Solvency ratio under Solvency II 96 Other risks 96 Summary 98
A core guiding principle for Munich Re is acting in a farsighted and responsible manner in the interests of both the Group and society. We have thus based our Groupwide corporate responsibility strategy on the shared value approach. This means that, in our business operations, we bring together economic and social progress. For a comprehensive perspective on this key concern of Munich Re, visit www.munichre.com/cr-en.
The Asia Pacific and Africa Division conducts propertycasualty reinsurance business with our clients in Africa, Asia, Australia, New Zealand and the Pacific Islands. Branches in Mumbai, Beijing, Seoul, Singapore, Sydney and Tokyo, along with liaison offices in Bangkok and Taipei, allow us to take full advantage of the business opportunities in the rapidly growing Asia-Pacific insurance market. In the African market, we are represented by our subsidiary Munich Reinsurance Company of Africa Ltd., headquartered in Johannesburg. These units and other liaison offices guarantee our competitiveness in these key growth markets.
Operating under the umbrella of ERGO are four separate units: ERGO Deutschland AG, ERGO International AG, ERGO Digital Ventures AG and ERGO Technology & Services Management AG. German business is concentrated in ERGO Deutschland AG. ERGO International AG manages international business. ERGO Digital Ventures AG is responsible for digitalisation, while ERGO Technology & Services Management AG is increasingly managing all of the technology activities.
Munich Re Group Annual Report 2020 with the focus on Europe and Asia. The latest information on ERGO can be found at www.ergo.com.
Remuneration of the members of the Board of Management in 2020
The remuneration system in 2020 met the relevant company and supervisory law requirements, including those of the German Corporate Governance Code.
Remuneration comprises fixed (non-performance- related) and variable (performance-related) components, as well as benefits in connection with a company pension scheme. Details are included in the following table: Structure of the remuneration system for the members of the Board of Management
Total shareholder return (TSR) of Munich Re shares compared with a defined peer group
(Peer group: Allianz, AXA, Generali, Hannover Re, SCOR, Swiss Re, Zurich Insurance Group)
3 Target overall direct remuneration comprises basic remuneration plus variable remuneration based on 100% performance evaluation.
Fixed remuneration Fixed remuneration comprises basic remuneration plus remuneration in kind and fringe benefits (such as company cars and insurance policies). The salary tax on the remuneration in kind and fringe benefits is borne by Munich Re.
Variable remuneration Assessment bases and link to corporate strategy Variable remuneration comprises an annual and a multiyear component, both of which are related to the future.
Munich Re’s business strategy is geared to profitable growth and successful positioning among our competitors. As an established result aggregate and relevant key figure for the capital market, the IFRS consolidated result takes account of the significance of high and stable earnings power in the annual variable remuneration component. The target for the IFRS consolidated result is based on annual planning figures, which in turn reflect Munich Re’s strategic ambition.
Based on its long-term strategic orientation and economic management of the Group, Munich Re would like to sustainably create value for its shareholders in the form of TSR. TSR takes account of dividend payments as well as share price performance. A multi-year component based on an increase in TSR in comparison with our peer group makes up the largest portion of variable remuneration for the Board of Management. From Munich Re’s point of view, the relative TSR is well suited for bringing in line the interests of shareholders and of the members of the Board of Management. The TSR over a period of several years reflects Munich Re’s long-term performance not only in absolute terms, but also in relative terms. After all, aboveaverage TSR development in comparison with the peer group is not conceivable in the long term without sustainably generating good results and creating value for shareholders. Surpassing the performance of the peer group is in the interests of shareholders – even in a weak market environment.
In evaluating overall performance, in particular financial and non-financial criteria for the individual member’s performance and the performance of the respective divisional unit/division and the field of business need to be taken into consideration. Other aspects, such as those relating to periods prior to the appraisal period in question, may also be taken into account. For this purpose, the Supervisory Board has compiled a set of criteria with the following examples of bonus-malus aspects:
Collective management performance – Result of field of business (reinsurance and/or primary insurance) – ESG (environmental, social and governance) criteria – Employee satisfaction – Reaction to special market circumstances and unforeseeable developments
Transparency is provided with regard to whether and for what specific reason loadings or reductions were applied, and what they amounted to.
The evaluation of overall performance can also take into account factors that influence business development but are not reflected in the IFRS consolidated result and TSR. Therefore, in light of the aim of keeping the remuneration system simple and transparent, no further financial assessment bases are needed.
Targets/Achievement of objective for the annual bonus The aim of the annual bonus is to achieve a high IFRS consolidated result. The chosen targets are challenging for the members of the Board of Management given the prevailing low-interest-rate policies and fierce competition in the insurance markets.
Targets for 2020 A target of €2,800m was set for 2020, with the following linear scaling for the 0–200 % target corridor: €2,100m = 0% achievement of objective €2,800m = 100% achievement of objective €3,500m = 200% achievement of objective
Achievement of objectives in 2020 At its meeting in March 2021, the Supervisory Board will decide about the achievement of objectives in 2020 on the basis of the IFRS consolidated result and taking into account any loadings or reductions as part of the overall performance evaluation. As the editorial deadline for the Annual Report precedes the Supervisory Board meeting, this information cannot be definitively included in the remuneration report. However, it is likely that the 2020 annual bonus will amount to 0% as a result of the coronavirus pandemic. The definitive information will be made available at www.munichre.com/board-ofmanagement /remuneration-report on 17 March 2021.
In addition, all employment contracts of the members of the Board of Management provide for the right of the Company to implement any requirements by the supervisory authority to limit, cancel or not pay out variable remuneration in relation to the member of the Board of Management.
The employment contracts of the members of the Board of Management furthermore stipulate that Board of Management members are obliged to indemnify the Company if they fail to comply with their duty to exercise due care and diligence as prudent and conscientious members of the Board of Management (Section 93 of the German Stock Corporation Act [AktG]). The Supervisory Board has the option of demanding such compensation following a breach of duty. As a consequence, bonus payments, including those already made, can be partially or entirely offset.
Upper remuneration limits The respective 0–200% target corridor defines an upper limit for variable remuneration paid to members of the Board of Management. Any higher achievement of objectives is capped at 200%; in this case, there is therefore also no loading as a result of the overall performance evaluation. There are caps on the maximum amounts of total remuneration and on each variable component in accordance with the German Corporate Governance Code.
Share ownership of the members of the Board of Management The remuneration system in 2020 did not require members of the Board of Management to invest in Company shares. All the same, most of the members of the Board of Management active in 2020 held a large number of Company shares.
% of basic remuneration for 20202 € € % Joachim Wenning 16,108 242.80 3,911,022.40 168 Thomas Blunck 5,052 242.80 1,226,625.60 109 Nicholas Gartside 1,525 242.80 370,270.00 33 Doris Höpke 4,318 242.80 1,048,410.40 93 Torsten Jeworrek 4,654 242.80 1,129,991.20 70 Christoph Jurecka 7,011 242.80 1,702,270.80 113 Achim Kassow (since 1 May 2020) 1,455 242.80 353,274.00 31 Markus Rieß3 7,500 242.80 1,821,000.00 66 Peter Röder4 (until 31 December 2020) 5,964 242.80 1,448,059.20 129 1 Last trading day in 2020. 2 The percentage of shares relates to the full annual basic remuneration. 3 As regards the overall value of the shares in relation to basic remuneration, the basic remuneration that Markus Rieß received for his work at ERGO Group AG
was also taken into consideration. 4 In the case of shares held by Peter Röder that are still subject to minimum holding periods, these periods remain in effect unchanged despite his retirement
No guaranteed variable remuneration (sign-on bonuses/recruitment bonuses) As a matter of principle, the Company does not pay guaranteed variable remuneration to members of the Board of Management. We only pay sign-on/recruitment bonuses in exceptional cases and on production of corresponding evidence if a new member of the Board of Management forfeits a bonus by a previous employer. Compensation for forfeiting variable remuneration components paid by a previous employer is paid in several instalments and is tied to prerequisites for disbursement.
Board members appointed before 2009 were transferred to the defined contribution plan. They kept their pension entitlement from the defined benefit plan (fixed amount in euros) existing at the date of transfer, which was maintained as a vested pension. For their service years as of 1 January 2009, they receive an incremental pension benefit based on the defined contribution plan.
In addition, members of the Board of Management appointed before 2019 benefit from the Munich Re pension scheme, which is also a defined contribution plan.
Members who have joined the Board of Management since 1 January 2017 are not entitled to a reduced occupational pension on early retirement.
− In the case of a combination of defined benefit plans and defined contribution plans: The entitlement under the vested pension is a proportion of the vested pension based on the ratio of actual service with the Company to the period the Board member would have worked for the Company altogether up to the fixed retirement age (m/n-tel process, Section 2(1) of the Company Pension Act). The entitlement from the incremental pension comprises the pension benefits fully financed under the insurance contract up to the occurrence of the insured event based on the pension contributions made up to the date of leaving the Company – (Section 2(5) of the Company Pension Act). This entitlement is paid out as an annuity or a lump sum.
Amount of remuneration The level of the target overall direct remuneration for the individual members of the Board of Management was set by the full Supervisory Board, acting on recommendations from the Supervisory Board’s Remuneration Committee, and taking into account the responsibilities and performance of each member of the Board of Management, the performance of the full Board of Management and the situation, performance and future prospects of Munich Re.
As part of horizontal and vertical benchmarking, remuneration was first assessed as to whether it is customary and appropriate compared with remuneration at other market players and within Munich Re. As a rule, remuneration data of DAX 30 companies derived from an annual study is used to assess whether remuneration is customary in the market. When making comparisons, the Supervisory Board pays particular attention to market capitalisation. In the course of assessing how customary remuneration is within Munich Re, the Supervisory Board considers the remuneration over time of Board of Manage- ment members in overall relation to the remuneration of both senior managers and staff members.
Remuneration of individual Board members as per DRS 17 (revised 2010) (in accordance with Section 285 sentence 1 (9a) sentences 5–8 of the German Commercial Code (HGB) and Section 314(1) (6a) sentences 5–8 HGB)1
Multi-year performance3, 4 Other Total € € € € € € Joachim Wenning 2020 2,325,000 37,149 0 1,604,423 3,966,572 2019 2,225,000 40,963 867,750 773,465 3,907,178 Thomas Blunck 2020 1,125,000 32,093 0 863,870 2,020,963 2019 1,075,000 33,913 419,250 793,555 2,321,718 Nicholas Gartside (since 18 March 2019)5 2020 1,125,000 22,625 0 573,750 1,721,375 2019 848,909 19,478 331,075 411,188 1,610,650 Doris Höpke 2020 1,125,000 26,919 0 823,690 1,975,609 2019 1,075,000 31,532 419,250 879,305 2,405,087 Torsten Jeworrek 2020 1,625,000 39,029 0 1,185,310 2,849,339 2019 1,550,000 38,286 604,500 1,098,580 3,291,366 Christoph Jurecka 2020 1,500,000 24,240 0 1,524,240 2019 1,300,000 30,041 507,000 1,837,041 Achim Kassow (since 1 May 2020)6 2020 750,000 46,036 0 382,500 1,178,536 2019 Hermann Pohlchristoph (until 30 April 2020) 2020 358,333 15,185 0 507,640 881,158 2019 1,075,000 48,370 419,250 1,542,620 Markus Rieß7 2020 2,750,000 116,944 0 1,801,166 4,668,110
Thereof for Munich Reinsurance Company 500,000 36,654 0 700,088 1,236,742 2019 2,675,000 119,459 165,750 1,666,785 4,626,994 Thereof for Munich Reinsurance Company 425,000 23,888 165,750 667,013 1,281,651
Peter Röder (until 31 December 2020) 2020 1,125,000 35,060 0 823,690 1,983,750 2019 1,075,000 30,446 419,250 763,420 2,288,116 Total 2020 13,808,333 395,280 0 7,609,789 956,250 22,769,652 2019 12,898,909 392,488 4,153,075 5,975,110 411,188 23,830,770 1 Where necessary, amounts have been rounded to the nearest euro. 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 2020 annual bonus. The amounts shown for the annual bonus are based on estimates, i.e. the relevant provisions and any additional/reduced expenditure for the 2019 annual bonus. The amounts shown for the 2019 annual bonus comprise the respective provision for 2019 and any additional/reduced expenditure for the 2018 annual bonus. The bonus payments for 2019 can be seen in the remuneration tables “Remuneration paid in accordance with the German Corporate Governance Code”.
Name Annual bonus2, 4 Multi-year bonus3, 4 Total amounts payable Set in for € € € Joachim Wenning 2020 2021 697,500 1,627,500 2,325,000 2019 2020 697,500 1,627,500 2,325,000 Thomas Blunck 2020 2021 337,500 787,500 1,125,000 2019 2020 337,500 787,500 1,125,000 Nicholas Gartside (since 18 March 2019)5 2020 2021 423,563 988,313 1,411,876 2019 2020 337,500 787,500 1,125,000 Doris Höpke 2020 2021 337,500 787,500 1,125,000 2019 2020 337,500 787,500 1,125,000 Torsten Jeworrek 2020 2021 487,500 1,137,500 1,625,000 2019 2020 487,500 1,137,500 1,625,000 Christoph Jurecka 2020 2021 487,500 1,137,500 1,625,000 2019 2020 450,000 1,050,000 1,500,000 Achim Kassow (since 1 May 2020)5 2020 2021 423,563 988,313 1,411,876 2019 2020 225,000 525,000 750,000 Hermann Pohlchristoph (until 30 April 2020) 2020 2021 2019 2020 107,500 250,833 358,333 Markus Rieß6 2020 2021 138,750 323,750 462,500 2019 2020 150,000 350,000 500,000 Peter Röder (until 31 December 2020) 2020 2021 2019 2020 337,500 787,500 1,125,000 Total 2020 2021 3,333,376 7,777,876 11,111,252 2019 2020 3,467,500 8,090,833 11,558,333 1 Where necessary, amounts have been rounded to the nearest euro. 2 The remuneration set for the annual bonus for 2020 is payable in 2021, that for 2021 in 2022. 3 The remuneration set for the multi-year bonus for 2020 is payable in 2024, that for 2021 in 2025. 4 Information on the assessment bases and targets for the amounts set for 2020 and 2021 is provided under Remuneration of the members of the Board of Management in 2020 at the beginning of the remuneration report. 5 In the cases of Nicholas Gartside and Achim Kassow, the compensation payments made instead of participation in the employer-financed pension will be allocated, from the 2021 financial year, to the remuneration components – resulting in higher annual bonuses and higher multi-year bonuses compared with 2020. 6 The ERGO Group AG remuneration system does not provide for a variable component. Markus Rieß thus only receives variable target amounts from Munich Reinsurance
Provisions for personnel expenses3 €/year € € Joachim Wenning4, 5 2020 – 18,303 1,517 2019 – 18,173 1,643 Thomas Blunck4, 5 2020 120,000 5,267,574 209,529 2019 120,000 4,424,945 211,946 Nicholas Gartside (since 18 March 2019)6 2020 – – – 2019 – – – Doris Höpke4, 5 2020 – 12,310 606 2019 – 12,532 592 Torsten Jeworrek4, 7 2020 171,000 8,479,895 242,454 2019 171,000 7,316,522 249,534 Christoph Jurecka4, 8 2020 – – – 2019 – – – Achim Kassow (since 1 May 2020)9 2020 – – – 2019 – – – Hermann Pohlchristoph (until 30 April 2020)10 2020 – – – 2019 – 5,394 324 Markus Rieß4, 8 2020 – 70,654 13,296
Thereof for Munich Reinsurance Company – 70,654 13,296 2019 – 57,772 11,842 Thereof for Munich Reinsurance Company – 57,772 11,842
Peter Röder (until 31 December 2020)11 2020 90,000 4,667,954 115,947 2019 90,000 3,569,324 119,178 Total 2020 381,000 18,516,690 583,349 2019 381,000 15,404,662 595,059
% €/year € € Joachim Wenning4, 5 2020 25.50 279,263 –12 1,185,750 2019 25.50 239,933 –12 1,134,750 Thomas Blunck4, 5 2020 16.25 166,304 9,103,864 365,625 2019 16.25 151,726 7,079,079 349,375 Nicholas Gartside (since 18 March 2019)6 2020 – – – – 2019 – – – – Doris Höpke4, 5 2020 25.50 113,639 –12 573,750 2019 25.50 94,836 –12 548,250 Torsten Jeworrek4, 7 2020 19.50 277,391 14,744,605 633,750 2019 19.50 253,325 11,820,896 604,500 Christoph Jurecka4, 8 2020 25.50 36,004 –12 765,000 2019 25.50 16,730 –12 663,000 Achim Kassow (since 1 May 2020)9 2020 – – – – 2019 – – – – Hermann Pohlchristoph (until 30 April 2020)10 2020 25.50 39,761 –12 182,750 2019 25.50 35,165 –12 548,250 Markus Rieß4, 8 2020 25.15 116,236 3,167,74613 817,500
10 Left the Board as at 30 April 2020; entitled to an occupational pension from 1 December 2027. 11 Left the Board as at 31 December 2020; has received a pension since 1 January 2021. 12 Defined contribution plan within the meaning of IAS 19: Employee Benefits, so no present value shown. 13 Munich Reinsurance Company: see footnote 12; ERGO Group AG: no Defined Contribution Plan within the meaning of IAS 19, so present value shown.
The following tables show the benefits granted and the remuneration paid out in accordance with the German Corporate Governance Code:
Chairman of the Board of Management Board member € 2020 2020 (min) 2020 (max) 2019 2020 2020 (min) 2020 (max) 2019 Basic remuneration 2,325,000 2,325,000 2,325,000 2,225,000 1,125,000 1,125,000 1,125,000 1,075,000 Remuneration in kind/fringe benefits 37,149 37,149 37,149 40,963 32,093 32,093 32,093 33,913 Total 2,362,149 2,362,149 2,362,149 2,265,963 1,157,093 1,157,093 1,157,093 1,108,913 One-year variable remuneration
Multi-year variable remuneration Multi-year bonus 2019 1,557,500 752,500 Multi-year bonus 2020 1,627,500 0 3,255,000 787,500 0 1,575,000
Other Total 4,687,149 2,362,149 7,012,149 4,490,963 2,282,093 1,157,093 3,407,093 2,183,913 Pension expenses 1,187,267 1,187,267 1,187,267 1,136,393 575,154 575,154 575,154 561,321 Total remuneration 5,874,416 3,549,416 8,199,416 5,627,356 2,857,247 1,732,247 3,982,247 2,745,234
Board member € 2020 2020 (min) 2020 (max) 2019 2020 2020 (min) 2020 (max) 2019 Basic remuneration 1,125,000 1,125,000 1,125,000 848,909 1,125,000 1,125,000 1,125,000 1,075,000 Remuneration in kind/fringe benefits 22,625 22,625 22,625 19,478 26,919 26,919 26,919 31,532 Total 1,147,625 1,147,625 1,147,625 868,387 1,151,919 1,151,919 1,151,919 1,106,532 One-year variable remuneration
→ Torsten Jeworrek Christoph Jurecka Board member Board member € 2020 2020 (min) 2020 (max) 2019 2020 2020 (min) 2020 (max) 2019 Basic remuneration 1,625,000 1,625,000 1,625,000 1,550,000 1,500,000 1,500,000 1,500,000 1,300,000 Remuneration in kind/fringe benefits 39,029 39,029 39,029 38,286 24,240 24,240 24,240 30,041 Total 1,664,029 1,664,029 1,664,029 1,588,286 1,524,240 1,524,240 1,524,240 1,330,041 One-year variable remuneration
Multi-year variable remuneration Multi-year bonus 2019 1,085,000 910,000 Multi-year bonus 2020 1,137,500 0 2,275,000 1,050,000 0 2,100,000
Other Total 3,289,029 1,664,029 4,914,029 3,138,286 3,024,240 1,524,240 4,524,240 2,630,041 Pension expenses 876,204 876,204 876,204 854,034 765,000 765,000 765,000 663,000 Total remuneration 4,165,233 2,540,233 5,790,233 3,992,320 3,789,240 2,289,240 5,289,240 3,293,041
Multi-year variable remuneration Multi-year bonus 2019 - 752,500 Multi-year bonus 2020 525,000 0 1,050,000 250,833 0 501,667
Board member thereof for Munich Reinsurance Company € 2020 2020 (min) 2020 (max) 2019 2020 2020 (min) 2020 (max) 2019 Basic remuneration 2,750,000 2,750,000 2,750,000 2,675,000 500,000 500,000 500,000 425,000 Remuneration in kind/fringe benefits 116,944 116,944 116,944 119,459 36,654 36,654 36,654 23,888 Total 2,866,944 2,866,944 2,866,944 2,794,459 536,654 536,654 536,654 448,888 One-year variable remuneration
Basic remuneration 2,325,000 2,225,000 1,125,000 1,075,000 Remuneration in kind/fringe benefits 37,149 40,963 32,093 33,913 Total 2,362,149 2,265,963 1,157,093 1,108,913 One-year variable remuneration
Other Total 2,362,149 4,738,136 1,157,093 2,392,033 Pension expenses 1,187,267 1,136,393 575,154 561,321 Total remuneration 3,549,416 5,874,529 1,732,247 2,953,354
Basic remuneration 750,000 – 358,333 1,075,000 Remuneration in kind/fringe benefits 46,036 – 15,185 48,370 Total 796,036 – 373,518 1,123,370 One-year variable remuneration
Other7 382,500 Total 1,178,536 – 373,518 2,050,260 Pension expenses – 182,750 548,574 Total remuneration 1,178,536 – 556,268 2,598,834
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 2020 annual bonus; the amount shown is based on estimates and the relevant provisions posted.
6 Nicholas Gartside does not participate in an employer-financed pension. By way of compensation for this, a conditional one-off payment will be made at the end of his appointment. In the event of his death or disability prior to the end of his term of office, this payment will be made pro rata temporis for the period until then.
7 Achim Kassow does not participate in an employer-financed pension. By way of compensation for this, a conditional monthly payment was made along with other remuneration.
8 Markus Rieß’ remuneration also includes compensation components and pension expenses for work at ERGO Group AG.
Members of the Supervisory Board received a daily attendance fee of €1,000 for meetings of the Supervisory Board or its committees – with the exception of the Conference Committee.
Attend- ance fees Total € € € € € € € € Stefan Kaindl 2020 100,000 55,000 14,000 169,000 2019 75,000 41,250 8,000 124,250 Gabriele Mücke 2020 100,000 8,000 108,000 2019 75,000 4,000 79,000 Ulrich Plottke 2020 100,000 55,000 14,000 169,000 36,387 13,224 49,611 2019 100,000 41,250 10,000 151,250 43,822 12,459 56,281 Manfred Rassy 2020 100,000 8,000 108,000 2019 75,000 4,000 79,000 Gabriele Sinz-Toporzysek 2020 100,000 8,000 108,000 5,697 5,697 2019 100,000 6,000 106,000 15,000 15,000 Carsten Spohr 2020 75,000 5,000 80,000 (since 29 April 2020) 2019 Karl-Heinz Streibich 2020 100,000 8,000 108,000 2019 75,000 4,000 79,000 Maximilian Zimmerer 2020 100,000 120,000 14,000 234,000 2019 100,000 82,500 10,000 192,500 Total2 2020 2,178,333 600,000 203,000 2,981,333 83,109 17,862 100,971 2019 1,927,500 493,333 134,000 2,554,833 137,500 25,000 162,500 1 Plus value-added tax (USt) in each case, in accordance with the relevant Articles of Association. 2 The previous year’s figures do not include the remuneration of members who left the Supervisory Board in the 2019 financial year.
Macroeconomic and industry environment The coronavirus pandemic and the measures deployed to counteract it in 2020 plunged the global economy into its most severe crisis in decades. Global economic output fell sharply on the previous year. The economies in the United States, the eurozone, Japan and the United Kingdom were in a deep recession. Although the Chinese economy began recovering from its sharp drop as early as the spring, it managed only a low average growth rate in 2020. The rates of inflation in advanced economies were lower on average than in the previous year; in the eurozone and Japan, inflation was very low.
Equity markets 31.12.2020 31.12.2019 DJ EURO STOXX 50 3,553 3,745 Dow Jones Index 30,606 28,538
According to preliminary estimates, the German insurance industry’s year-on-year premium income growth in 2020 was weak on the whole. Premiums rose in propertycasualty business and in private health insurance; however, premiums in life insurance declined slightly.
The information about Munich Re’s business model, required under Sections 289c(1) and 315c(1) of the German Commercial Code, is published in the Group section.
A core guiding principle for Munich Re is to act in a farsighted and responsible manner. We have based our Group-wide corporate responsibility strategy on the shared value approach, which means that we strive for our business operations to add both economic and societal value. Dealing with the consequences of climate change and increasing digitalisation, and strengthening risk awareness, constitute Munich Re’s main objectives in this regard.
With our Ambition 2025, which we adopted in December 2020, we have strengthened our corporate responsibility strategy even further, and put even higher priority on environmental, social and governance (ESG) criteria.
For almost 50 years, Munich Re has been addressing the issue of climate change, its effects on the insurance industry, and the resulting risks and opportunities. Munich Re began pointing to the effects of climate change very early, and has been participating in international climate conferences, and supporting international climate goals since the start. We want to act as a role model on the topic of climate protection and contribute to the Paris climate goals of keeping global warming well below 2°C, and thus limiting the effects of climate change.
A key contribution in fighting the effects of climate change is helping new technologies break into the market for a low-carbon future – whether it be in power generation, transport, energy storage or industrial production. We offer insurance solutions in which we assume a portion of the often very specific risks of such new technologies.
In primary insurance and in direct and facultative (re)insurance business, Munich Re will be significantly lowering its carbon emissions in connection with fossil fuels, and implementing a detailed climate strategy to this effect in 2021. As of 2040, Munich Re will no longer do any insurance business in connection with thermal coal (mines or power plants). The ensuing attributable carbon emissions will already be substantially reduced as of 2022, and by 2025 they will be 35% lower than the base year of 2019. In the oil and gas mining and production sector, we will be lowering the emissions attributable to our business by 5% by 2025, and to net zero by 2050. Munich Re has already basically stopped insuring new coal-fired power plants and coal mines, as well as oil-sand mines.
In addition to our goals under Ambition 2025, our voluntary commitments to covenants such as the Ten Principles of the United Nations Global Compact, the Principles for Responsible Investment (PRI), and the Principles for Sustainable Insurance (PSI) constitute the pillars of our actions. We take environmental, social and
Munich Re Group Annual Report 2020 governance (ESG) aspects into account when assessing risks, developing insurance solutions, making investment decisions, and in our internal processes (for example, in procurement).
Furthermore, in 2020 Munich Re issued its first-ever subordinated green bond, underscoring its commitment to driving a climate-friendly transformation of the economy via the capital markets. Munich Re will use the €1.25bn in capital thus raised to finance or refinance sustainable projects in accordance with our Green Bond Framework. Projects include investments of equity and debt in renewable energy, energy efficiency, clean transportation, green buildings, sustainable water and wastewater management, the eco-efficient and/or circular economy, and the environmentally sustainable management of natural resources and land. Munich Re’s Green Bond Framework is aligned with the 2018 Green Bond Principles set by the International Capital Market Association (ICMA).
In addition to climate change, digitalisation is becoming increasingly important. As a result of the coronavirus pandemic in particular, digitalisation has advanced significantly, both in the public and private sectors. Many insurance companies also used the time to significantly speed up their efforts to transform their processes into digital and data-driven systems.
For Munich Re, digitalisation is creating numerous opportunities for the insurance business. It allows us to deepen our knowledge, strengthen our existing business relationships and open up new opportunities with the help of the Internet of Things. This includes the technologybased early detection and reduction of insurance losses and the provision and financing of production facilities (equipment-as-a-service business models).
The increasing automation, digitalisation and individualisation is also creating new risks from the use of artificial intelligence. In response, Munich Re is offering performance guarantees for business models based on artificial intelligence. ERGO is focusing on continuing to modernise its IT landscape and applying the acquired skills Group-wide.
For us, using advances in digital technology responsibly – for example by developing standards to evaluate algorithms – is of central importance. Our work in this field is guided by the principle of responsible artificial intelligence based on the seven Ethics Guidelines for Trustworthy Artificial Intelligence prepared by the European Commission’s HighLevel Expert Group on Artificial Intelligence. Munich Re’s main goal in this respect is to offer insurance solutions that are tailored to our customers’ needs, for example by making it easier and quicker for us to assess risks, settle claims, or insure new types of risk.
When developing algorithms for this purpose using artificial intelligence, any unfair disadvantaging of policyholders must be avoided. This may result from premium increases or the denial of insurance cover – for example, if algorithms are based on nationality or ethnic background. Compliance with data protection law must also be ensured when using artificial intelligence to process personal data.
Munich Re does not apply any of the nationally or internationally available frameworks for sustainability reporting (e.g. the German Sustainability Code or Global Reporting Initiative) in its combined non-financial statement. Such frameworks are based on a variety of different definitions of materiality and would mean selecting topics that were insufficient to present the nonfinancial aspects of Munich Re’s business in the combined non-financial statement. At Munich Re, we have instead chosen our reporting topics based on a two-stage, internal selection process.
Based on topics preselected by the stakeholder dialogue which might influence Munich Re’s corporate responsibility strategy, we first identify those issues which, from our perspective, are relevant for an understanding of the effects that our business has on environmental, labour, social or human rights aspects, and in the fight against corruption and bribery. We have published information about our stakeholder dialogue in our Corporate Responsibility Report at www.munichre.com/cr-en.
The identified topics are then discussed by a multidisciplinary panel, to determine whether they are significant for a proper understanding of the Group’s development, performance, and current position. This review is performed on the basis of a uniform set of criteria, including how frequently reports are submitted to the Board of Management and Supervisory Board, and whether a topic needs to be taken into account in our risk management system.
Non-financial, ESG-related risks are reported in the internal and external risk reports and in our regulatory reporting. Our Integrated Risk Management Division is independently responsible for assessing and monitoring these risks.
In the 2020 reporting year, no reportable ESG risks were identified.
Our experts for natural disaster risk assessment in our Geo Risks department have many years of experience in developing probability-based computer models for assessing natural catastrophe risks, and also take into account the potential accumulation risks of natural disasters. We also include in our risk evaluations any significant changes to claims spreads that result from climate risks.
In addition, Munich Re is closely networked within the field of climate science, on the one hand through working and publishing together with scientific institutes, and on the other hand by funding research programmes. Our findings from these analyses of nat cat risks, anthropogenic climate change and natural climatic cycles help us to constantly improve Munich Re’s appraisal of related risks, for example of severe thunderstorms, tropical cyclones or floods.
− Thermal coal and oil sands: Mandatory policy on insuring coal and oil sand risks; applicable in primary insurance and reinsurance, restrictions on investment in the coal and oil sand sectors, with clearly defined revenue ceilings
− Arctic drilling: Binding risk assessment by the Arctic Drilling Panel, which then decides whether to accept or reject the project; applicable in primary insurance and reinsurance
− ESG country ratings: Prohibition on investing in government bonds from countries with inadequate ESG ratings
In our insurance business, we take ESG aspects into account in underwriting and in our products and services.
A key focus is on helping new technologies break into the mainstream for a sustainable and viable economy. Our goal is to support these technologies by offering insurance solutions that cover the associated risks, thus making the different technologies more attractive for investors and strengthening financing prospects. Munich Re has particular risk management expertise in this area, and boasts many years of experience especially in the renewable energy, energy storage and energy efficiency sectors.
On the subject of ESG aspects in the insurance industry, Munich Re, together with other insurers, is additionally committed to the Principles for Sustainable Insurance (PSI) developed by the Finance Initiative of the United Nations Environment Programme. The PSI aim to increase awareness of ESG risks and how to prevent them, as well as develop corresponding industry standards. Our annual progress on these issues is documented in the PSI public disclosures. The current report is available at www.munichre.com/en/cr/documents.
Munich Re actively assisted in designing a PSI initiative which, in June 2020, led to a compilation of best practices for assessing sustainability risks in non-life insurance being adopted for the first time. The proposed ESG standards are the result of several years of collaboration with leading insurers and key stakeholders at the global level. They explain to insurers as well as agents how to systematically approach ESG aspects. We continue to develop our own standards for rating ESG risks, including taking into account those developed by the PSI initiative.
Risk transfer and other innovative solutions for dealing with climate change With its Ambition 2025, Munich Re has set climate goals for its insurance business as well. These goals comprise emission reduction paths in primary insurance as well as in direct and facultative fossil-fuel reinsurance business, for the coal industry and oil and gas (exploration/production). The goal is for Munich Re to cut its net emissions from oil and gas to zero by 2050. Emissions from coal in those lines are to be reduced to zero already by 2040.
It is also absolutely necessary for us to offer protection and help adapt to natural catastrophes and climate change, in order to mitigate their humanitarian and financial consequences. We support prevention and are making our know-how and data from our worldwide natural catastrophe loss database available to our clients, the media and public and private organisations, in order to allow them to take measures to adjust to those consequences of climate change that have already become unavoidable. We provide this service mostly for free; in exceptional cases some charges will apply, depending on the time and amount of data involved. In addition, as a (re)insurer, Munich Re bears some of the financial burden that arises from natural catastrophes, and thus bolsters the capacity of public and private risk carriers – as well as the affected populations – to return as quickly as possible to normality after a loss event (resilience). Greater insurance penetration can help absorb the economic shock of a
Integrating ESG criteria is a fundamental component of our investment strategy. As a result, specially tailored ESG criteria have been incorporated into the selection process for every asset class. Our aim is to invest the bulk of our assets sustainably, and we track our progress in this regard in a sustainability index used internally at MEAG (NHQuote).
In 2020, part of our liquid portfolio (equities/bonds) was analysed from a carbon perspective using MSCI ESG data. We then used the findings to help develop our net-zero strategy.
Moreover, investments in equities and corporate bonds take into account the MSCI World ESG Leaders, FTSE4Good and ESI (Ethibel Sustainability Index) sustainability indices, as well as the ratings issued by the ESG agencies ISS-ESG and Sustainalytics. Government bonds are analysed on the basis of country sustainability ratings from MSCI. When deciding whether to invest in real estate, we take criteria such as a building’s energy efficiency and construction materials into account. Specific ESG aspects are already reviewed in the due diligence process for investments in infrastructure, renewable energy and forestry. Processes for the equity, bond (credit and governments) and private-equity sectors have been in place since 2018. All portfolio managers and credit analysts at all MEAG locations have received advance training in ESG criteria.
In addition, MEAG offers its private and institutional clients sustainable investment products. The MEAG sustainability fund invests worldwide, mostly in companies that do business sustainably. Producers in the tobacco, alcohol or weapons industries are excluded, as are companies in the gambling sector. MEAG FairReturn invests mostly in sustainable European bonds and equities. The decision criteria include both the issuer’s environmental and social track records, as well as its corporate governance and business performance. Companies in controversial fields of business are not considered. The MEAG EM Rent Nachhaltigkeit sustainability fund invests mostly in state and corporate bonds from developing and emerging countries that demonstrate stable and sustainable growth. Companies in controversial fields of business are excluded here as well.
Asset management leverages climate protection potential Increased investment in renewable energy and infrastructure projects is a contribution towards adapting to and mitigating the effects of climate change.
We complement this approach of promoting new technologies and, wherever possible, divesting from climatedamaging technologies, with our Group-wide position on coal as an energy source. We have enshrined this position in our Responsible Investment Guideline. Munich Re does not invest in either equities or bonds from companies that generate more than 30% of their revenue from coal, or more than 10% of their revenue from oil sands extraction.
Overall, as at the end of the 2020 financial year, Munich Re invested around 1.4% (1.2%) of its total portfolio in renewable energy and green bonds. In doing so, we continue to focus on diversifying our investments across various regions and sectors, in order to distribute the technical and political risks across the portfolio.
Munich Re as a preferred employer and diversity as a strategic success factor
For Munich Re as a knowledge-based Group, the competence of our talented and high-performing staff constitutes one of the pillars of our success. Recruiting, developing and retaining employees constitute one of the two main components of our human resources policy. The second is promoting diversity across the Group as a strategic key to Munich Re’s success.
Personnel issues that affect the entire Group are combined in a central unit in Human Resources. Strategic impulses on fundamental issues are provided by an HR committee; these are then embedded in the business practices of the fields of business via policies (e.g. on diversity). Our operative personnel management is closely tied to the specific needs of the respective business model, with the goal being to apply our business strategies as effectively as possible in the respective Group environment. In this regard, we sometimes adjust Group-wide personnel standards where appropriate, and adapt them to the local needs of specific fields of business.
The goal of Munich Re’s human resources policy is to be an attractive employer in all of its key markets, and to remain so in the future. Significant elements of this policy include attracting candidates worldwide who have extensive expertise and experience, and then developing and retaining them.
Staff development In order to develop our staff, Munich Re boasts a comprehensive palette of training and support programmes, which is constantly updated to reflect current and future demands in particular. COVID-19 has sped up the development of our digital skills in many ways, and has significantly changed how our staff work worldwide. The training objectives and content are based on Munich Re’s competence model, which covers all the core skills that we require of our staff across the Group.
Driving digitalisation and transformation One of Munich Re’s central goals is to ensure that our staff acquire and develop digital expertise.
The 3,750 (13,000) accesses to the Digital School in 2020, and the roughly 450 employees who have obtained the highest level of qualification under the Data Analytics Curriculum, demonstrate how relevant and attractive the School is. Our e-learning course on the basics of the Data Analytics Curriculum, which was developed in-house and featured 1,300 edits in 2020, coupled with a broad palette of training, won Munich Re a professional development award this year.
MEAG also seized the opportunity to rapidly expand its digital formats, for example in the recruiting and onboarding process, and is offering new online learning formats.
Remaining an attractive employer by seeking out and retaining staff Munich Re aims to treat our staff and applicants fairly and responsibly; we value the loyalty of our employees and want to ensure that they are able to perform to the best of their ability. In addition to the aforementioned training and support programmes, we also offer a transparent salary system, extensive company healthcare management, as well as flexible working hours and conditions.
These elements are enshrined in various staff policies, such as internal company agreements in all fields of business in Germany, HR guidelines applicable worldwide in reinsurance, MEAG’s staff handbook in Germany, as well as international HR standards and processes for recruitment and selection at ERGO. At Munich Re, our remuneration rules are set out in a Group-wide policy.
On 1 January 2020, we launched a new and forwardlooking concept for remuneration and performance management in global reinsurance. Munich Re’s IFRS result is now the single applicable KPI worldwide for variable remuneration, and thus for staff participation in the business’s success. We have been strengthening staff agility and autonomy through regular performance management dialogue – called Continuous Conversations – on individual commitment, feedback and development, and are focusing on staff cooperation. Implementation is being supported by broad international measures, for example LinkedIn Learning paths specifically selected by experts, with recommended courses on specific topics, team workshops, a strength-based self-assessment test, and regular staff surveys.
In 2020, we surveyed all staff in reinsurance and at MEAG and gave them the opportunity to help design new ways of working in the organisation. The survey found that staff were highly satisfied and extremely willing and able to perform.
Even in 2020, which was overshadowed by the coronavirus pandemic, Munich Re showed itself to be a reliable and responsible employer. We neither had to apply for the short-time work scheme in Germany, nor did we accept government aid in other countries. The health and safety of our staff has remained our top priority in these times of COVID-19, and we have enabled our staff to work from home whilst restricting our on-site operations, which are subject to strict hygiene rules. Online portals and tools have kept staff and management up to date in all fields of business, and continue to offer tips and support on working and managing from home. Our Emergency Management Team and Human Resources ensured that our global business activities were able to shift to working from home and then gradually returning to the premises over the summer of the reporting year, all the while closely monitoring infection rates.
Our great staff loyalty is demonstrated by an average length of service of 13.8 (13.6) years at Munich Re and 14.5 (14.6) years at Munich Reinsurance Company. Staff turnover is very low, with a voluntary turnover rate of 3.5% (5.0%). The rate for Munich Reinsurance Company itself is 1.6% (1.6%).
Our goal at Munich Re is to create an optimal environment which, based on our various backgrounds and experience, makes the most of and strengthens the potential of all our staff. Munich Re is composed of staff from over 60 different countries working at over 50 different locations worldwide.
Women currently constitute 52.9% (53.1%) of our workforce across the Group. The percentage of women in senior management positions (first and second management levels) is 30.0% (30.1%) worldwide. The percentage of women in the overall workforce at Munich Reinsurance Company is 44.4% (44.6%), and in senior management (first and second management levels) the figure is 20.6% (18.2%).
Our various talent programmes focus on sufficient diversity. This was again very clearly demonstrated in 2020. The percentage of women in the Group Management Platform was 31% (28%), and 42% (42%) have an international background. The percentage of women participating in the reinsurance group’s global talent programme, Hydrogen, is 38% (43%); approximately 82% (79%) of the participants are from the International Organisation.
In 2020, further measures were implemented to strengthen diversity and inclusion. To celebrate the global initiative World Day for Cultural Diversity, 23 companies in 17 countries participated in the ERGO Digital Diversity Map, which gave an overview of the various local diversity activities and included 53 videos from around the globe. In addition, a number of networks have been established in the Group, in which staff of different sexual orientations and gender identities, as well as staff who are disabled, affected by illness or otherwise committed to the issues concerned, can meet to exchange ideas. In the USA and Canada, webinars are being offered together with external partners to promote inclusion and social change.
On the basis of our revised Code of Conduct, which took effect in 2018, all staff are required to act responsibly, transparently, honestly and dependably. Staff must disclose conflicts of interest, in order to allow them to be professionally and fairly resolved. Staff may neither accept nor offer bribes. Staff in reinsurance are required to take mandatory training about the Code of Conduct and specifically on preventing corruption; compliance training is mandatory at ERGO and MEAG as well. At ERGO, the training is provided to all staff in Germany in the form of an online course on the Code of Conduct. All Board members and other executive staff at ERGO in Germany must also attend a mandatory classroom seminar on compliance, which builds on the online programme. Training measures have also been introduced at the various ERGO branches abroad.
In the Group-wide Code of Conduct, the Chairman of our Board of Management has underlined the importance of our compliance culture, which protects Munich Re’s reputation and ensures that we pursue our corporate objectives based on our values. Our managers bear a particular responsibility for ensuring compliance with our legal standards, embodying our core principles, and thereby creating a tangible compliance culture.
In accordance with the “know-your-customer” principle, sufficient information about our business partners, their background, and about the purpose and legitimacy of the intended business deal must be available before concluding any transaction. In addition, when choosing whom we do business with, we make sure that any potential direct business partners comply with laws and regulations, and act responsibly. The know-your-customer principle also includes a transparent and documented selection process for service providers and suppliers, as well as the conduct of due diligence reviews of business partners who act on Munich Re’s behalf. Anti-corruption clauses, which to date were mandatory only in contracts valued at over €1m in the reinsurance field of business, have been required in all contracts with service providers and suppliers since 1 November 2020.
Munich Re staff are required to inform their superiors, or the responsible internal officer, if they learn of any breach of anti-corruption rules. In addition, staff may consult the company ombudsman or use the electronic whistleblower portal to report any activity they have witnessed.
Our compliance reports are issued to Munich Reinsurance Company’s Board of Management and its Supervisory Board’s Audit Committee on a regular and ad-hoc basis. The reports include updates about the implementation of our CMS regarding anti-corruption or compliance issues, the results of special audits, and any measures undertaken, such as the imposition of sanctions for breaches. A reporting line from the Munich Re companies to our Group Compliance & Legal unit has been set up for this purpose. Any serious breach of the law or important internal rules by a Group company is to be reported immediately, with updates every six months. In such cases, the Munich Re company in question also issues a corresponding report to local management and the supervisory bodies.
The main rules for Munich Re are contained in the Code of Conduct and in various data protection and information security norms, which are specific to each field of business and mandatory for all staff. The norms are based mainly on the EU General Data Protection Regulation (GDPR) for Group companies situated in the EU/EEA. Based on these norms, Munich Reinsurance Company, ERGO and MEAG have each adopted a data protection policy covering their activities, which together ensure a consistent, mandatory level of protection across those fields of business. Binding Corporate Rules at all locations worldwide aim to ensure an appropriate level of data protection for our intra-Group communications with with reinsurance companies domiciled outside the EU/EEA. The Binding Corporate Rules were updated in 2019 and are pending approval with the responsible authorities.
Munich Re staff receive regular training on the GDPR with the aid of e-learning programs. All new staff are also required to take the e-learning program during their induction periods. Moreover, division-specific online courses were added in 2020.
The framework for any business activity is our risk strategy, from which we derive various limitations and reporting thresholds. A key element is our economic capital resources, which we determine in accordance with the Solvency II supervisory regime. We observe a range of important additional conditions. These include national accounting regulations, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
The starting point for value-based management is the economic value added, which we determine based on the key corporate management tool of economic earnings. These correspond with the change in eligible own funds under Solvency II, adjusted for items that do not represent economic value added – such as capital measures, and the change in regulatory restrictions.
We use the IFRS consolidated result as a standardised, accounting-based benchmark for the Group and its fields of business. The standardised approach of the IFRS consolidated result makes it easier for outsiders to understand and interpret the information in it; as such, it is a pivotal part of our financial reporting in capital markets.
Gross premiums written Gross premiums written comprise all premium income due for payment in a financial year. Increases in gross premiums written are the prime indicator of corporate growth at the Group and segment levels. However, increases in this performance metric are not an inherently meaningful target for our Group, as we must always consider premium growth as it relates to the profitability of the business we write.
Return on investment (RoI) This is a key indicator of investment performance for Munich Re, on the basis of external reporting. It is derived from the investment result and the average market value of our investment portfolio – including off-balance-sheet unrealised gains and losses, but excluding owner-occupied property and insurance-related loans.2
The RoE is an important profitability KPI, which is of relevance in particular in the medium term. It is calculated on the basis of the IFRS consolidated result in relation to the average IFRS equity at the beginning and end of the year. IFRS equity is adjusted for unrealised gains and losses and changes resulting from currency translation outside profit or loss and remeasurement gains/losses from cash flow hedges. The RoE is significantly influenced by the IFRS result. IFRS equity is affected by profits as well as by capital measures such as dividend payments and share buy-backs, in particular. The RoE is recognised for the Group and for the reinsurance and ERGO fields of business. The calculation of the RoE for the fields of business allows for further adjustments to equity in order to eliminate distortions attributable to intra-Group transactions. As part of the Ambition 2025, the RoE is to rise to 12–14% by 2025.
The earnings per share figure reflects the IFRS consolidated result for a year in relation to the average number of outstanding shares at the beginning and end of the year. The earnings per share is essentially influenced by the IFRS consolidated result. The number of outstanding shares can change as a result of share buy-backs or other capital measures. Further information on the earnings per share is available under (52) Earnings per share in the Notes to the consolidated financial statements.The Ambition 2025 envisages an average rise of at least 5% p.a. in the earnings per share in the period 2021–2025.
The dividend per share reflects the dividends paid for one year in relation to the number of dividend-bearing shares. The number of shares can change as a result of share buybacks or other capital measures. The Ambition 2025 envisages an average rise of at least 5% p.a. in the dividend per share in the period 2021–2025; in years with particular claims expenditure, it should not be lowered at least.
The solvency ratio under Solvency II is the ratio of the eligible own funds to the solvency capital requirement. Information on solvency capital requirements and eligible own funds is available in the risk report. The solvency ratio is to remain in the optimum range of 175–220%.
Munich Re generated a profit of €1.2bn in the reporting year; on 31 March 2020, owing to high uncertainty regarding the effects of COVID-19 we retracted the profit forecast of €2.8bn for 2020 we had set at the beginning of the financial year and postponed the 2020/2021 share buy-back programme announced in February 2020. In reinsurance, we posted pandemic-related losses totalling €3.4bn, of which €370m was attributable to life and health reinsurance and slightly over €3bn to property-casualty reinsurance. At ERGO, the negative impact arising from COVID-19 totalled €64m. Adjusted for the losses caused by the pandemic, the profit target of €2.8bn set at the beginning of the year would have been achieved.
Reinsurance property-casualty % 105.6 100.2 ERGO Property-casualty Germany % 92.4 92.3 ERGO International % 92.7 94.3
2 Information on the calculation of this indicator can be found in the Notes to the consolidated financial statements, section Segment reporting, Notes on determining the return on equity (RoE).
Munich Re’s gross premiums written, at €54,890m, were significantly higher year on year (51,457m). This was mainly due to organic growth in reinsurance.
The investment result (excluding insurance-related investments) decreased to €7,398m (7,822m). This was largely due to lower regular income and impairment losses on account of temporary price falls in equity markets in Q1. Conversely, the investment result increased owing to higher gains on the disposal of, above all, fixed-interest securities, equities and real estate, as well as an improved net balance of derivatives.
The currency result amounted to –€200m (73m), mainly driven by losses on the Canadian dollar and Russian rouble. Our effective tax rate was 18.2% (15.1%), which fell short of our expectations due to one-off effects for previous years.
Munich Re will use the raised capital to finance projects as defined in the Group’s Green Bond Framework. For more detailed information, please see the section Corporate responsibility in insurance and investment in our combined non-financial statement.
Carrying amounts Unrealised gains/losses1 Fair values €m 31.12.2020 Prev. year 31.12.2020 Prev. year 31.12.2020 Prev. year Land and buildings, including buildings on third-party land
1 Presentation essentially shows fixed-interest securities and loans, including deposits and cash at banks, at fair value.
At the reporting date, over half of our portfolio of interestbearing securities was invested in government bonds. The vast majority of these continue to come from countries with a high credit rating. The fair value of our German and US government bond holdings came to 13.1% (12.8%) and 9.2% (8.8%) of the total portfolio of interest-bearing securities. Italian and Spanish government bonds each accounted for around 0.8% (0.8%) and 1.9% (2.3%) of the portfolio of interest-bearing securities. Our new investments in the reporting year were mostly in Australian and US government bonds. We reduced our bond holdings mainly from issuers in the United Kingdom and Spain in the reporting year. The purchase of government bonds from emerging markets is part of our balanced investment strategy. They constituted 9.2% of our government bond portfolio.
Our portfolio of government bonds, covered bonds and corporate bonds had a good rating structure: as at 31 December 2020, some 81% of securities were rated AAA to A.
We posted considerably higher net write-downs of nonderivative investments because – in the first quarter in particular – our equity portfolio had been affected by heavy price falls on the stock markets on account of the impact of the coronavirus pandemic.
Gains on disposal were higher overall than in the previous year, and chiefly related to our portfolio of fixed-interest securities and equities, as well as Q1 and Q4 gains from the disposal of real estate.
We posted a net profit from write-downs and write-ups of derivatives and from the disposal of derivatives, primarily due to gains on interest-rate derivatives, which compensated for losses on equity and credit derivatives held for hedging purposes.
Result from equities and equity derivatives1 €m 2020 Prev. Year Regular income 735 748 Write-downs –1,750 –311 Realised gains/losses 1,077 1,037 Result from equities 62 1,475 Change in on-balance-sheet unrealised gains and losses in equity (gross) –766 1,814 Result from equity derivatives –425 –927 Total –1,129 2,362 1 To determine the total annualised return on our equity portfolio (see text), we calculate the ratio of the total result shown in the table and the mean value of the following figures: Equity portfolio (carrying amounts) as at 31 December 2019 (€19,438m), 31 March 2020 (€15,323m), 30 June 2020 (€15,568m), 30 September 2020 (€16,068m) and 31 December 2020 (€16,985m).
Given that we generate the majority of our business in foreign currencies, fluctuations in exchange rates have a significant impact on premium development. If exchange rates had remained unchanged, our gross premiums written would have increased by 10.1% compared with the previous year.
Following several years of favourable loss experience, we saw higher mortality in our US portfolio in 2020, even when adjusted for COVID-19 effects. This circumstance is consistent with the population mortality observed. We are of the opinion that this may be at least partially an indirect consequence of COVID-19.
Our global annual review of provisions also had a decreasing impact on the underwriting result. This includes the adjustment of our provisions for outstanding claims to interest-rate levels.
Moreover, the development of new business also had a positive impact on the result.
The result from reinsurance treaties with non-significant risk transfer continued to perform very favourably. Thanks to growth in new business, above all in Asia and the USA, the result of €175m was significantly up on the previous year’s figure (€128m) and in excess of our expectations. Business performance was not influenced by COVID-19, thus reaffirming its stabilising effect on the aggregate result.
Based on premium volume, around 40% of our global reinsurance business is written in North America, with the USA accounting for approximately 25% and thus ranking before Canada. Around 25% of our premium stems from Europe – with approximately 10% generated in the United Kingdom and Ireland, and about 5% in Germany. Another significant share of around 25% stems from Asia and the MENA region. Australia and New Zealand contributed around 5% to premium income. We are also well positioned in Africa and Latin America, but due to the
In Canada, we also posted an increase in premium income to €1.8bn (1.7bn), thereby retaining our leading market position in traditional business. The technical result, in turn, accounted for an over-proportionate contribution to the overall result, even though it did not fully reach the previous year’s level, partly owing to COVID-19.
In Asia/MENA, our premium income climbed to €3.4bn (3.0bn). New business continued to perform very well. Thanks to our broad diversification, we are in a position to benefit from the region’s growth potential. The technical result continued to develop favourably and was within our expectations – despite a major loss.
Key figures 2020 Prev. year Change % Gross premiums written €m 24,615 22,091 11.4 Share of gross premiums written in reinsurance % 66.0 65.3 Loss ratio % 74.7 66.6
Thereof: Major losses Percentage points 20.8 15.2 Expense ratio % 30.9 33.6 Combined ratio % 105.6 100.2 Technical result €m –171 1,157 – Investment result €m 2,347 2,220 5.7 Operating result €m 759 1,764 –56.9 Consolidated result €m 571 1,562 –63.4
Munich Re Group Annual Report 2020 slightly. Despite high losses from natural catastrophes in the previous year, the supply of reinsurance capacity remained high during the 2020 renewals. In the renewals for 2020, prices rose by approximately 1.8%. Overall, we adhered to our profit-oriented underwriting policy.
The consolidated result and the operating result in property-casualty reinsurance deteriorated considerably compared with the previous year, in particular owing to losses in cancellation-of-events business resulting from COVID-19. Expenditure for major losses was up, and the technical result declined significantly on the previous year. Adjusted for commissions, Munich Re’s customary review of provisions resulted in a reduction in the basic claims provisions for prior years of around €938m for the full year, which is equivalent to around 4.2 percentage points of the combined ratio. This positive development related to almost all lines in our portfolio. The safety margin in the provisions remained unchanged year on year.
Major losses – in excess of €10m each – totalled €4,689m (3,124m) in 2020, after retrocession and before tax. This amount includes run-off profits and losses for major claims from previous years, and is equivalent to 20.8% of net earned premium. As a consequence of COVID-19, the expenditure is much higher than in the previous year, and exceeds our major-loss expectation of 12% of net earned premium. Apart from COVID-19-related losses, 2020 was by and large a normal claims year.
Major losses from natural catastrophes totalled €906m (2,053m) for the full year 2020. This corresponds to 4.0% (10.0%) of net earned premium. The largest natural catastrophes of the year happened in the USA, the largest individual loss being Hurricane Laura, with anticipated expenditure in the region of €280m. There were also a series of thunderstorms and wildfires.
The investment result increased by €126m on the previous year, largely owing to an improved net balance of derivatives owing to gains on interest-rate derivatives and higher gains on the disposal of fixed-interest securities.
Based on premium volume, around 45% of our global property-casualty reinsurance business – including Risk Solutions – is written in North America. Around 35% of our premium comes from Europe, of which around half is generated in the United Kingdom. Further substantial shares are contributed by Asia (about 10%), Australia/ New Zealand (approximately 5%) and Latin America (approximately 5%).
Prices in the US market improved significantly on account of the many loss events. Owing to hurricanes, tornadoes and wildfires, major natural catastrophe losses exceeded the long-term average in 2020. In 2020, we saw growth with selected clients in reinsurance and wrote additional profitable new business.
The premium income of the Hartford Steam Boiler Group (HSB Group) amounted to €1,179m (1,072m) and was once again up on the previous year. This increase is mainly attributable to growth generated not only by new products, but also with our core business. The result was very gratifying. American Modern also posted a rise in premium income to €1,252m (1,168m) owing to higher prices and new business. The result situation fell short of expectations owing to natural hazard losses, such as hurricanes, tornadoes and wildfires.
Premium in Japan was up appreciably year on year following two years of heavy losses; it totalled €578m (425m).
Business expanded greatly in China, where premium income amounted to €885m (682m).
In agricultural reinsurance, we saw a decline in premium income to €397m (410m) in the North American market. Claims experience saw an amelioration compared with the previous year, but storm events in the USA had an adverse impact.
Supported by a positive market environment, total premium volume in marine business increased by around 14% to €1,165m (1,022m). The result was gratifying.
Capital Partners offers clients a broad range of structured individual reinsurance and capital-market products, as well as parametric and derivative solutions to hedge against weather and other risks. These solutions are applied to clients from the agricultural sector as well. We also use Capital Partners’ services for our own purposes in order to buy retrocession cover on the basis of our defined risk strategy. In the reporting year, we concluded client transactions worth more than €1.5bn in the area of structured reinsurance. In addition to a comprehensive traditional retrocession programme totalling US$ 600m, Capital Partners also placed two sidecar transactions worth around US$ 635m in the capital market on its own behalf.
Gross premiums written in the segment were down in the 2020 financial year, owing to a COVID-19-related decrease in travel insurance. Positive development in Health Germany (especially in supplementary insurance) and Digital Ventures (above all in health insurance business), and growth from new products in Life Germany more than offset the planned portfolio reduction in Life Germany. The segment’s total premium income was also down on the previous year.
New business Life Germany 2020 Prev. year Change €m €m % Regular premiums 180 198 –9.2 Single premiums 525 797 –34.1 Total 705 995 –29.1 Annual premium equivalent1 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
The technical result increased substantially year on year, largely because the previous year had been impacted by a one-off effect. At €2,567m (2,368m), the investment result also improved slightly in the past financial year. The negative effects of the capital market environment were offset by higher gains on disposals and an improved net balance of derivatives. Overall, our hedging strategy proved effective in 2020’s volatile capital market environment. To finance the additional interest reserve (ZZR – to be built up only in single-entity financial statements under German GAAP), we realised slightly higher valuation reserves in 2020 than in the previous year. The operating result grew significantly overall.
Key figures 2020 Prev. year Change €m €m % Gross premiums written 5,372 5,560 –3.4 Technical result 225 224 0.5 Operating result 169 230 –26.6
Key figures 2020 Prev. year Change €m €m % Gross premiums written 800 765 4.6 Technical result 104 67 55.4 Operating result 47 26 78.6
The technical result increased substantially compared with the previous year, mainly driven by a temporary reduction in claims expenditure for health insurance, and business growth in supplementary dental insurance. The investment result fell to –€3m (10m), chiefly on account of higher impairment losses on equities. Altogether, the operating result increased as a result of these developments.
Key figures 2020 Prev. year Change % Gross premiums written €m 3,677 3,500 5.1 Share of gross premiums written by ERGO % 20.9 19.8 Loss ratio % 61.9 60.3 Expense ratio % 30.5 32.0 Combined ratio % 92.4 92.3 Technical result €m 294 303 –2.9 Investment result €m 175 157 11.4 Operating result €m 255 212 20.4 Consolidated result €m 157 148 6.5
As regards premium income, our most important classes of business in the ERGO Property-casualty Germany segment were motor insurance and third-party liability insurance. They respectively accounted for around 19% and 17% of the gross premiums written.
In international property-casualty business, gross premiums written were down 2.8% to €2,714m (2,791m). The decline was mainly attributable to the sale of companies outside Germany and negative currency effects from our business in Poland. We posted premium growth mainly in the Netherlands, Austria and Greece.
As a result of organic growth in our Spanish and Belgian markets, gross premiums written developed favourably in international health business, climbing by 6.0% to €1,509m (1,424m) in the financial year.
The technical result improved compared with the previous year. Spanish health business and Belgian life business were the main drivers of this positive development. In Spain, the increase was partly attributable to premium growth. In Belgian life business, the previous year’s figure had been affected by higher impairment losses on deferred acquisition costs owing to the low-interest-rate environment. In international property-casualty business, the technical result was down on the previous year, mainly on account of the disposal of our Turkish company in 2019.
In international property-casualty business, the combined ratio improved year on year. This included our biggest market, Poland, where the combined ratio decreased by 0.9 percentage points, and Austria, where it was down by 2.6 percentage points. We also posted an improved combined ratio in international health business, down 2.0 percentage points on the previous year. Paid claims and the change in claims provisions totalled €2,063m (2,107m), along with net operating expenses of €988m (€1,012m), compared with net earned premiums of €3,289m (3,309m).
The investment result was slightly down on the previous year. An improved net balance of derivatives and higher gains on disposals were offset by higher impairment losses and lower income.
Group equity was lower than at the beginning of the year. This was mainly attributable to a lower currency translation reserve, the dividend payout and the share buy-back programme. The decline was partly counterbalanced by our consolidated result and higher valuation reserves for fixed-interest securities.
Between 2006 and 2020, we returned a total of €30.6bn to our shareholders. The Board of Management approved another share buy-back programme in February 2020. Given the uncertainty as a consequence of the coronavirus crisis, this programme was initially put on hold on 31 March 2020, before a definitive decision was taken on 20 July 2020 not to implement the programme. During the reporting year, we bought back shares with a total volume of €340m.
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, voting rights from the shares concerned are excluded by law. Insofar as shareholders are entered under their own name as being the holders of shares which belong to a third party and exceed the upper limit of 2% of the share capital as stated in the Articles of Association, the shares entered shall not carry any voting rights, pursuant to Article 3(5) of the Articles of Association.
− Under Article 4(1) of the Articles of Association, the Board of Management is authorised, with the consent of the Supervisory Board, to increase the Company’s share capital at any time up to 25 April 2022 by an amount of up to €280m by issuing new registered, no-par-value shares against cash or non-cash contribution (Authorised Capital 2017). In accordance with the above-mentioned provisions of the Articles of Association, it may exclude subscription rights. As regards the resolution of 26 April 2017, the Board of Management declared that it will utilise the Authorised Capital 2017 only up to a maximum amount of 33% of the share capital at the time of the Annual General Meeting. It further stated that it will only exercise the authority to exclude shareholders’ subscription rights where such shares do not exceed 10% of the existing share capital at the time the authorisation is exercised for the first time.
In the consolidated cash flow statement, the consolidated profit of €1,211m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is also adjusted by €5,264m 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.
Outflows from investing activities were determined by the change from the acquisition/sale and maturity of investments and insurance-related investments totalling −€6,089m.
Our general definition of risk is possible future developments or events that could result in a negative prognosis or a negative deviation from the Group’s targets. We classify risks as “significant” if they could have a long-term adverse effect on Munich Re’s assets, financial situation or profitability. We have applied this definition consistently to each business unit and legal entity, taking account of its individual risk-bearing capacity. In doing so, we differentiate between risks depicted in our internal model and other risks.
Solvency capital requirement – Internal model Munich Re has a comprehensive internal model that determines the capital needed to ensure that the Group is able to meet its commitments even after extreme loss events. We use the model to calculate the capital required under Solvency II (the solvency capital requirement, or SCR).
The table shows the solvency capital requirement for Munich Re and its risk categories as at 31 December 2020.
SCR increased largely owing to the fall in interest rates, which led to a rise in the market values of fixed-interest securities on the one hand and, in the ERGO field of business, to a reduction in loss-absorbing funds, as a result of which there was an increase in the remaining credit risks. Other information about the changes in the different risk categories and details about risk concentrations can be found in the following sections.
Munich Re Group Annual Report 2020 information on property-casualty business can be found in the Notes to the consolidated financial statements under (40) Disclosures on risks from property-casualty insurance business.
We differentiate between large losses involving a cost exceeding €10m in one field of business, losses affecting more than one risk or more than one line of business (accumulation losses), and all other losses (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 actuarial methods 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.
We limit our risk exposure by setting coverage limits not only for natural catastrophe risks, for example, but also for potential man-made losses. Our experts develop scientifically sound scenarios for possible natural events that quantify the probability of occurrence and damage potential. In addition to natural catastrophes, we include other accumulation risks such as cyber and pandemics, using special models.
Another measure for controlling underwriting risks is the targeted cession of a portion of our risks to other carriers via external reinsurance or retrocession. Most of our companies have intra-Group and/or external reinsurance and/or retrocession cover.
Solvency capital requirement – Property-casualty The solvency capital requirement increased by 6.6% at Group level. This was mainly due to growth in business with natural hazard exposure – in line with our business strategy – in the reinsurance field of business. The SCR increase was dampened by the depreciation of the US dollar.
The widespread global measures to curb the COVID-19 pandemic resulted in high losses in the property-casualty reinsurance segment. We will consider this in the validation of the underlying models.
Reinsurance ERGO Diversification 31.12.2020 Prev. year 31.12.2020 Prev. year 31.12.2020 Prev. year €m €m €m €m €m €m Basic losses 3,948 3,895 507 393 –330 –243 Large and accumulation losses 8,892 8,282 240 153 –184 –108 Subtotal 12,840 12,177 747 545 Diversification effect –3,534 –3,403 –188 –111 Total 9,306 8,774 559 434 –452 –375
→ Group 31.12.2020 Prev. year Change €m €m €m % Basic losses 4,124 4,044 80 2.0 Large and accumulation losses 8,949 8,327 622 7.5 Subtotal 13,073 12,371 702 5.7 Diversification effect –3,660 –3,537 –123 –3.5 Total 9,413 8,833 580 6.6
Life and health underwriting risk The underwriting risk is defined here as the risk of insured benefits payable in life or health insurance business being higher than expected. Of particular relevance are biometric risks and policyholder-behaviour risks, such as lapses and lump-sum options. We differentiate between risks that have a short-term or long-term effect on our portfolio. In addition to the simple risk of random fluctuations resulting in higher claims expenditure in a particular year, the adverse developments with a short-term impact that we model notably include rare – but costly – events such as pandemics. Further relevant information on the risks in life and health insurance can be found in the Notes to the consolidated financial statements under (39) Disclosures on risks from life and health insurance business.
Risk modelling attributes probabilities to potential modified assumptions. We use primarily historical data extracted from our underlying portfolios to calibrate these probabilities, and additionally apply general mortality rates for the population to model the mortality trend risk. To enable us to define appropriate parameters for the modelling of the range of areas in which we operate, portfolios with a homogeneous risk structure are grouped together and individual comprehensive profit and loss distributions determined. We then aggregate these distributions, taking account of the dependency structure to obtain an overall distribution.
Munich Re Group Annual Report 2020 insurance, most long-term contracts include the possibility and/or obligation to adjust premiums. Practically, however, there are limits to the resilience of policyholders.
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 interest-rate 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 from changes in credit risk spreads – for example, on euro government bonds from various issuers, or on corporate bonds. We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments, but also the underwriting liabilities – especially in life primary insurance. Due to the long-term interest-rate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities can be highly dependent on conditions in the capital markets.
We use appropriate limit and early-warning systems in our asset-liability management to manage market risks. Derivatives such as equity futures, options and interestrate swaps – which are used mainly for hedging purposes – also play a role in our management of the risks. The impact of derivatives is taken into account in the calculation of solvency capital requirements. Further information on derivative financial instruments can be found in the Notes to the consolidated financial statements, (8) Other securities at fair value through profit or loss and insurance-related investments.
Reinsurance ERGO Diversification 31.12.2020 Prev. year 31.12.2020 Prev. year 31.12.2020 Prev. year €m €m €m €m €m €m Equity risk 2,437 2,792 1,692 1,479 –55 –109 General interest-rate risk 1,515 1,549 2,500 2,800 –920 –1,338 Specific interest-rate risk 1,824 1,623 3,829 3,081 –617 –632 Property risk 1,591 1,540 845 758 –87 –55 Currency risk 3,364 4,457 177 232 –108 –59 Subtotal 10,731 11,962 9,043 8,348 Diversification effect –5,114 –5,705 –2,408 –2,373 Total 5,617 6,257 6,635 5,975 –1,522 –2,152
→ Group 31.12.2020 Prev. year Change €m €m €m % Equity risk 4,074 4,162 –88 –2.1 General interest-rate risk 3,094 3,012 82 2.7 Specific interest-rate risk 5,037 4,071 966 23.7 Property risk 2,350 2,243 107 4.8 Currency risk 3,433 4,630 –1,197 –25.9 Subtotal 17,988 18,118 –130 –0.7 Diversification effect –7,257 –8,038 781 9.7 Total 10,730 10,080 650 6.4
Solvency capital requirement – Market The solvency capital requirement increased by 6.4% at Group level. Detailed information on the changes in the individual subcategories is available in the following sections.
Equity risk The year-on-year reduction in the equity-backing ratio from 6.4% to 6.0% (after derivatives) was reflected in a decrease in the equity risk in the reinsurance field of business.
In the ERGO field of business, the overall increase in the interest-rate risks primarily resulted from the further drop in interest rates. As a consequence, the risk buffers available to our life insurance companies decreased, leaving more interest-rate risks with the shareholder.
In the reinsurance field of business, the market value of interest-sensitive investments as at 31 December 2020 was €73.5bn (€71.0bn). Measured in terms of modified duration, the interest-rate sensitivity of those investments was 6.6 (6.5), while that of the liabilities was 6.7 (6.3). A decrease in interest rates of one basis point would increase available own funds by approximately €11.0m (11.8m).
Property risk The further expansion of the global property portfolio led to an increase in the property risk. This effect was partially offset by the depreciation of foreign currencies against the euro.
Credit risk We define credit risk as the financial loss that Munich Re could incur as a result of a change in the financial situation of a counterparty. In addition to credit risks arising out of investments in securities and payment transactions with clients, we actively assume credit risk through the writing of credit and financial reinsurance and in corresponding primary insurance business.
Munich Re determines credit risks using a portfolio model, which is calibrated over a longer period (at least one full credit cycle), and which takes account of changes in fair value caused by rating migrations and debtor default. The credit risk arising out of investments (including deposits retained on assumed reinsurance, government bonds and credit default swaps – CDSs) and reserves ceded is calculated by individual debtor. If the credit risk does not exclusively depend on the debtor’s creditworthiness, but also on other factors (such as subordination, guarantees or collateralisation), these are also taken into account. 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. The calculation of the credit risk in Other receivables is based on internal expert assessments. We also capitalise the credit risk for highly rated government bonds. Information on ratings can be found in the Notes to the consolidated financial statements, (6) Loans ff.
Risk concentrations are mainly in government bonds issued by countries inside and outside the European Union. In addition, pfandbriefe and similar covered bonds account for a large proportion of the investments. These partly result in issuer risk, and partly in risks related to the assets belonging to the cover pool.
We use a cross-balance-sheet counterparty limit system valid throughout the Group to monitor and control our Group-wide credit risks. The limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data, and the risk appetite defined by the Board of Management. The utilisation of limits is calculated on the basis of risk-weighted exposures. There are also volume limits for securities lending and repurchase transactions. Group-wide rules for collateral management – for example, for over-the-counter (OTC) derivatives and catastrophe bonds issued – enable the associated credit risk to be reduced.
In monitoring the country risks, we do not simply rely on the usual ratings, but perform independent analyses of the political, economic and fiscal situation in the most important of the countries issuing paper in which we might potentially invest. On this basis, and taking account of the investment requirements of the fields of business in the respective currency areas and countries, limits or action to be taken are approved. These are mandatory throughout the Group for investments and the insurance of political risks.
With the help of defined stress scenarios, our experts forecast potential consequences for the financial markets, the fair values of our investments, and the present values of our underwriting liabilities. At Group level, we counter any negative effects with the high degree of diversification in our investments and our liability structure, and with our active Group-wide asset-liability management.
The sensitivities in the credit risk model are regularly checked against the most important input parameters. This primarily concerns the recovery rates from insolvent debtors, the probabilities of debtor migration between rating classes, and the parameters for correlations between debtors. All validations demonstrated the appropriateness of the modelling approaches used.
Operational risk We define operational risk as the risk of losses resulting from inadequate or failed internal processes, incidents caused by the actions of personnel or system malfunctions, or external events. This includes criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations, and disagreements with business partners.
We use appropriate procedures to specifically identify and analyse reputational risk, strategic risk, security risk and liquidity risk. These risks are also assessed and managed in our risk management process.
Reputational risk We define reputational risk as the risk of damage to Munich Re’s reputation as a consequence of a negative public image resulting in a deterioration in its credit rating, corporate value, etc. The reputational-risk aspect of relevant issues is assessed in the fields of business by reputational risk committees. Where a reputational risk could potentially have an impact on Munich Re, central divisions at Group level are involved in the assessment.
Security risk We define security risks as risks resulting from threats to the security of our employees, data, information, and property. We are intensifying our analysis of cyber risks in particular in recognition of the increasing importance of information technology for Munich Re’s core processes and the dynamic growth of cyber crime.
Liquidity risk Our objective in managing liquidity risk is to ensure that we are in a position to meet our payment obligations at all times. To guarantee this, the liquidity position at our units is continuously monitored and subject to stringent requirements for the availability of liquidity. The short-term and mediumterm liquidity planning is submitted to the Board of Manage- ment on a regular basis.
Solvency II ratio1 31.12.2020 Prev. year Change Eligible own funds2 €m 39,919 41,544 –1,625 Solvency capital requirement €m 1 Eligible own funds excluding the application of transitional measures for technical provisions; including the application of transitional measures for technical provisions, the own funds amounted to €46.1bn (48.1bn); Solvency II ratio: 240% (274%).
2 Negative economic earnings reduced the eligible own funds as at the reporting date by a total of €2.2bn. While the dividend approved by the Board of Management and proposed to the Annual General Meeting for the 2020 financial year also had a reducing effect, the issuing of a subordinated bond and the suspension of the share buy-back – the reducing effect of which had already been recognised as at 31 December 2019 – both had a positive effect. Overall, eligible own funds increased by €0.9bn in the 2020 financial year as a result of capital measures. An amount of –€0.3bn for other measures was also recognised.
Munich Re is heavily invested in the eurozone, and in reinsurance in particular in the US dollar currency area. We attach importance to maintaining a correspondingly broad diversification of investments to cover our technical provisions and liabilities. However, low interest rates continue to pose major challenges, in particular for life insurance companies with guaranteed minimum interest rates in the eurozone. We take various risk management measures to counter fluctuations in the capital markets that can lead to volatilities in the Group’s own funds.
In geopolitical terms, the focus remains on the large number of major conflicts and trouble spots which – if they escalate – could have perceptible consequences not only at a regional level, but also globally. These include the various crises in the Middle East, tensions between a number of Mediterranean neighbouring states and a possible intensification of the USA’s confrontation with Iran, Russia or North Korea. With respect to global capital markets, each of these crises has the potential to dramatically increase uncertainty and volatility, at least in the short term.
In Germany, government action with implications for private health insurance cannot be ruled out, especially if political parties advocating a “citizens’ insurance scheme” influence the policies of a future German Federal Government. At the present time, however, it is not possible to predict what these implications might be.
It is also conceivable that greater emphasis will be placed on climate and environmental policy following the German federal election in 2021, which could also have an impact on the business model for investments or for primary insurance and reinsurance business. This is being monitored closely throughout the Group.
Global players such as Munich Re are subject to increased fiscal pressure nationally and internationally, as well as a higher audit intensity. Given the current political emphasis on an appropriate taxation of international companies and current work at OECD level as regards a global minimum tax rate, this trend is likely to continue and intensify.
As part of the normal course of business, Munich Re companies are involved in court, regulatory and arbitration proceedings in various countries. The outcome of pending or impending proceedings is neither certain nor predictable. However, we believe that none of these proceedings will have a significant negative effect on the financial position of Munich Re. Legal risks are dealt with using combined legal expertise within the individual departments and units.
In accordance with the prescribed processes, our Board committees explicitly defined the risk appetite for significant risk categories in the year under review, and quantified it with key figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout the Group. In 2020, risk exposures were regularly quantified and compared with the risk appetite. They were reported on and discussed in the relevant committees. At 208.1%, the Solvency II ratio is within our communicated optimal ranges of 175–220% (without application of transitional measures).
Despite the burden to date caused by the coronavirus pandemic – and with an eye towards the claims expected in 2021 in connection with the pandemic – Munich Re continues to rest on a very solid capital base. Based on up-to-date findings and on our internal pandemic model, Munich Re’s Solvency II ratio (without application of transitional measures) would be within the optimal range even in the event of further insurance claims and negative capital-market effects. We therefore assess Munich Re’s risk situation to be manageable and under control. For more detailed information, please see Outlook 2021.
Opportunities report Our diversified business model, strong capitalisation and innovation, good customer focus, and deep knowledge of the industry put us in a good position to benefit from continuously evolving markets and changes in client behaviour, while generating profitable growth by developing customised solutions for our clients. Unless stated otherwise, the opportunities for Munich Re outlined below generally relate equally to all fields of business.
The further deterioration in interest rates triggered by the coronavirus pandemic has created a variety of difficulties for our cedants, particularly in life insurance, and poses many challenges for our own investments, although they are partially compensated for by our asset management. A less expansionary monetary policy could lead to higher interest rates and allow the bond markets to normalise. This would entail some investment losses in the short term, but would be favourable to our insurance business and bring higher returns in the long run.
Munich Re Group Annual Report 2020 new cutting-edge business models. In addition, we have established the FlexFactory joint venture together with Porsche and its subsidiary MHP, where we are bundling manufacturing, software and financial management expertise to realise small production runs flexibly and economically.
A further example is our subsidiary ERGO Mobility Solutions GmbH, in which we are jointly developing innovative service and product solutions together with our cooperation partners in the field of mobility; key achievements in 2020 include the start of sales activities at Great Wall Motors in China and the conclusion of a cooperation agreement with BMW.
Comparison of prospects for the Munich Re Group in the 2019 annual report with results achieved
The year 2020 was marked by the global spread of COVID-19 and far-reaching restrictions on public, private and economic life. We faced – and are indeed still facing – enormous social, economic and business challenges. Protecting the health of our staff, their families and our business partners remains our highest priority. We are using appropriate models such as flexible working hours and home working in order to secure our business operations.
At the beginning of the year, we projected gross premium of around €52bn for Munich Re for the 2020 financial year. After pleasing performance in the first six months, especially in reinsurance, we raised our forecast to around €54bn. At €54.9bn, we exceeded this target figure.
The 2020 investment result generated an overall return of 3.0% in relation to the average market value of our portfolio. We met our target of a return on investment of around 3% thanks to the ability to offset lower regular income and impairment losses on our equity portfolio – resulting from temporary falls in share prices in Q1 – with gains from the disposal of fixed-interest securities and equities as well as gains from the sale of real estate and an improved net balance of derivatives.
Munich Re Group Annual Report 2020 thanks to positive effects in reinsurance. Adjusted for COVID-19-related losses, the value added by new business developed positively. Despite COVID-19-related losses, new business made a positive contribution at Group level.
At the beginning of the year, we had projected a technical result, including reinsurance treaties with non-significant risk transfer, of €550m in life and health reinsurance. Largely as a result of high claims expenditure related to the coronavirus pandemic, this target was retracted upon publication of the Q2 results in August. The target was adjusted on 1 December 2020, to over €100m. At €97m, we narrowly missed this lower target. COVID-19-related claims amounted to €370m in life and health reinsurance and were dominated by mortality covers in the USA.
At the beginning of the financial year, we had forecast gross premiums written of slightly more than €17.5bn for the ERGO field of business. We achieved this, with €17.6bn. Our forecast at the start of the year for the combined ratio of the ERGO Property-casualty Germany segment had been around 92% – provided major losses remained within normal bounds. Although the 2020 loss ratio was adversely affected by the coronavirus pandemic, among other things, we only narrowly missed our forecast, with 92.4% at the end of the financial year.
At the beginning of the year, we had aimed for a combined ratio of around 94% in the ERGO International segment, provided major losses remained within normal bounds. The combined ratio saw a significant improvement, especially in Poland – our largest market – and in Austria, and was a pleasing 92.7% at the end of the financial year.
Outlook for the Munich Re Group 2021 Gross premiums written €bn 55 Technical result life and health reinsurance1 €m 400 Combined ratio property-casualty reinsurance % 96 Combined ratio ERGO Property-casualty Germany % 92 Combined ratio ERGO Property-casualty International % 93 Return on investment2 % over 2.5 Consolidated result €bn 2.8 Economic earnings €bn over 2.8 1 Including the result from reinsurance treaties with non-significant risk transfer. 2 Excluding insurance-related investments.
Munich Re anticipates further COVID-19-related losses in 2021, though to a much lesser degree than in 2020. Despite recovery in the financial markets, uncertainty remains as regards the length and severity of the recessions in many countries and the impact these could have on the international financial markets. For Munich Re, this continues to entail risks related to a possible widening of credit risk spreads for bonds. Further loss potential is found in the possible reductions in market values of shares and property, or an additional drop in the interest rate.
We aim to achieve a consolidated result of around €2.8bn: €1.6bn higher than the previous year’s figure, which was significantly impacted by COVID-19 losses. 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 tax parameters, or other one-off effects.
Subject to approval by the Annual General Meeting, the dividend will amount to €9.80 per share. This is equivalent to a total payout of €1.4bn.
The renewals at 1 April 2021 (above all in Japan) and 1 July 2021 (parts of the portfolio in the USA, Australia and Latin America) will involve the renegotiation of a premium volume of around €5.9bn in reinsurance treaty business. It is Munich Re’s expectation that the recent price increases will continue in these renewal rounds, too.
The accounting result of Munich Reinsurance Company developed as follows: Condensed income statement for Munich Reinsurance Company 2020 Prev. year Change €m €m % Earned premiums for own account 20,588 18,734 9.9 Interest on technical provisions for own account 360 367 –2.0 Other underwriting income for own account 53 16 228.8 Claims incurred for own account –16,500 –13,535 –21.9 Change in other technical provisions for own account 338 229 47.6 Expenses for performance-related and non-performance-related premium refunds for own account –1 –1 –60.3 Operating expenses for own account –5,311 –5,641 5.9 Other underwriting expenses for own account –15 –7 –113.2 Subtotal –488 162 – Change in claims equalisation provision and similar provisions –772 –795 2.8 Underwriting result for own account –1,260 –632 –99.3 Investment income 7,050 4,856 45.2 Investment expenses –2,180 –1,754 –24.3 Interest income on technical provisions –388 –391 0.7 Other income 537 1,288 –58.3 Other expenses –445 –1,340 66.8 Non-technical result 4,574 2,658 72.1 Operating result before tax 3,314 2,026 63.6 Taxes on income and profit and other taxes –133 –534 75.0 Profit for the year 3,180 1,492 113.2 Profit brought forward from previous year 41 48 –14.4 Transfers from other revenue reserves 0 0 – Appropriations to revenue reserves –1,590 –126 <-1.000,0 Net retained profits 1,632 1,414 15.4
In the 2020 financial year, Munich Reinsurance Company’s gross premium income totalled €25,152m (22,814m). The year-on-year increase of 10.2% chiefly resulted from the realisation of profitable growth opportunities in writing new business and expanding existing business. Changes in the value of the euro as against other currencies had a slightly dampening effect.
Major-loss expenditure totalling €3,565m (2,686m) after retrocession and before tax was significantly higher than in the previous year and exceeded our expectations. There were again a large number of major losses in 2020. The financial year was marked by high losses in connection with COVID-19; these affected a large number of classes of business, especially event cancellation and business interruption, and totalled around €2,800m.
Premium income in health reinsurance increased in the reporting year thanks to new business, in particular in Asia. The result saw a modest increase year on year due to a reduction in the expense ratio.
In personal accident reinsurance, premium income was down in the reporting year owing to the cancellation of unprofitable business. The result before claims equalisation provision decreased substantially owing to much higher claims expenditure than in the previous year.
In third-party liability reinsurance, premium income strongly increased in the reporting year mainly on account of new business and business growth in the UK and Asia. By contrast, the underwriting result before claims equalisation provision worsened significantly compared with the previous year, mostly owing to higher loss and major-loss expenditure, and lower reserve releases for claims from prior accident years.
Combined ratio % 93.3 97.0 Underwriting result before claims equalisation provision and similar provisions €m
Premium income in motor reinsurance remained almost constant year on year. The improved technical result was mainly due to a lower expense ratio.
Combined ratio % 90.1 86.7 Underwriting result before claims equalisation provision and similar provisions €m
In marine reinsurance, premium income increased in the reporting year, mainly on account of new business. The underwriting result before claims equalisation provision saw a slight decrease year on year owing to a higher loss ratio.
Combined ratio % 112.5 112.3 Underwriting result before claims equalisation provision and similar provisions €m
Due to a new, more precise categorisation by class of business, there were changes in the distribution of premium income and underwriting results among fire and other classes of business. This was the main reason for the substantial decrease in premium income and the improved underwriting result.
In engineering reinsurance (machinery, EAR, CAR, EEI, etc.), premium income saw a slight year-on-year increase due to business growth. The underwriting result was up slightly on the previous year.
Under other classes of business, we subsume the remaining classes of property reinsurance, such as burglary, plate glass, hail (including agricultural reinsurance), water damage, contingency, windstorm, livestock and householders’ and homeowners’ comprehensive reinsurance as well as credit reinsurance.
Due to a new, more precise categorisation by class of business, there were changes in the distribution of premium income and underwriting results among fire and other classes of business. This was the main reason for the substantial increase in premium income. In addition, the year-on-year increase in premium income was driven by new business and the expansion of existing business in various markets, as well as improved rates. Due to the new categorisation by class of business, negative underwriting result was allocated from fire to other classes of business. In addition, high COVID-19 losses contributed to the significantly negative result.
The COVID-19 pandemic and the measures deployed to counteract it in 2020 plunged the global economy into its most severe crisis in decades. Global economic output fell sharply on the previous year. The economies in the United States, the eurozone, Japan and the United Kingdom were in a deep recession. Although the Chinese economy began recovering from its sharp drop as early as the spring, it managed only a low average growth rate in 2020. The rates of inflation in advanced economies were lower on average than in the previous year; in the eurozone and Japan, inflation was very low.
Many central banks took far-reaching measures to cushion the impact of the economic crisis and to stabilise the financial system. Yields on ten-year government bonds in the United States and Germany dropped to record lows in 2020. A minor recovery notwithstanding, yields in late December were still down on the start of the year. Yields on ten-year government bonds in Germany remained in negative territory.
Volatility in international financial markets was very high. Equity markets worldwide fell sharply in response to the rapid spread of the coronavirus, and on account of an escalation in the oil market’s price war. Important equity indices, such as the US Dow Jones and the DJ EuroStoxx 50, were down more than a third in mid-March from their levels at the end of 2019. Following massive intervention by central banks and pledges of extensive fiscal measures, a lot of equity markets proceeded to rebound strongly.
Currency markets likewise experienced sharp fluctuations. At the end of December, the US dollar, the Canadian dollar and the British pound were all much lower against the euro compared with the end of 2019.
Opposing effects from higher regular income and a change in net write-ups and write-downs nearly balanced each other out.
The lower tax expenditure was chiefly due to a significant fall in permanent establishments’ results. In addition, the utilisation of loss carry-forwards and the German parent company’s lower tax burden from previous years helped to further reduce tax expenditure.
Balance sheet structure of Munich Reinsurance Company €m 2020 Prev. year Change €m €m % Intangible assets 147 167 –12.1 Investments 76,765 75,622 1.5 Receivables 19,828 16,526 20.0 Other assets 842 655 28.5 Deferred items 207 203 1.6 Excess of plan assets over pension liabilities 642 570 12.6 Total assets 98,430 93,743 5.0 Equity 12,362 10,894 13.5 Subordinated liabilities 4,903 3,681 33.2 Technical provisions 64,179 63,431 1.2 Other provisions 1,819 2,001 –9.1 Deposits retained on retroceded business 2,049 1,751 17.0 Other liabilities 13,088 11,957 9.5 Deferred items 31 28 12.7 Total equity and liabilities 98,430 93,743 5.0
The carrying amount of Munich Reinsurance Company’s investments excluding deposits retained on assumed reinsurance increased slightly to €67,893m (64,465m).
As at 31 December 2020, 87% of our fixed-interest securities were rated “A” or better. Overall, 95% of our fixed-interest securities were investment-grade at the reporting date.
Equity1 €m 2020 Prev. year Issued capital 588 576 Capital reserve 6,845 6,845 Revenue reserves 3,298 2,059 Net retained profits 1,632 1,414 Equity 12,362 10,894 1 Information on Section 160(1) no. 2 of the German Stock Corporation Act (AktG) can be found in Note 6 of Munich Reinsurance Company’s Annual Report 2020.
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 aboveaverage loss expenditure is largely offset. According to current calculations, it is expected that – given normal claims expenditure in the 2021 financial year – the allocations to the claims equalisation provision, which have an adverse impact on the result, will be lower.
By contrast, due to negative results, the claims equalisation provision in personal accident reinsurance was reduced by €70m (+€174m), credit by €33m (+€480m) and marine by €17m (+€40m).
Statement on Corporate Governance for the 2020 financial year pursuant to Section 289f and Section 315d of the German Commercial Code (HGB)
The projections by Munich Reinsurance Company about the future development of its business are essentially subject to the same influences as the reinsurance life and health and reinsurance property-casualty segments presented in the consolidated financial statements. You can find this information in the outlook 2021.
Assets 132 A Intangible assets 132 B Investments 134 C Insurance-related investments 135 D Ceded share of technical provisions 135 E Receivables 135 F Cash at banks, cheques and cash in hand 135 G Deferred acquisition costs 135 H Deferred tax assets 135 I Other assets 135 J Non-current assets held for sale 136
Notes to the consolidated balance sheet – Assets 148 01 Goodwill 148 02 Other intangible assets 149 03 Land and buildings, including buildings on third-party land 151 04 Hierarchy for the fair value measurement of investments 151 05 Investments in affiliated companies, associates and joint ventures 157 06 Loans 157 07 Other securities available for sale 158 08 Other securities at fair value through profit or loss and insurance-related investments
Notes to the consolidated income statement 180 30 Premiums 180 31 Income from technical interest 180 32 Expenses for claims and benefits 181 33 Operating expenses 181 34 Investment result 182 35 Insurance-related investment result 182 36 Other operating result 182 37 Other non-operating result, currency result and net finance costs 183 38 Taxes on income 183
Disclosures on risks from insurance contracts and financial instruments 184 39 Disclosures on risks from life and health insurance business 184 40 Disclosures on risks from property-casualty insurance business 186
Notes 31.12.2020 Prev. year Change €m €m €m €m €m % A. Intangible assets I. Goodwill (1) 2,782 2,941 –159 –5.4 II. Other intangible assets (2) 1,223 1,240 –17 –1.4 4,005 4,180 –175 –4.2 B. Investments I. Land and buildings, including buildings on third-party land (3)
Associates and joint ventures accounted for using the equity method 3,104 2,625 480 18.3 III. Loans (6) 51,944 52,507 –563 –1.1 IV. Other securities 1. Available for sale (7) 155,389 151,558 3,831 2.5 2. At fair value through profit or loss (8) 2,927 2,781 146 5.2 158,316 154,338 3,977 2.6 V. Deposits retained on assumed reinsurance (9) 7,980 7,938 41 0.5 VI. Other investments (10) 4,800 5,144 –344 –6.7 232,950 228,764 4,186 1.8 C. Insurance-related investments (8) 11,033 9,163 1,870 20.4 D. Ceded share of technical provisions (11) 5,321 4,937 384 7.8 E. Receivables I. Current tax receivables 765 699 66 9.5 II. Other receivables (12) 25,431 21,539 3,891 18.1 26,196 22,238 3,957 17.8 F. Cash at banks, cheques and cash in hand 5,615 4,994 621 12.4 G. Deferred acquisition costs (13) Gross 9,617 9,664 –47 –0.5 Ceded share –498 –393 –106 –26.9 Net 9,119 9,272 –153 –1.6 H. Deferred tax assets (14) 278 316 –38 –12.0 I. Other assets (15) 3,215 3,289 –74 –2.2 J. Non-current assets held for sale (16) 215 400 –185 –46.2 Total assets 297,946 287,553 10,393 3.6 1 You can download this information as an Excel file; please refer to the Financial Supplement under www.munichre.com/results-reports.
Notes 31.12.2020 Prev. year Change €m €m €m €m % A. Equity (17) I. Issued capital and capital reserve 7,432 7,421 12 0.2 II. Retained earnings 13,568 12,804 764 6.0 III. Other reserves 7,683 7,510 173 2.3 IV. Consolidated result attributable to Munich Reinsurance
Notes 2020 Prev. year Change €m €m €m €m €m % Gross premiums written 54,890 51,457 3,433 6.7 1. Earned premiums (30) Gross 53,788 50,873 2,915 5.7 Ceded share –2,566 –2,594 28 1.1 Net 51,223 48,280 2,943 6.1 2. Income from technical interest (31) 5,270 6,745 –1,475 –21.9 3. Expenses for claims and benefits (32) Gross –44,635 –41,058 –3,577 –8.7 Ceded share 1,558 1,373 184 13.4 Net –43,077 –39,685 –3,393 –8.5 4. Operating expenses (33) Gross –13,379 –13,616 237 1.7 Ceded share 564 560 4 0.8 Net –12,815 –13,056 242 1.9 5. Technical result (1–4) 600 2,283 –1,683 –73.7
Statement of recognised income and expense for the 2020 financial year €m 2020 Prev. year Consolidated result 1,211 2,707 Currency translation Gains (losses) recognised in equity –1,392 422 Recognised in the consolidated income statement 0 0 Unrealised gains and losses on investments Gains (losses) recognised in equity 2,939 4,514 Recognised in the consolidated income statement –1,284 –853 Change resulting from equity method measurement Gains (losses) recognised in equity –21 –15 Recognised in the consolidated income statement –71 0 Change resulting from cash flow hedges Gains (losses) recognised in equity –2 1 Recognised in the consolidated income statement 0 0 Other changes –1 4 I. Items where income and expenses recognised directly in equity are reallocated into the consolidated income statement 168 4,073 Remeasurements of defined benefit plans –204 –411 Other changes 0 0 II. Items where income and expenses recognised directly in equity are not reallocated to the consolidated income statement
–204 –411 Income and expense recognised directly in equity (I + II) –36 3,661 Total recognised income and expense 1,175 6,369 Thereof: Attributable to Munich Reinsurance Company equity holders
Total recognised income and expense 0 0 Change in shareholdings in subsidiaries 0 0 Change in consolidated group 0 0 Dividend 0 0 Purchase of own shares –17 0 Retirement of own shares 21 0 Balance at 31.12.2019 576 6,845 Allocation to retained earnings 0 0 Consolidated result 0 0 Income and expense recognised directly in equity 0 0
Total recognised income and expense 0 0 Change in shareholdings in subsidiaries 0 0 Change in consolidated group 0 0 Dividend 0 0 Purchase of own shares –6 0 Retirement of own shares 17 0 Balance at 31.12.2020 588 6,845
Consolidated cash flow statement for the 2020 financial year €m 2020 Prev. year Consolidated result 1,211 2,707
I. Cash flows from operating activities 7,219 9,493 Change from losing control of consolidated subsidiaries 2 –59 Change from obtaining control of consolidated subsidiaries –2 –1 Change from the acquisition, sale and maturity of investments –3,585 –6,564 Change from the acquisition, sale and maturity of insurance-related investments –2,504 377 Other –46 –673
III. Cash flows from financing activities –323 –2,496 Cash flows for the financial year (I + II + III)1 761 78
Additional information Income tax paid (net) – included in the cash inflows from operating activities –263 –392 Dividends received 775 792 Interest received 4,915 5,359 Interest paid –385 –406 1 Cash mainly comprises cash at banks. 2 For a definition of the disposal group, see Assets J – Non-current assets held for sale.
In preparing the consolidated financial statements, preparers must use their judgement in applying accounting policies, and make specific estimates and assumptions that affect the items shown in the consolidated balance sheet, the consolidated income statement and the disclosures on contingent liabilities.
Particularly in primary insurance and reinsurance, the use of estimates is of substantial significance in measuring technical provisions, given that measurement is based on models and the development of future cash flows from insurance contracts cannot be conclusively predicted. Judgements and estimates also play a significant role in the case of other items as well as in determining the basis of consolidation.
Our presentation currency is the euro (€). Amounts are rounded to million euros. Due to rounding, there may be minor deviations in summations and in the calculation of percentages, with figures in brackets referring to the previous year. We only add plus or minus signs where it is not clear from the context whether the amount in question is an expense/outflow or income/inflow.
In the 2020 financial year, the following amended IFRSs had to be applied for the first time, after having been adopted into European law.
− Amendments to References to the Conceptual Framework in other IFRSs (rev. 3/2018)
The amendments will have little or no material effect on Munich Re, except for the Amendments to IFRS 3 described below.
In addition to a change in the definition of a business, the amendments to IFRS 3, Definition of a Business, make it possible in particular to assess more easily whether an acquisition is considered a business with the help of a fair value concentration test.
To make use of this exception under IFRS 4, it was necessary to document on the basis of the financial statements as at 31 December 2015 that most of the
Group’s activity is in insurance. Insurance business is considered “predominant” if at the time of measurement more than 90% of total liabilities were related to insurance business. Besides liabilities that fall within the scope of IFRS 4, these also include liabilities from investment contracts measured at fair value and other liabilities resulting from insurance business. At Munich Re, liabilities related to insurance business accounted for a share of around 96.5% of total liabilities as at 31 December 2015.
The measurement of our financial assets under IFRS 9 is partly geared to their contractual cash flows. If these only comprise the payment of principal and interest on the nominal amount outstanding, measurement is based either on amortised cost or – outside profit or loss – on the fair value, depending on the business model. By contrast, equities, derivatives and complex structured products are measured at fair value through profit or loss. The change in the classification criteria as a result of the introduction of IFRS 9 results in a change in the measurement of our financial assets. The following table provides an overview of how we would present these under IFRS 9. The financial assets that meet the cash flow requirement do not include those that are held for trading under IFRS 9 or managed on the basis of their fair value. These are included in the columns that show the instruments which do not meet the cash flow requirement.
Other investments, deposits with banks 3,441 3,775 –334 0 0 0 Insurance-related investments
The following table provides for an assessment of the quality of our investments that will not be measured at fair value through profit or loss in line with IFRS 9 as their contractual cash flows only comprise the payment of principal and interest on the nominal amount outstanding. The amounts shown are the carrying amounts of these investments pursuant to IAS 39, Financial Instruments: Recognition and Measurement.
The table does not include cash with banks, cheques, cash in hand or other receivables. However, these mainly comprise business with counterparties of first-class financial strength with a rating of at least BBB.
Financial assets held by subsidiaries already required to use IFRS 9 under national law were also immaterial from the Group’s perspective.
For several associates and joint ventures that already use IFRS 9 and accounted for in Munich Re’s consolidated financial statements using the equity method, we applied the exemption from IAS 28.36 provided in IFRS 4.20O(b) and retained the financial statements of these associates and joint ventures prepared under IFRS 9 when applying the equity method.
These adjustments affect the consolidated income statement for the year 2019 as follows: Consolidated income statement 2019 as originally recognised
New standards and amendments to standards that are not yet effective
IFRS 9 requires extensive additional disclosures in the notes that were incorporated in IFRS 7, Financial Instruments: Disclosures.
A Group-wide project ensures that we implement the required processes within the specified period.
IFRS 17 is applicable to all primary insurance contracts, reinsurance contracts and investment contracts with discretionary participation features. The measurement rules are mainly based on a “building block approach”, which is made up of a fulfilment value, which comprises the discounted expected future cash flows and an explicit risk adjustment, and a contractual service margin. Under certain conditions, a simplified measurement approach is permitted for short-term contracts. The general measurement model in adjusted form is to be applied to certain primary insurance contracts with participation features and to ceded reinsurance.
IFRS 9 was adopted into European law in November 2016 and the amendment to IFRS 4 in December 2020. By contrast, the decision to adopt IFRS 17 at European level is still outstanding and is expected to be taken in the course of 2021.
The IASB has also published amendments to the following standards that have not yet been adopted into European law: − Amendments to IAS 1 (rev. 1/2020), Classification of Liabilities as Current or Non-current and Deferral of Effective Date of this amendment (rev. 7/2020)
A list of all our shareholdings can be found in the section List of shareholdings as at 31 December 2020 in accordance with Section 313(2) of the German Commercial Code (HGB).
Cash over which control was obtained 0 4 Total –2 –1
Net assets acquired €m 31.12.2020 Prev. year Goodwill/gain from bargain purchase 2 1 Other intangible assets 1 0 Investments 1 1 Cash 0 4 Other assets 3 0 Technical provisions (net) 0 –1 Other liabilities –4 0 Total 2 5
Cash flows arising from losing control €m 2020 Prev. year Total consideration for losing control 2 99 Non-cash consideration for losing control
Cash over which control was lost 0 –157 Total 2 –59
The subsidiary, Closed Joint Stock Company ERGO Insurance Company, Minsk, was sold and deconsolidated in Q2 2020. This disposal had a negative impact of less than €1m on the consolidated result.
On 30 January 2020, Munich Re acquired 100% of the voting shares in the wind park company FW Żary Sp. z o.o., Warsaw, via its subsidiary MR RENT-Investment GmbH, Munich. The company has concluded a general contractor agreement for the turnkey construction of a wind park in Poland, with completion scheduled for 2021.
In 2020, several transactions were completed for Munich Re to acquire further shares in Next Insurance Inc., Wilmington, via its subsidiary, ERGO Group AG, Düsseldorf. The latter now holds 36.44% of the shares.
On 18 June 2020, via its subsidiary, MR Gotham LP, Delaware, Munich Re completed the acquisition of around 20% of the voting shares in Astoria Power Partners Holding LLC, Delaware. The latter indirectly holds 100% of the shares of Astoria Energy I and 55% of the shares of Astoria Energy II. The two combined-cycle power stations in the New York City borough of Queens have a combined total power generation capacity of 1.2 gigawatts and are a cornerstone of reliable energy supply in Greater New York.
Structured entities are entities that have been conceived in a way that voting or comparable rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant business activities are directed by means of contractual arrangements.
With the exception of investment funds for investments in unit-linked life insurance, which are recognised as insurance-related investments, the maximum exposure to loss is the carrying amount of the respective items on the assets side, and zero for the items on the liabilities side. Therefore, for the items on the assets side, there is usually no difference between the carrying amount of interests in unconsolidated structured entities and the maximum exposure to loss.
For impairment testing, the goodwill is allocated to the cash-generating units that derive benefit from the synergies of the business combinations. At the same time, the unit to which the goodwill is allocated represents the lowest level at which goodwill is monitored for internal management purposes. Goodwill is allocated in reinsurance to divisions, and in primary insurance to the ERGO segment Property-casualty Germany, and to legal entities. We regard amounts of 10% or more of total Group goodwill as significant.
Software assets are carried at cost and are amortised on a straight-line basis over a useful life of three to five years. The depreciations and amortisations 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”. If necessary in the case of the software assets, impairment losses are recognised or reversed up to a maximum of the amortised acquisition cost or production cost.
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 on a straight-line basis in accordance with the component approach, depending on the weighted useful life for their specific building class. The underlying useful lives mainly range between 40 and 59 years. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount.
Fixed-interest or non-fixed-interest securities available for sale that are not designated as at fair value through profit or loss or recognised under loans are accounted for at fair value, with resulting changes in value recognised in equity with no effect on profit or loss. Unrealised gains or losses are calculated taking into account interest accrued and, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation (provision for deferred premium refunds), are recognised directly in equity under “other reserves”.
Repurchase agreements and securities lending Under repurchase agreements we, as the lender, acquire securities against payment of an amount with the obligation to sell them back to the borrower at a later date. As the risks and rewards from the securities remain with the borrower, the amounts paid are not posted as such in our accounts but are shown as a receivable from the borrower under “other investments, deposits with banks”. Interest income from these transactions is recognised in the investment result. Similarly, securities sold by us as the borrower are not derecognised, and the amount received from the lender is shown as a liability in our accounts.
Offsetting of financial instruments We offset financial assets and financial liabilities if the requirements are met in accordance with IAS 32, Financial Instruments: Presentation, and if doing so is legally enforceable.
The allocation of an instrument to a level indicates the extent to which observable market inputs helped to measure the instrument. The fair value hierarchy categorises three levels of inputs: quoted prices in active markets (Level 1), inputs based on observable market prices (Level 2) and inputs that are not directly observable in active markets (Level 3). If market prices are available, these constitute the most objective yardstick for measurement at fair value and are to be used. If measurement is carried out using a model, any available inputs observable in the market are used first. If necessary, these inputs are supplemented with unobservable input factors and internal estimates.
Assets allocated to Level 2 are valued using models based on observable market data. If the financial instrument concerned has a fixed contract period, the inputs used for valuation must be observable for the whole of this period. In addition, Level 2 includes financial assets for which valuation and the market data required for valuation are provided by price quoters, but for which it is not possible to completely determine to which extent the data used is observable in the market. The financial instruments we have allocated to this level mainly comprise bearer bonds and bond funds, borrowers’ note loans, covered bonds, subordinated securities, specified credit structures and derivatives not traded on the stock market.
To the extent that a change in individual inputs significantly affects the fair value shown, we will disclose the change and the resulting impact. This is particularly applicable to instruments measured under Level 3, as their measurement is predominantly dependent on unobservable inputs.
Other insurance-related investments are not utilised for asset-liability management. These include insurance derivatives, derivative components of variable annuities, derivatives for hedging variable annuity contracts and, on a limited scale, loans. In the case of loans, contractual wording largely waives the right to reimbursement if and when an insurance event occurs. Similar agreements also exist for quasi-equity instruments. Insurance-linked derivatives include retrocessions in the form of derivatives, the derivative components of natural catastrophe bonds and from securitisations of mortality and morbidity risks, individually structured insurance-linked derivatives, and derivative components which are separated from their host insurance contract in accounting. Other insurance-related investments are predominantly measured at fair value through profit or loss. In addition, we designate contracts containing embedded derivatives that would generally
Result from insurance-related investments The breakdown of the insurance-related investment result matches that of the investment result.
Current tax receivables are accounted for in accordance with local tax regulations and other receivables at amortised cost. The impairment test of our receivables is performed in a two-stage process, firstly at the level of individual items, and then on the basis of groups of similar receivables. The impairment is recognised as an expense. If, in a subsequent period, the reasons for the impairment cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the amortised cost.
Current tax receivables comprise current taxes on income of the individual companies, based on their respective national taxation. Other tax receivables are shown under “other receivables”.
Cash and cash equivalents as well as other liquid assets are accounted for at face value.
Other assets are generally recognised at amortised cost. Amortisations or depreciations mainly occur on a straightline basis; the weighted average useful life is about 55 years. Where required, impairment losses either are recognised or are reversed up to a maximum of the amortised acquisition cost for the Group’s owner-occupied property, plant and equipment. These impairment losses and impairment losses reversed are distributed between the functional areas.
Right-of-use assets under leases are comprised of lease liabilities, lease payments made at the time or before the asset is made available for use, initial direct costs, and restoration obligations. Right-of-use assets are amortised on a straight-line basis over the term of the lease.
Non-current assets held for sale are assets that can be sold in their current condition and whose sale is highly probable. The item may comprise individual assets or groups of assets. We account for non-current assets held for sale at fair value less sales cost, provided the fair value is lower than the carrying amount. They are no longer depreciated. Measurement of financial instruments remains unchanged; the only difference is how they are disclosed.
Under retained earnings, we show the profits which consolidated companies have earned and retained since becoming part of Munich Re. In addition, the adjustment amount resulting from changes in accounting policies for earlier periods not included in the consolidated financial statements is recognised in the opening balance of the retained earnings for the earliest prior period reported. Retained earnings also include the effects from remeasurement of defined benefit plans.
In primary insurance, measurement is generally carried out individually for each risk. In German life primary insurance, biometric actuarial assumptions based on the tables of the German Association of Actuaries (Deutsche Aktuarvereinigung e.V.) are used. We also largely use the tables of the national actuarial associations for the rest of primary insurance business. The actuarial interest rate employed for discounting in life primary insurance is limited by the respective maximum actuarial interest rate prescribed by the supervisory authorities. In health primary insurance, discount rates are chosen that reflect the best estimate of expected investment income, less a safety margin.
The provision for outstanding claims is for payment obligations arising from insurance contracts in primary insurance and reinsurance where the size of the claim or the timing of the payment is still uncertain. Part of the provision is for known claims for which individually calculated provisions are posted. Another part is for expenses for claims whose occurrence is not yet known. There are also provisions for claims that are known, but whose extent has turned out to be greater than originally foreseen. All these provisions include expenses for internal and external loss adjustments. The provision for outstanding claims is based on estimates: the actual payments may be higher or lower. The amounts posted are the realistically estimated future amounts to be paid; they are calculated on the basis of past experience and assumptions about future developments (e.g. social, economic or technological factors). The claims payments also include estimated adjustments to accounts payable recognised in the previous year with a corresponding impact on the provision; these adjustments are the result of an altered assessment of payment behaviour. Future payment obligations are generally not discounted; exceptions are some provisions for occupational disability pensions and annuities in workers’ compensation and other lines of property-casualty business. For determining the provision for outstanding claims, Munich Re uses a range of actuarial projection methods. Where ranges have been calculated, a realistic estimated value for the ultimate loss is determined within these. In applying the statistical methods, we regard large exposures separately.
Other technical provisions mainly include the provision for premium refunds in primary insurance and the provision for profit commission in reinsurance. The former is posted in life and health primary insurance for obligations involving policyholder bonuses and rebates that have not yet been irrevocably allocated to individual contracts at the end of the reporting period. These provisions are posted on the basis of national regulations almost entirely for primary insurance business in Germany; a retrospective approach is usually taken based on supervisory or individual contract regulations.
Liability adequacy test All technical provisions are regularly subjected to a liability adequacy test in accordance with IFRS 4. If current experience shows that the provisions posted on the basis of the original assumptions – less the related deferred acquisition costs and the present value of the related premiums – are inadequate to cover the expected future benefits, we adjust the relevant technical provisions with recognition in profit or loss and disclose this under impairment losses in the Notes to the consolidated balance sheet (see (2) Other intangible assets, (13) Deferred acquisition costs, and (21) Provision for future policy benefits). The appropriateness of unearned premiums and of the provision for outstanding claims is assessed in relation to the realistically estimated future amount to be paid. The appropriateness of the provision for future policy benefits is assessed on the basis of realistic estimates of the actuarial assumptions, the proportional investment result and, for contracts with participation in surplus, future profit sharing.
Lease liabilities are included in “other liabilities”. The lease liability represents the present value of the payment obligations entered into. As a rule, lease payments are discounted at the incremental borrowing rate. Lease payments are discounted at the interest rate on which the lease is based, provided that this rate can be determined.
Liabilities to be transferred together with disposal groups are recognised in this item (see Assets – J Non-current assets held for sale).
Life and health Property-casualty €m 31.12.2020 Prev. year 31.12.2020 Prev. year A. Subordinated liabilities 1,202 956 3,832 2,871 B. Gross technical provisions I. Unearned premiums 341 337 8,042 7,583 II. Provision for future policy benefits 12,464 12,607 0 26 III. Provision for outstanding claims 9,962 9,563 51,392 50,696 IV. Other technical provisions 391 340 230 274 23,158 22,848 59,664 58,579 C. Gross technical provisions for unit-linked life insurance contracts 0 0 0 0 D. Other provisions 190 233 690 805 E. Liabilities related to non-current assets held for sale 0 0 0 0 F. Other segment liabilities 14,381 10,522 9,020 8,049 Total segment liabilities 38,932 34,559 73,206 70,303 1 You can download this information as an Excel file; please refer to the Financial Supplement under www.munichre.com/results-reports.
Germany International 31.12.2020 Prev. year 31.12.2020 Prev. year 31.12.2020 Prev. year 31.12.2020 Prev. year 0 0 0 0 13 13 5,047 3,839 241 282 522 507 1,817 1,809 10,964 10,518 90,474 89,698 387 409 9,603 9,562 112,928 112,302 3,018 2,970 5,083 4,779 3,021 2,868 72,475 70,875 20,889 19,574 125 99 843 724 22,478 21,011 114,622 112,525 6,117 5,793 15,285 14,962 218,846 214,706 5,554 5,572 0 0 2,401 2,600 7,955 8,172 2,135 1,992 1,146 1,061 1,277 1,200 5,438 5,291 0 0 0 0 123 179 123 179 5,090 4,282 540 631 1,513 1,306 30,544 24,790 127,400 124,370 7,803 7,486 20,611 20,260 267,952 256,978 Equity 29,994 30,576 Total equity and liabilities 297,946 287,553
In reinsurance, we incurred COVID-19-related losses particularly owing to the cancellation or postponement of major events and higher mortality. These losses totalled €3.4bn, of which €370m was attributable to life and health reinsurance and slightly over €3bn to property-casualty reinsurance. The lines of business most affected by the losses included cancellation-of-events, business interruption, third-party liability and credit.
Life and heath Property-casualty €m 2020 Prev. year 2020 Prev. year Interest income 868 899 970 1,137 Interest expenses –22 –31 –43 –29 Depreciation and amortisation –51 –58 –110 –118 Other operating income 295 259 387 303 Other operating expenses –242 –257 –650 –766 Income from associates and joint ventures accounted for using the equity method 1 2 71 162
Notes on determining the return on equity (RoE) for the year 2020
Reinsurance ERGO Total €m 31.12.2020 31.12.2019 31.12.2020 31.12.2019 31.12.2020 31.12.2019 Segment assets 133,892 128,171 164,055 159,383 297,946 287,553 Segment liabilites 112,138 104,862 155,815 152,116 267,952 256,978
Adjustments used in the calculation of equity and in currency translation
Unrealised gains and losses, currency translation reserve, remeasurement gains/losses from cash flow hedges 4,994 5,301 2,689 2,209 7,683 7,510 Adjustment item for material asset transfers between reinsurance and ERGO
Notes on determining the return on equity (RoE) for the year 2019
Unrealised gains and losses, currency translation reserve, remeasurement gains/losses from cash flow hedges 5,301 2,491 2,209 949 7,510 3,440 Adjustment item for material asset transfers between reinsurance and ERGO
Investments in non-current assets per segment1 €m 2020 Prev. year Life and health reinsurance 35 53 Property-casualty reinsurance 839 276 ERGO Life and Health Germany 67 332 ERGO Property-casualty Germany 166 193 ERGO International 89 73 Total 1,196 926 1 The non-current assets mainly comprise intangible assets (especially goodwill) and our owner-occupied and investment property, as well as investments in renewable energy.
Australia 1,849 1,697 Japan 1,709 1,435 China 1,682 1,381 South Korea 295 300 Others 1,418 1,215 6,952 6,029 Africa, Middle East
South Africa 779 694 United Arab Emirates 399 379 Others 763 751 1 The premiums are generally allocated according to the location of the risks insured.
Changes in goodwill €m 2020 Prev. year Gross carrying amount at 31 Dec. previous year
Currency translation differences –159 37 Additions 2 1 Disposals 0 0 Reclassifications 0 0 Amortisation and impairment losses –2 –1 Carrying amount at 31 Dec. financial year
In the detailed planning phase (five years) we expected markedly increasing premium income and an improvement in the combined ratio if major losses remained stable.
For the detailed planning phase (five years), we expected a moderate rise in premium income with an improved combined ratio.
The calculation of these values in use is based on distributable target results derived from the current market environment and the latest corporate planning approved by management. Prepared in an interactive process involving the operational units, the responsible controlling units and the Board of Management, the corporate plans are reviewed and updated at least every quarter. The target results were determined based on the assumption that COVID-19 would not adversely affect the earnings prospects of our business models on a permanent basis. The aforementioned key assumptions regarding premium income development and combined ratios derive from the aggregation of the company plans of the individual companies of a cashgenerating unit. The key assumptions regarding developments in the equity market and interest-rate level are defined on the basis of the current market environment.
After the detailed planning phase, we estimate the target results achievable long term on the basis of the last adjusted planning year and taking into account growth rates and RoI derived from macroeconomic forecasts.
Calculations were made after consideration of normalised taxes. In the table, for disclosure purposes, a corresponding discount rate before tax is given in each case. Sensitivity analyses were performed for the discount rates, growth rates and distributable target results. No impairment was identified.
Internally developed Other €m 2020 Prev. year 2020 Prev. year 2020 Prev. year Gross carrying amount at 31 Dec. previous year 1,319 1,299 483 462 1,556 1,343 Accumulated amortisation and impairment losses at 31 Dec. previous year
Carrying amount at 31 Dec. financial year 293 346 14 24 590 471 Accumulated amortisation and impairment losses at 31 Dec. financial year
Acquired licences/ patents €m 2020 Prev. year 2020 Prev. year 2020 Prev. year Gross carrying amount at 31 Dec. previous year 214 223 727 661 338 330 Accumulated amortisation and impairment losses at 31 Dec. previous year
Disposals Loss of control 0 0 0 0 0 0 Other 0 0 0 –3 0 0
Carrying amount at 31 Dec. financial year 25 29 71 118 210 232 Accumulated amortisation and impairment losses at 31 Dec. financial year
Gross carrying amount at 31 Dec. financial year 208 214 691 727 329 338
→ Miscellaneous Total €m 2020 Prev. year 2020 Prev. year Gross carrying amount at 31 Dec. previous year 36 34 4,674 4,352 Accumulated amortisation and impairment losses at 31 Dec. previous year
Carrying amount at 31 Dec. previous year 21 15 1,240 1,161 Currency translation differences –1 0 –44 26 Additions
Reclassifications 0 0 –1 –7 Impairment losses reversed 0 0 0 0 Amortisation and impairment losses
Gross carrying amount at 31 Dec. financial year 36 36 4,781 4,674
Munich Re Group Annual Report 2020 3 Land and buildings, including buildings on third-party land
Development of investments in land and buildings, including buildings on third-party land €m 2020 Prev. year Gross carrying amount at 31 Dec. previous year
Subsequent acquisition costs 30 38 Business combinations 0 0 Other 801 307
The fair value of investment property at the end of the reporting period amounted to €12,131m (11,589m). The portfolio managed by the Group is measured by valuers within the Group, and the portfolio managed by third parties is valued 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 measurement. The fair value is determined individually per item by discounting the future cash flow as at the measurement date. Depending on the type of property and its individual opportunity/risk profile, discount rates of 1.2% to 3.7% are used for residential buildings and 1.0% to 6.3% for office buildings and commercial property.
Property pledged as security and other restrictions on title amounted to €1,164m (1,133m). Contractual commitments to acquire property totalled €35m (799m).
Cat bond (host) Theoretical price Interest-rate curve Present-value method Mortgage loans Theoretical price Sector-specific yield curve considering the profit margin included in the nominal interest rate
Equity forwards Theoretical price Listing of underlying shares Money-market interest-rate curve Dividend yield
Interest-rate risks Interest-rate swaps Theoretical price Swap and CSA curve1 Present-value method Swaptions/interest-rate guarantee
Bond forwards (forward transactions) Theoretical price Listing of underlying OIS curve
Credit default swaps Theoretical price Credit spreads Recovery rates CSA curve1
Multi-tranches Theoretical price At-the-money volatility matrix and skew Swap curve Sector-, rating- or issuer-specific yield curve
Swaption notes Theoretical price At-the-money volatility matrix and skew Swap curve Money-market interest-rate curve Sector-, rating- or issuer-specific yield curve
Theoretical market price Interest-rate curve (among others) Electricity price forecast and inflation forecast
Present-value method 1 The OIS curve is used if the quotation currency is the CSA currency.
The inputs requiring consideration in measuring variable annuities are derived either directly from market data (in particular volatilities, interest-rate curves and currency spot rates) or from actuarial data (especially biometric and lapse rates). The lapse rates used are modelled dynamically depending on the specific insurance product and current situation of the capital markets. The assumptions with regard to mortality are based on client-specific data or published mortality tables, which are adjusted with a view to the target markets and the actuaries’ expectations. The dependency between different capital market inputs is modelled by correlation matrices. Where the valuation of these products is not based on observable inputs, which is usually the case, we allocate them to Level 3 of the fair value hierarchy.
Among the associates and joint ventures accounted for using the equity method, there is only one company for which a quoted market price is available. This price amounts to €65m (86m) and is allocated to Level 1 of the fair value hierarchy.
The following table but one presents the reconciliation from the opening balances to the closing balances for investments allocated to Level 3 of the fair value hierarchy.
Gains (losses) recognised in the consolidated income statement are shown in the investment result or insurancerelated investment result, while gains (losses) recognised in equity are shown in the statement of recognised income and expense under “Unrealised gains and losses on investments, Gains (losses) recognised in equity”. Gains (losses) recognised in the consolidated income statement that are attributable to investments recognised at the end of the financial year are shown in the statement of recognised income and expense under “Unrealised gains and losses on investments, Recognised in the consolidated income statement”.
Other investments 0 10 335 345 Insurance-related investments 5,390 4,097 1,547 11,033 Total 16,943 144,723 8,315 169,980 Investments not measured at fair value Loans 0 53,004 11,712 64,716 Total 0 53,004 11,712 64,716
→ Prev. year €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 194 194 Investments in associates and joint ventures measured at fair value 0 0 29 29 Other securities available for sale
Gains (losses) recognised in the consolidated income statement –35 –15 0 4 Gains (losses) recognised in equity 24 0 1 4
Acquisitions 49 50 26 2 Disposals –20 –13 –1 –9 Transfer to Level 3 1 4 0 0 Transfer out of Level 3 –1 –8 0 –8 Changes in the fair value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 213 194 55 29 Gains (losses) recognised in the consolidated income statement that are attributable to investments shown at the end of the financial year –35 –14 0 0
Other investments €m 2020 Prev. year 2020 Prev. year 2020 Prev. year Carrying amount at 31 Dec. previous year 0 0 0 1 302 255 Gains and losses 0 0 0 0 –17 53
Gains (losses) recognised in the consolidated income statement 0 0 0 0 6 49 Gains (losses) recognised in equity 0 0 0 0 –23 4
Acquisitions 1 0 4 0 65 23 Disposals 0 –1 0 –1 –15 –29 Transfer to Level 3 0 0 0 0 0 0 Transfer out of Level 3 0 0 0 0 0 0 Changes in the fair value of derivatives 0 0 0 0 0 0 Carrying amount at 31 Dec. financial year 0 0 4 0 335 302 Gains (losses) recognised in the consolidated income statement that are attributable to investments shown at the end of the financial year 0 0 0 0 6 49
Gains (losses) recognised in the consolidated income statement 763 77 715 169 Gains (losses) recognised in equity –6 6 –78 167
Impairment losses with respect to these companies amounted to €3m (1m), and are almost entirely attributable to property-casualty reinsurance.
Further information about affiliated companies, associates and joint ventures can be found under (48) Contingent liabilities, other financial commitments, (49) Significant restrictions, and in the List of shareholdings as at 31 December 2020 pursuant to Section 313(2) of the German Commercial Code (HGB).
The fair value of the loans is based on recognised valuation techniques in line with the present value principle and taking observable and, in some cases, non-observable market inputs into account (see (4) Hierarchy for the fair value measurement of assets). The fair value totalled €64,722m (64,654m) at the reporting date.
Munich Re Group Annual Report 2020 7 Other securities available for sale
Disposal proceeds €m 2020 Prev. year Fixed-interest securities 50,491 57,377 Non-fixed-interest securities
Realised gains and losses €m 2020 Prev. year Gains on disposal 3,645 2,658
Rating of fixed-interest securities according to fair values €m 31.12.2020 Prev. year AAA 41,152 39,637 AA 42,411 41,733 A 22,242 22,597 BBB 24,613 21,879 Lower 7,419 5,693 No rating 567 581 Total 138,404 132,120
Securities at fair value through profit or loss comprise securities of €2,430m (2,236m) held for trading as well as securities and loans of €497m (545m) designated as at fair value through profit or loss.
The securities held for trading are made up of fixedinterest securities totalling €15m (16m), non-fixed-interest securities totalling €76m (121m) and derivatives held for trading amounting to €2,339m (2,099m). The securities designated as at fair value through profit or loss comprise €310m (351m) assignable to fixed-interest securities and loans and €187m (194m) to non-fixed interest securities. Some €3m (43m) of the instruments at fair value through profit or loss is due within one year.
Derivative financial instruments are used by Munich Re to manage and hedge against interest-rate, currency, and other market risks. This is done at the Group companies within the framework of the applicable supervisory regulations and additional internal company guidelines. Given the daily collateral-adjustment process, the risk of default is practically non-existent in the case of products traded on the stock exchange and for centrally cleared and secured over-the-counter (OTC) derivatives. Unsecured OTC products, on the other hand, harbour a theoretical risk in the amount of the replacement costs. Therefore, Munich Re selects only top-quality counterparties for such transactions, and exchanges collateral daily on the basis of current fair values.
Cash flow hedges play a role in countering fluctuations that may be caused, for example, by variable interest payments. Munich Re uses cash flow hedges chiefly to hedge against interest-rate risks, with interest-rate swaps being the main instruments employed. Changes in the fair value of the hedging instrument are recognised directly in equity for this purpose. 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. The change in fair value assignable to the ineffective portion of the hedging was negligible at the reporting date. At the end of the reporting period, there was an equity item of €9m (17m) from cash flow hedges. The net fair value of the derivatives falling into this category amounted to €19m (27m) at the end of the reporting period.
Of the amounts held on deposit with banks, €3,429m (3,770m) is due within one year. With these deposits, the fair values largely correspond to the carrying amounts. Assets pledged as security and other restrictions on title amount to €30m (12m) for deposits with banks.
The expenditures recognised in the carrying amount for assets in the course of construction totalled €14m (0m) for renewable energy investments.
The investments in renewable energies include items pledged as security, and other restrictions on title, amounting to €144m (157m).
Other changes 0 –11 Carrying amount at 31 Dec. financial year 11 Ceded share of technical provisions
Of the amounts receivable on primary insurance business, €946m (890m) is apportionable to receivables from insurance agents. The miscellaneous receivables include receivables of €9,623m (7,273m) resulting from contracts with non-significant risk transfer, which do not fall within the scope of IFRS 4. Financial assets of €762m (123m) resulting from these contracts are netted with the corresponding liabilities in the balance sheet. Moreover, derivatives with a positive market value of €154m (99m) are recognised on a net basis.
Given that the majority of other receivables, i.e. a total of €15,629m (13,686m), have a period to maturity of less than one year, the fair values largely correspond to the carrying amounts. The miscellaneous receivables include receivables of €9,623m (7,273m) resulting from contracts with nonsignificant risk transfer. These usually have longer periods to maturity which correspond to the cover and run-off periods of the underlying risks. Their fair value amounted to €10,405m (7,272m). We allocate these to Level 3 of the fair value hierarchy, as their measurement is primarily based on biometric and lapse rates and historical event data.
Of all our receivables on underwriting business at the end of the reporting period, €496m (460m) were outstanding for more than 90 days. The average default rate for the last three years was 1.8% (1.8%).
The deferred tax assets and liabilities recognised in the consolidated balance sheet concern the following balance sheet items:
Deferred tax 31.12.2020 Prev. year €m Assets Liabilities Assets Liabilities Assets A. Intangible assets 137 113 140 138 B. Investments 2,475 4,291 2,111 3,459 C. Insurance-related investments 1 26 1 16 E. Receivables 154 194 37 261 I. Other assets 588 1,005 387 939 Total assets 3,355 5,629 2,676 4,813
Equity and liabilities C. Net technical provisions 3,425 5,050 3,169 4,761 E. Other provisions 1,346 271 1,309 270 F. Liabilities 342 94 462 12 Total equity and liabilities 5,113 5,415 4,940 5,043
Not expiring 1,495 286 1,781 2,226 285 2,511 1,495 286 1,781 2,226 285 2,511 Loss carry-forwards from capital losses
Expiring in up to three years 0 26 26 0 11 11 Expiring in over three years and up to ten years 0 81 81 0 102 102 Expiring in over ten years 0 0 0 0 0 0 Not expiring 0 0 0 0 0 0
These mainly comprise property, plant and equipment, with owner-occupied property totalling €2,045m (2,127m), and operating and office equipment amounting to €213m (234m). Advance payments on insurance amounted to €284m (293m), derivatives totalled €19m (27m), and miscellaneous deferred items came to €181m (158m).
Impairment losses reversed 8 6 0 0 8 6 Depreciation and impairment losses
The expenditures recognised in the carrying amount for assets in the course of construction totalled €19m (12m) for property and €12m (14m) for operating and office equipment. Commitments to acquire property totalled €3m (4m) and commitments to acquire operating and office equipment €9m (14m).
The shareholding in HDFC ERGO Health Insurance Limited, Hyderabad, classified as held for sale using the equity method, was merged with HDFC ERGO General Insurance Company Ltd., Mumbai, in Q4 2020.
The Cannock Chase Group, a group of seven Dutch subsidiaries belonging to DAS Legal Finance B.V., Amsterdam, was still classified as held for sale as at the end of the reporting period. The sale of the group is expected to occur in the first half of 2021.
All of the Other securities available for sale shown in the table were allocated to Level 2 of the fair value hierarchy.
Number of shares 2020 Prev. year Status at 31 Dec. previous year 141,460,598 145,797,378 Reductions
On 31 December 2020, no Munich Reinsurance Company shares were held by Group companies.
The 2020/2021 programme approved by the Munich Reinsurance Company Board of Management on 26 February 2020, which provided for the acquisition of shares up to a value of €1bn before the 2021 Annual General Meeting, was initially put on hold until further notice. On 20 July 2020, Munich Re decided that the 2020/2021 share buy-back programme would definitely not be implemented owing to COVID-19.
Composition of contingent capital €m 31.12.2020 Contingent Capital 2020 (until 28 April 2025) 117 Total 117
The taxes of –€522m (–845m) recognised directly in equity comprise an amount of –€484m (–854m) for deferred tax assets, and current taxes on unrealised gains and losses of –€38m (9m) on investments.
The following table shows the allocation of the financial liabilities to levels of the fair value hierarchy.
Derivatives 22 1,676 1,630 3,328 Total 22 1,676 1,630 3,328 Liabilities not measured at fair value Subordinated liabilities 5,448 57 2 5,507 Bonds and notes issued 374 0 0 374 Amounts due to banks 0 331 697 1,028 Other liabilities from financial transactions 3 2,771 16 2,790 Total 5,826 3,159 714 9,699
Only derivatives with a negative fair value are currently recognised at fair value. Of these, we mainly allocate the insurance derivatives to Level 3 of the fair value hierarchy, depending on the observation of specific market inputs.
Considering the sensitivity of the applied non-observable inputs, we refer to the remarks found in (4) Hierarchy for the fair value measurement of assets.
Other liabilities at fair value through profit or loss €m 31.12.2020 Prev. year Carrying amount at 31 Dec. previous year
Gains and losses –286 144 Gains (losses) recognised in the income statement
Gains (losses) recognised in the income statement that are attributable to liabilities shown at the end of the financial year
In the financial year, Munich Reinsurance Company issued its first subordinated green bond, with the volume issued amounting to €1,250m.
The fair value of the subordinated liabilities at the end of the reporting period amounted to €5,507m (4,348m). For the Munich Reinsurance Company bonds, we take the stock market prices as fair values. For the other subordinated liabilities, we determine the fair values using net present-value methods with observable market inputs.
Breakdown of subordinated liabilities €m A.M. Best Fitch Moody’s S&P 31.12.2020 Prev. year Munich Reinsurance Company, Munich, 1.25% until 2031, thereafter floating, €1,250m, Bonds 2020/2041 – A – A 1,237 0 Munich Reinsurance Company, Munich, 3.25% until 2029, thereafter floating, €1,250m, Bonds 2018/2049
Unearned premiums €m 31.12.2020 Prev. year Gross 10,964 10,518 Ceded share –392 –443 Net 10,571 10,075
The increase in gross unearned premiums to €10,964m (10,518m) is attributable to the increase in premiums written to €54.890m (51,457m).
Gross provision for future policy benefits according to type of insurance cover €m 31.12.2020 Prev. year Life and health 112,329 111,650 Reinsurance 12,464 12,607 ERGO 99,866 99,042
In the ERGO Life and Health Germany segment, there was an adjustment in the financial year to the assumptions regarding future lapses and long-term interest-rate levels that are geared to the long-term regular return on investments. The provision for future policy benefits increased as a result of these adjustments. As we expect only a temporary and limited increase in mortality, COVID19 will not have a significant impact on the provision for future policy benefits.
Development of gross provision for future policy benefits €m 2020 Prev. year Status at 31 Dec. previous year 112,302 111,147 Currency translation differences –535 341 Changes in consolidated group/Other 747 2,825 Changes
The change shown under Changes in consolidated group/Other contains €246m (280m) in savings premiums for capitalisation products and €658m (644m) for reclassifications from the provision for premium refunds. It also includes the provision for future policy benefits of the disposal group amounting to –€29m (–17m).
Provision for outstanding claims €m 31.12.2020 Prev. year Gross 72,475 70,875 Ceded share –2,797 –2,902 Net 69,678 67,973
Provisions for annuity claims are calculated as the present value of the expected future payments. The discount rates used are presented under (39) Disclosures on risks from life and health insurance business and (40) Disclosures on risks from property-casualty insurance business.