Insurance-related investments €bn 8.5 7.3 Equity €bn 30.3 26.2 27.4 23.3 23.0
Off-balance-sheet unrealised gains and losses4 €bn 17.4 8.7 11.0 5.7 3.6
Combined ratio property-casualty Germany % 95.3 96.7 98.0 Combined ratio international % 97.3 98.7 99.8 1 Previous years’ figures adjusted owing to IFRS 8 and IAS 8; see “Changes in accounting policies and other adjustments”. 2 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for 2011 have been adjusted accordingly.
1 Including Munich Health’s primary insurance and reinsurance activities in the health market as at 31 December 2014.
To our shareholders 001 Letter to shareholders 003 Notable events in 2014 008 The Board of Management 010 Munich Re shares 012 Our strategy 016
Management report 031 Munich Re 033 Macroeconomic and industry environment 070 Business performance 072 Financial position 100 Stakeholders 108 Risk report 117 Opportunities report 141
Governments and central banks should therefore reflect on how much they intend to contribute to these effects, for example by not imposing restrictions on new debt or by pursuing a relaxed monetary policy. Interest is not a hurdle placed by evil forces in the way of sensible and sustainable investments; it is first and foremost an indication of the risk associated with an investment as assessed by the market. An investment that is
made only because the associated costs of the risk have been artificially reduced will usually prove to be unsustainable. And reduced demand for credit is not necessarily a negative economic indicator; it may also indicate that companies are financing their business models and households are making their investments (such as buying a house) in a more sustainable way. A reduction in debt is normal in the wake of a severe financial and economic crisis, and not something that has to be resisted at all costs.
The flood of liquidity in important markets means that Munich Re can expect lower returns on its investments again in 2015. However, our strategy for a number of years has been to base our profitability primarily on the technical result achieved in our insurance business. That strategic decision is paying off in the current capital market environment. We are also attempting to diversify our investments even more – for
example by increasing our investments in alternative asset classes such as infrastructure. In primary insurance, a new generation of products in German life insurance, which we have also been offering for company pension schemes since January, provides an innovative and forward-looking answer to the challenges posed by low interest rates.
Not only the capital markets but also the reinsurance markets will remain challenging in 2015. We have to be prepared to face continuing fierce competition, which is being fuelled by excess market liquidity. Rigorous cycle management and underwriting discipline, and excellent client service, will therefore still be extremely important. At the same time, we intend to use innovations to secure new profitable business. There is potential for growth not only from a geographical perspective, as in the growth regions of Asia, but also in the risks not – or not fully – covered in the market. Examples of this are cyber risk, energy, supply chain and business interruption, and protection of reputation.
dividend policy, and our business, are based on the principle of sustainability. Although the dividend is being raised substantially by €0.50, or almost 7%, we are increasing it only to a level that we can maintain even after a less successful year and that will permit us to comfortably finance profitable growth and innovation.
Ladies and gentlemen, on behalf of my colleagues on the Board of Management and all our staff across the world, I would like to thank you for the confidence you have shown in us. We will, of course, make every effort to fulfil your expectations again this year.
Q4 15 January 2014 A risk rating system for industrial projects has been developed by Munich Re and TÜV SÜD. The new system facilitates the assessment of complex investment projects and thus the taking of investment decisions. The basis of Project Risk Rating (PRR) is a modular system of individual risk components reflecting an investment project’s main risks. These components take account of macroeconomic, technical, ecological and contractual aspects of the project.
ERGO’s new customer and sales division commences operations – combining all client-centric functions associated with applications, contracts, and services. True to its slogan “To insure is to understand”, the primary insurer gears its management even more closely to clients’ needs. The new division is headed by Silke Lautenschläger, who transfers from the Board of Management of DKV to that of ERGO. Life and health insurance is pooled in a single division for insurances of the person, headed by Dr. Clemens Muth. At the same time, the new ERGO Beratung 2 July 2014 Germany’s Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and Munich Re support the establishment of a risk transfer system for agriculture in Peru. For this purpose, they launch the project “Integrated Financial Management of Climate Risks in Peru’s Agricultural Sector”. The aim is to develop, together with the Peruvian authorities, a legal, institutional and structural framework for a system to protect agricultural production against weather-related risks.
1 October 2014 MEAG expands its infrastructure investments to include debt investments. To cover long-term payment obligations in its core business, Munich Re aims to make (equity and debt) investments of up to €8bn in infrastructure, renewable energy and new technology projects of an appropriate quality via its asset manager MEAG in the coming years.
15 October 2014 MEAG sets up two new bond funds, once again making the competence it has acquired in investing the Group’s funds also available to private and institutional investors. MEAG Emerging Markets Rent invests in bonds issued by emerging markets and developing countries, and MEAG GlobalRent diversifies its investments globally in pursuit of absolute returns.
Doris Höpke (47) takes over responsibility for the Health Division from the Chairman of the Board of Management of Munich Re, Nikolaus von Bomhard, with effect from 1 May 2014. Höpke, who is a lawyer, has been Head of Munich Re in Madrid since 2011, and has worked for Munich Re since 1999.
30 October 2014 The Supervisory Board of property-casualty insurer ERGO Versicherung AG appoints Rainer Tögel to the Board of Management with effect from 1 January 2015. Tögel is responsible for plan business, i.e. above all for personal lines insurance.
Georg Daschner from 1 October 2014, assuming sole charge of the Division as from 1 January 2015. Daschner, who has been a member of the Board of Management since 2003, retires on 31 December 2014. Albo, also a lawyer, has been working at Munich Reinsurance America, Inc. since 2009 as President of the Reinsurance Division in the USA, and joined Munich Re in 1992.
20 June 2014 ERGO enters the insurance market in Singapore and acquires all of the shares in the property-casualty insurer SHC Insurance Pte. Ltd., thereby expanding its presence in southeast Asia. This acquisition marks a further significant milestone and positions the company very well for taking advantage of the city-state’s plans to become the region’s insurance centre. The insurer, which is renamed ERGO Insurance in October, provides a broad spectrum of property-casualty insurance covers.
If a house has been destroyed, ERGO covers not only the costs of reconstruction, but also of demolition and disposal, as well as the costs for an architect.
Ludger Arnoldussen Germany, Asia Pacific and Africa Central Procurement (since 1 January 2015) Services
Nikolaus von Bomhard Chairman of the Board of Management, Chairman of the Group Committee Group Development Group Investments Group Communications Group Compliance Group Audit Health (until 30 April 2014)
Torsten Jeworrek Chairman of the Reinsurance Committee Reinsurance Development Corporate Underwriting Corporate Claims Accounting, Controlling and Central Reserving for Reinsurance Information Technology Global Business Architecture Geo Risks Research/ Corporate Climate Centre
Thomas Blunck Special and Financial Risks Reinsurance Investments Central Procurement (until 31 December 2014)
After gaining around 20% in value in the previous year, share prices worldwide grew only moderately in the first three months of 2014. Although the global economy seemed to have found its feet again, there were also a number of factors that caused some nervousness among investors. The US Federal Reserve gradually reduced the vast increase in money supply that was being used to stimulate the economy. Additional uncertainties resulted from turbulences in a number of emerging countries, the Crimean crisis, and doubts about the growth and stability of China.
Stock market growth in the third quarter of 2014 was mainly driven by central bank measures and by significant amounts of liquidity, and alternated with rising concerns about global economic growth.
— Supervisory Board and Board of Management to again propose payment of an increased dividend of €7.75 per share at the Annual General Meeting
— Since 2001, Munich Re shares have been listed in all the main sustainability indexes and have received excellent ratings
The European insurance industry continued to perform well in 2014, surpassing the development of the European share price index1 for the third consecutive time. Once again it outperformed the European bank index2 and the German DAX 30, mainly on account of the moderate economic recovery and decreased risk perception among investors. Given the improved growth perspectives and the prospects of increasing dividends, primary insurers benefited especially from these developments and their share prices responded positively.
Munich Re shares closed the year at €165.75, equivalent to a 3.5% increase. Including the dividend paid for the financial year 2014, the return was a gratifying 8.2%. The DAX 30 rose by only 2.7%, whilst the European insurance index increased by 3.7%. Taking a longer period as a basis, the return on Munich Re shares including dividends has grown more strongly than the European insurance index over the last three- and five-year periods.
Around 40 analysts from banks and brokerage houses regularly evaluate our shares. At the end of December 2014, some 24% of the analysts gave our shares a positive assessment, 55% a neutral one, and 21% a negative rating. You can find the analysts’ current recommendations and result estimates on our website.
Active capital management is an integral component of our business policy. We therefore strive to give our shareholders an appropriate share in our corporate success. As a rule, we pay out at least 25% of the annual result as a dividend. Our policy is to at least maintain – and where possible even to increase – our level of dividend of the previous year. The last time we reduced our dividend was in 1970; we use share buybacks as a more flexible means of managing our capitalisation.
DJ EURO STOXX 50 1.3 DJ EURO STOXX Insurance 12.0 MSCI EURO 1.1 FTSE EUROTOP 100 0.6 DJ Sustainability World 0.3 FTSE4Good Global Index 0.2
For many years, Munich Re has been awarded consistently excellent ratings by the leading rating agencies. In the financial year 2014, the outlook for all Munich Re’s ratings remained stable at a high level.
Share capital €m 587.7 587.7 Number of shares at 31 December m 172.9 179.3
Year-end closing price € 165.75 160.15 Annual performance (excluding dividend) % 3.5 17.8 Beta 250 relative to DAX (daily, raw) % 0.8 1.0 Market capitalisation at 31 December €bn 28.7 28.7 Market value/equity at 31 December1 0.9 1.1 Average trading volume ’000 700 667 Earnings per share2 € 18.31 18.45 Dividend per share € 7.75 7.25 Dividend yield at 31 December % 4.7 4.5 Dividend payout (status at 25 February 2015) €bn 1.3 1.3 1 Including minority interests.
We combine primary insurance and reinsurance under one roof. This set-up allows us to cover all sections of the insurance industry’s value chain. It benefits our clients, because we can offer them customised solutions that draw on our full spectrum of knowledge. As a Group, we are also less dependent on market cycles in individual insurance and reinsurance segments, and in national markets. We thus aim to secure an attractive return while simultaneously maintaining relatively low volatility.
The risks that we write differ greatly in nature. Their predominant non-correlation in terms of potential loss occurrence enables us to balance the risks in the portfolio over time, across regions and across fields of business – a diversification benefit that is key for our success. The size and mix of the risks assumed mean we can cover a comparatively large number of risks with the capital available. This broad diversification and a risk underwriting strategy geared to technical profitability enable us to generate stable and sustainable profits and detach ourselves to a large extent from the fluctuations of the capital markets.
— New insurance solutions secure competitive edge, generate profitable growth and win clients’ loyalty
For Munich Re, a value-based, long-term approach is a basic prerequisite for business success. Mandatory rules for compliance with legal and ethical standards, responsible business practice and our environmental protection activities are part of our corporate strategy and are key factors in our success.
Our extensive knowledge in identifying and assessing risks and in structuring insur- ance solutions enables us to create value in a highly dynamic and global environment and to stand out from our competitors. Thanks to our capital management expertise, we are also a sought-after partner for products geared to our clients’ balance-sheet, solvency and rating-capital requirements, as well as their risk models. Our reputation in the market and our global, client-focused set-up give us quick and direct access to all clients.
ERGO gears itself consistently to the needs and requirements of its clients and aims to measurably further improve through close communication with them. This encompasses high-quality, needs-oriented, customer-centric sales advice, clear and comprehensible communication, innovative services and rapid assistance in the event of a loss via efficient processes and a lean organisation. A central customer and sales division supports this ambition. In combination with its solid financial strength, this makes ERGO and its specialists reliable partners for insurance and pension product requirements.
ERGO offers the appropriate sales channel for every client. Self-employed agents, direct sales staff, brokers and strong cooperation partners provide services to private clients and firms in Germany and abroad. The primary insurer is making targeted use of its competence in direct selling in order to meet the growing demand from consumers for needs-based digital offerings and services. In addition, sales partnerships link ERGO with a large number of banks in Germany and in various international markets.
The international healthcare market will continue to grow strongly. The ageing of societies in many countries and medical advances are leading to rising healthcare costs, often putting immense pressure on social security systems and increasing the need for private insurance solutions. We tap this business potential via primary insurance and reinsurance offerings in our business field Munich Health. We service a broad spectrum of clients – from governments to private or state health insurers to private end customers – with a health-sector risk management approach tailored to their specific needs. Munich Health is thus active worldwide as a risk carrier and service provider, driving forward high-quality medical care and ensuring it remains financeable.
Corporate governance report 026 How we view corporate governance 026 What rules apply to Munich Re? 026 Corporate legal structure 027 Board of Management 027 Collaboration between Board of Management and Supervisory Board 028 Supervisory Board 028 Annual General Meeting 029 Share trading and shares held by Board members 029
In the financial year 2014, the Supervisory Board fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association and its rules of procedure. No member of the Supervisory Board or of the committees attended fewer than half the meetings. We monitored the Board of Management in its conduct of the business, and gave advice on all matters of importance for the Group. No inspection measures in accordance with Section 111 (2) sentence 1 of the German Stock Corporation Act (AktG) were required at any time.
Collaboration between Supervisory Board and Board of Management The Board of Management involved the Supervisory Board in all important business transactions and decisions of fundamental significance for the Group. During meetings, we held in-depth discussions with the Board of Management about the information provided to us. Cooperation with the Board of Management was characterised in every regard by targeted and responsible action aimed at promoting the successful development of Munich Re. The Board of Management satisfied its reporting obligations towards the Supervisory Board in all respects, both verbally and in writing.
Outside of Supervisory Board meetings, the Board of Management informed us promptly about important events in the Group, including the election of employee representatives to the Supervisory Board carried out in line with Munich Re’s co-determination agreement, and ERGO’s acquisition of the Greek insurance company ATE Insurance and the property-casualty insurer SHC Insurance Pte. Ltd. The shareholder representatives and the employee representatives met with the Chairman of the Board of Management regularly before the meetings for separate discussions of strategic issues and other matters of essential importance.
Between meetings, I held regular discussions with Dr. Nikolaus von Bomhard, Chairman of the Board of Management, about individual questions of strategic development and risk management, as well as about Munich Re’s current business situation. Also between meetings, the Chairman of the Audit Committee, Professor Dr. Henning Kagermann, remained in close contact with Dr. Jörg Schneider, the member of the Board of Management responsible for Group reporting.
The meeting on 29 April was devoted solely to matters involving the Board of Management, specifically the evaluation of the individual Board members’ annual performance for 2013 and their multi-year performance for 2011–2013. The personal objectives for a newly appointed member of the Board of Management were also set for 2014.
On 30 April, directly prior to the Annual General Meeting, we heard the Board of Management’s report on the present status of business performance in 2014. We also used the meeting to make last-minute preparations for the impending Annual General Meeting.
At the meeting held on 15 July, we dealt with the focal points of human resources work in the Group, and were briefed on the 2013 compensation report in accordance with the German Remuneration Regulation for Insurance Companies (VersVergV). During his regular report on current issues, Dr. Nikolaus von Bomhard also referred to important provisions contained in the Life Insurance Reform Act (LVRG).
On 14 October, we discussed corporate governance issues, including the annual efficiency review and the resolution regarding the Declaration of Conformity. The Board also presented strategies in life reinsurance business, successes and “lessons learned”. The personal objectives for a newly appointed member of the Board of Management were set for 2014.
On 9 December, the Chairman of ERGO presented a report on ERGO sales development in Germany, and he set out the current status of implementation of the strategy “Moving forward – My ERGO 2018”. The Munich Re Board of Management outlined the strategic and operative orientation of the business field Munich Health. After a comprehensive discussion, we decided on remuneration for the Board of Management as from 1 January 2015 and the financial targets for members of the Board of Management for 2015. We looked into the Group’s risk strategy in the course of the report on Munich Re’s risk situation by the Group Chief Risk Officer. The Board of Management also reported on Group planning for 2015–2017, and provided explanations in cases where actual business performance deviated from the planning for the year under review.
The Personnel Committee met six times in 2014. It essentially prepared the resolutions on matters involving the Board of Management already mentioned in the report on the work of the full Supervisory Board. It also dealt with fringe benefits for members of the Board of Management, with seats held by members of the Board of Management on supervisory, advisory and similar boards, and with Group-wide succession planning, especially with respect to Board-level appointments.
Details on the composition of the committees can be obtained on page 45 and from our website at www.munichre.com/
At its four meetings in 2014, the Standing Committee dealt with the preparation of Supervisory Board meetings and topics of corporate governance. In addition, the Standing Committee carried out a review of the efficiency of the Supervisory Board’s work in 2014, and determined that overall the reporting by the Board of Management and the work of the Supervisory Board was efficient and appropriate. A regular report by Dr. Nikolaus von Bomhard to the Standing Committee covered changes to the shareholder structure and the status of the share buy-back programme. The Committee also received the annual report on expenses for donations and sponsoring.
Another key task of the Committee consisted in monitoring the Group’s risk situation and risk management, and developing a risk strategy. The Group Chief Risk Officer provided verbal input at several meetings of the Committee and in four written reports. Further issues discussed regularly were the internal control system and compliance topics. The Head of Group Audit informed the members of the Committee in full about the outcome of the audits for 2013 and the audit planning for 2014. The Committee received regular updates on the current status of individual compliance issues and the progress of audits. The Committee took advantage of the opportunity – in the absence of the Board of Management – to confer amongst themselves or with the Head of Group Audit, the Group Chief Compliance Officer, the Group Chief Risk Officer and the external auditors.
The Audit Committee reviewed and monitored the auditors’ independence, and received regular reports on auditing and non-audit-related services. At two meetings, the Committee also addressed the potential effects of the European Union’s new Directive and Regulation on statutory audits. Pursuant to a resolution taken by the full Committee in November 2013 with respect to the tender for the external audit 2014, the Chair of the Committee commissioned KPMG with the audit for the financial year 2014, and also commissioned the auditor’s review of the 2014 half-year financial report.
The Nomination Committee continued the preparations for the election of shareholders’ representatives at the Annual General Meeting 2014 that had already begun in 2013. At three meetings held in the first quarter of the year, it discussed the re-election of Supervisory Board members and suitable candidates for election to the Supervisory Board. With regard to the nomination proposals submitted, the Committee took account of the catalogue of criteria and the objectives determined by the Supervisory Board for its composition.
Changes on the Supervisory Board The five-year term of office of the Supervisory Board expired at the end of the Annual General Meeting on 30 April 2014. The following shareholders’ representatives retired: Annika Falkengren and Peter Löscher. The following employee representatives also retired: Herbert Bach, Dina Bösch, Hans Peter Claußen, Silvia Müller, Reinhard Pasch and Richard Sommer. The Supervisory Board wishes to thank all the retired members for their valuable and constructive counsel and their dedication to the development and supervision of Munich Re, in some cases over many years.
Dr. Ulrich Hartmann passed away on 13 January 2014. He was a member of the Supervisory Board from December 1993 until April 2009, and acted as the Board’s Chairman from December 1996 to May 2004. He proved to be a knowledgeable, farsighted and valuable advisor, and made a significant contribution to overcoming the challenges faced by Munich Re in this period. We mourn the loss of an exceptional man.
Professor Hubert Markl passed away on 8 January 2015. As a member of the Supervisory Board from December 2002 until April 2009, Professor Markl made an extremely important and valuable contribution because of his extraordinarily wide knowledge and experience, and also because of his scientific perspective. We are extremely grateful to him for this.
Company and Group financial statements for 2014 KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft duly audited the Company and Group management reports and financial statements as at 31 December 2014 and issued them with an unqualified auditor’s opinion. The respective reports and the Board of Management’s proposal for appropriation of the net retained profits were subsequently submitted directly to the members of the Supervisory Board. At its meeting on 4 February 2015, the Audit Committee had the opportunity to confer in detail about the preliminary year-end figures as at 31 December 2014. On 9 March 2015, it prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. To this end, the Audit Committee examined the Company and Group financial statements, the management reports and the Board of Management’s proposal for appropriation of the net retained profits. It discussed these at length with the auditor present at the meeting, and gave detailed consideration to the auditor’s reports. The Chair of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting.
The full Supervisory Board also reviewed the Company and Group financial statements and management reports, and the proposal of the Board of Management for appropriation of the net retained profits. On the basis of this examination and having heard the auditor’s report, the Supervisory Board raised no objections to the outcome of the external audit. It approved the Company and Group financial statements on 10 March 2015. The financial statements were thus adopted. Having carefully weighed all relevant aspects, the Supervisory Board followed the proposal of the Board of Management for appropria tion of the net retained profits.
The Board of Management is responsible for managing the Company, setting objectives and determining strategy. In doing so, it is obliged to safeguard Company interests and endeavour to achieve a sustainable long-term increase in the Company’s value. The Board of Management is responsible for effecting adequate risk management and risk control in the Company. It must ensure compliance with statutory requirements and internal company guidelines. The Group Compliance Division of Munich Reinsurance Company reports directly to the Chairman of the Board of Management. At the instigation of the Board of Management, we have established another channel to complement the external independent ombudsman and thus strengthen the compliance system: the compliance whistleblowing portal. Employees and third parties can use this portal to anonymously report criminal behaviour such as bribery and corruption, fraud, conduct liable to cause damage to reputation, and contraventions of antitrust, insider trading and data protection laws.
An overview of the composition of the Board of Management and the distribution of responsibilities can be found on page 43
The Board of Management and the Supervisory Board cooperate closely for the benefit of the Company. The Board of Management reports regularly to the Supervisory Board about all questions relevant to the Company. Certain types of transaction require the consent of the Supervisory Board.
In compliance with the Articles of Association, the Supervisory Board has 20 members. Half are representatives of the shareholders, elected by the Annual General Meeting. The other half are elected representatives of the Group’s employees in the European Economic Area (EEA).
Objectives of the Supervisory Board for its composition, diversity and independence In accordance with Section 5.4.1 (2) of the German Corporate Governance Code, the Supervisory Board has set itself the following objectives for its composition: — The main criteria for selecting future members of the Supervisory Board are professional knowledge, personal abilities and experience (especially of an international nature), independence, commitment to sustained corporate profitability, and enterprise of the nominated persons.
— The Supervisory Board should have at least 16 independent members within the meaning of Section 5.4.2 of the German Corporate Governance Code, including at least eight shareholder representatives. No members of the Supervisory Board should have any relevant conflicts of interest.
The aforementioned objectives apply to the Supervisory Board as a whole. Shareholder and employee representatives will each contribute towards meeting these objectives. The Supervisory Board’s Nomination Committee, which selects candidates for the shareholder representatives, and the European Electoral Board, which is responsible for the election of the employee representatives, both have a corresponding catalogue of criteria at their disposal. Besides the objectives mentioned, the catalogue includes criteria such as special professional skills and personal qualities.
The regular responsibilities of the Annual General Meeting include reaching a resolution on the appropriation of profits and approving the actions of the Board of Management and Supervisory Board. Besides this, the Annual General Meeting elects the shareholder representatives on the Supervisory Board and, in particular, votes on changes to the Articles of Association and certain capital measures. Certain corporate contracts also require the approval of the Annual General Meeting to become effective.
Opportunities report 141 Reinsurance 142 ERGO 143 Munich Health 144 Investments 145
The reinsurance companies of the Group operate globally and in virtually all classes of reinsurance. We offer a full range of products, from traditional reinsurance to innovative solutions for risk assumption. Our companies conduct their business from their respective headquarters and via a large number of branches, subsidiaries and affiliated companies. The reinsurance group also includes specialty primary insurers in niche segments, whose business requires special competence in finding appropriate solutions. These primary insurers have the words “Risk Solutions” added to their logo.
In ERGO, we combine all Munich Re’s primary insurance activities with the exception of health insurance business outside Germany, which is handled by Munich Health, and the monoliners in reinsurance. Some 77% (78%) of gross premiums written by ERGO derive from Germany, and 23% (22%) from international business, mainly from central and eastern European countries. ERGO has also extended its activities to Asian markets such as India, China, Vietnam and Singapore.
— Innovative insurance solutions push back the boundaries of insurability and tap new business potential in reinsurance.
Munich Health operates on a global basis in reinsurance and exploits business opportunities in the field of health primary insurance outside Germany in selected growth markets such as the Gulf region and India, and in established European markets.
Munich Reinsurance Company and ERGO Versicherungsgruppe AG are under unified control within the meaning of the German Stock Corporation Act (AktG). The relevant statutory regulations, domination agreements and Group directives govern the distribution of responsibilities and competences for key decisions between Group management and ERGO.
In reinsurance, we operate in life and property-casualty business. Under reinsurance, we also include specialised primary insurance activities that are handled by the divisions of the reinsurance organisation and business from managing general agencies (MGAs).
As reinsurers, we write our business in direct collaboration with primary insurers, but also via brokers and increasingly within the framework of exclusive, strategic partnerships. In addition to traditional reinsurance business, we participate via our operating field Risk Solutions in the primary insurance business of industrial clients. Our risk expertise and solution-focused approach are key to our success.
Munich Re is already catering to an ever-increasing demand for capital optimisation, and other complex solutions for clients. This is a decisive element in our value proposition. We now bundle this expertise in the new business unit Capital Partners in the Special and Financial Risks Division. With the new unit, which has been set up to actively generate new business opportunities, we can offer our entire product range from a single source, and provide our clients with comprehensive and individual solutions. The new unit will start operations on 1 July 2015.
Four other divisions conduct property-casualty reinsurance. We further strengthened our competitiveness in 2014 by introducing various structural adjustments.
Global Clients and North America handles our accounts with major international insurance groups, globally operating Lloyd’s syndicates and Bermuda companies. It also pools our know-how in the North American market. It is responsible for our
Munich Re Group Annual Report 2014 property-casualty subsidiaries there, and for international special lines business such as workers’ compensation.
Our Europe and Latin America Division is responsible for property-casualty business with our clients from Europe (except Germany), Latin America and the Caribbean.
The Germany, Asia Pacific and Africa Division conducts property-casualty business with our clients in Germany, Africa, Asia, Australia and the Pacific Islands.
Special and Financial Risks is in charge of the classes of credit, aviation and space, agriculture, enterprise and contingency risks, and of risk solutions for industrial clients. Insurance risk securitisation and risk transfer to the capital markets are handled by our Risk Trading Unit. In addition, the division is responsible for handling our own reinsurance requirements (retrocession). Global marine business, previously split between different divisions, has been centralised and allocated to this division as a new divisional unit. The bundling of this business will further enhance underwriting quality, service for our clients worldwide, and product development.
Global Clients and American Alternative Insurance Corporation, Wilmington, Delaware3 North America American Family Home Insurance Company, Jacksonville, Florida American Modern Home Insurance Company, Amelia, Ohio American Modern Insurance Company of Florida, Inc., Jacksonville, Florida American Modern Insurance Group, Inc., Amelia, Ohio American Modern Select Insurance Company, Amelia, Ohio American Modern Surplus Lines Insurance Company, Amelia, Ohio American Southern Home Insurance Company, Jacksonville, Florida American Western Home Insurance Company, Oklahoma City, Oklahoma Beaufort Underwriting Agency Ltd., London Bell & Clements (London) Ltd., London First Marine Insurance Company, Amelia, Ohio Global Standards, LLC, Wilmington, Delaware Groves, John & Westrup Ltd., London HSB Engineering Insurance Ltd., London HSB Group, Inc., Dover, Delaware HSB Professional Loss Control, Inc., Lenoir City, Tennessee HSB Solomon Associates LLC, Dover, Delaware HSB Specialty Insurance Company, Hartford, Connecticut MSP Underwriting Ltd., London Munich Re Holding Company (UK) Ltd., London Munich Reinsurance America, Inc., Wilmington, Delaware3 Munich Reinsurance Company of Canada, Toronto Munich Re Underwriting Ltd., London NMU Group Ltd., London Roanoke Group Inc., Schaumburg, Illinois Temple Insurance Company, Toronto The Boiler Inspection and Insurance Company of Canada, Toronto The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, Hartford, Connecticut The Hartford Steam Boiler Inspection and Insurance Company, Hartford, Connecticut The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware The Midland Company, Cincinnati, Ohio
Munich Re’s second pillar is primary insurance business, which is conducted by ERGO. Via ERGO, we offer products from all the main classes of insurance: life insurance, German health insurance, and in nearly all lines of property-casualty insurance, as well as travel insurance and legal protection insurance. These products, in combination with the provision of assistance, other services and individual consultancy, cover the needs of private and corporate clients.
Segments International business is increasingly gaining in importance for ERGO. Munich Re responded to this in its accounting in the fourth quarter of 2014 by pooling almost all of its activities outside Germany in the segment ERGO International. We report on business with insurances of the person in Germany in the segment ERGO Life and Health Germany. This includes ERGO Direkt companies’ activities in life, health and property-casualty insurance. Travel insurance is also assigned to this segment. In the ERGO Property-casualty Germany segment, we bundle German property-casualty insurance business with the exception of direct insurance.
Current information is also provided at www.ergo.com 1 A detailed list of shareholdings can be found on page 292 ff. in the notes to the consolidated financial statements. 2 The companies listed are mainly subsidiaries and branches outside Germany with equity capital exceeding €5m. 3 Units that also transact business in Munich Health and are therefore allocated proportionately to reinsurance.
Special and Financial Risks Great Lakes Reinsurance (UK) Plc., London3 Great Lakes, Zurich Great Lakes, Dublin Great Lakes, Milan Munich Re of Malta p.l.c., Ta’ Xbiex3 New Reinsurance Company Ltd., Zurich3 Munich Re Weather & Commodity Risk Advisors, Wilmington, Delaware
The global health market is one of the fastest-growing sectors of the economy. This applies to healthcare and insurance alike. In order to maximise the opportunities involved, Munich Re has combined its health reinsurance worldwide and health primary insurance outside Germany under the brand of Munich Health. This covers large stretches of the health insurance value chain.
Life/Health Germany DKV Deutsche Krankenversicherung Aktiengesellschaft, Cologne ERGO Direkt Krankenversicherung AG, Fürth ERGO Direkt Lebensversicherung AG, Fürth ERGO Direkt Versicherung AG, Fürth ERGO Lebensversicherung Aktiengesellschaft, Hamburg ERGO Pensionskasse AG, Düsseldorf EUROPÄISCHE Reiseversicherung Aktiengesellschaft, Munich Victoria Lebensversicherung Aktiengesellschaft, Düsseldorf Vorsorge Lebensversicherung Aktiengesellschaft, Düsseldorf Vorsorge Luxemburg Lebensversicherung S.A., Grevenmacher
1 A detailed list of shareholdings can be found on page 292 ff. in the notes to the consolidated financial statements. Only Group companies with equity capital generally exceeding €5m are listed.
Apollo Munich Health Insurance Co. Ltd., Hyderabad Daman – National Health Insurance Company, Abu Dhabi Daman Health Insurance – Qatar LLC, Doha, Qatar DKV Belgium S.A., Brussels DKV Luxembourg S.A., Luxembourg DKV Seguros y Reaseguros, Sociedad Anónima Española, Saragossa ERGO Generales Seguros y Reaseguros, S.A., Madrid ERGO Vida Seguros y Reaseguros, Sociedad Anónima Española, Saragossa Globality S.A., Luxembourg Marina Salud S.A., Alicante MedNet Holding GmbH, Munich Munich Health Holding AG, Munich Munich Health North America, Inc., Wilmington, Delaware Munich Re Stop Loss, Inc., Wilmington, Delaware Saudi Enaya Cooperative Insurance Company, Jeddah Storebrand Helse ASA, Lysaker Unión Médica la Fuencisla, S.A., Compañía de Seguros, Saragossa
American Alternative Insurance Corporation, Wilmington, Delaware Great Lakes Reinsurance (UK) Plc., London Munich Re do Brasil Resseguradora S.A., São Paulo Munich Reinsurance Company, Munich Munich Re of Malta p.l.c., Ta’ Xbiex Munich Reinsurance America, Inc., Wilmington, Delaware New Reinsurance Company Ltd., Zurich
The framework for any business activity is our risk strategy, from which we derive various limitations and reporting thresholds. The core of this is available financial resources, which describe the economic capital position of Munich Re. We observe a range of important additional conditions in managing our business. They include national accounting regulations, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements. These conditions may even determine a unit’s short-term orientation.
Contrasting aspects have to be considered and evaluated when selecting suitable target figures. On the one hand, undue complexity should be avoided in order to ensure target figures remain transparent for investors, staff, and the public. On the other hand, the challenge lies in reflecting the often complex economic realities as closely as possible and emphasising added value as the Group’s overriding guiding principle. As our business activities are multifaceted, the parallel use of different performance indicators is unavoidable.
The numerator in the formula comprises the published IFRS net income after deduction of risk-free interest after tax (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. The basis for the adjustment is the capital exceeding the necessary risk-based capital, which is referred to as “additional available economic equity”; this may be necessary in certain cases for rating and solvency purposes, as well as for profitable growth. The additional available economic equity in the system presented here earns a risk-free interest rate because all the risk components of the investments and underwriting are covered with risk-based capital through the internal risk model, and assigned specific return requirements. If the risk capital exceeds the available economic equity, we set the adjustment item in the RORAC formula to zero.
Value added We use value added as a component of economic earnings for corporate management in property-casualty insurance and for Munich Health. The respective value added (adjusted for random fluctuation) is determined as follows: The adjusted result is derived from the income statement and consists primarily of the technical result, the normalised investment result and the remaining non-technical result. It contains value-based adjustments, including the smoothing of expenditure for major losses over time and the recognition of future claims expenses at their present value.
IFRS consolidated result The IFRS consolidated result is a performance measure derived from our external accounting. It serves as an important criterion for investors, analysts and the general public to assess the performance of the Group and our segments. With its standardised measurement basis, the IFRS consolidated result can be compared to the results of our market competitors and is thus an indicator used in Munich Re’s financial reporting.
Asset-liability management The economic value added by the investment result is calculated collectively for reinsurance and Munich Health due to their joint investment management. The main focus of Munich Re’s investment strategy is asset-liability management (ALM), which is a fundamental pillar of our value-based management system, and in which we take into account key characteristics of underwriting and other liabilities in structuring our investment portfolio. With ALM, we aim to ensure that changes in macroeconomic factors influence the value of our investments and that of our technical provisions and
We mirror important features of our underwriting liabilities on the assets side of the balance sheet 1 © Stichting CFO Forum Foundation 2008.
Munich Re Group Annual Report 2014 liabilities in the same way. For this purpose, we mirror important features of the liabil- ities – such as maturity patterns, currency structures and inflation sensitivities – on the assets side of the balance sheet by acquiring investments with similar characteristics where possible. This reduces our vulnerability to the effect of capital market fluctuations and stabilises our equity.
In addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff training level and client satisfaction also play a part. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors. On the basis of a comprehensive understanding of value creation with short-term and long-term, financial and non-financial parameters, we closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards”, from which we derive initiatives, performance measures and responsibilities. The scorecards have four perspectives: “financial”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and accountability, recognising wherever possible how much the individual, unit or field of business contributes to increasing long-term value. Our incentive systems for staff, executives and Board members support this orientation: in general, the higher the hierarchical level, the more remuneration is based on performance.
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) (Chairman of the Group Committee) Group Development Group Investments Group Communications Group Compliance Group Audit Health (until 30 April 2014)
Giuseppina Albo (since 1 October 2014) Europe and Latin America (until 31 December 2014 together with Georg Daschner)
Dr. rer. nat. Torsten Jeworrek (Chairman of the Reinsurance Committee) Reinsurance Development Corporate Underwriting Corporate Claims Accounting, Controlling and Central Reserving for Reinsurance Information Technology Global Business Architecture Geo Risks Research/ Corporate Climate Centre
Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chairman) Member since 17 April 2002, last re-elected 30 April 2014 Former Chairman of the Board of Management of Volkswagen AG
Dr. iur. Anne Horstmann Member since 30 April 2014 Employee of ERGO Versicherungs gruppe AG
Peter Löscher Member since 22 April 2009 until 30 April 2014 President of the Board of Trustees of the Siemens Foundation and former Chairman of the Board of Management of Siemens AG
Silvia Müller Member from 22 April 2009 until 30 April 2014 Employee of ERGO Versicherungsgruppe AG
Reinhard Pasch Member from 22 April 2009 until 30 April 2014 Employee of ERGO Versicherungsgruppe AG
Andrés Ruiz Feger Member since 22 April 2009, last re-elected 30 April 2014 Employee of Munich Re, Sucursal en España
Richard Sommer Member from 22 April 2009 until 30 April 2014 Trades Union Secretary and former Head of the Federal Specialist Group, Insurances, ver.di
Dr. phil. Ron Sommer Member since 5 November 1998, last re-elected 30 April 2014 Chairman of the Supervisory Board of MTS OJSC, Russia
Personnel Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Herbert Bach (until 30 April 2014) Wolfgang Mayrhuber Angelika Wirtz (since 30 April 2014)
COMMERZBANK AG ERGO Versicherungsgruppe AG2 (Chair) Munich Health Holding AG2 (Chair)
Dr. jur. Doris Höpke – DKV Seguros y Reaseguros S.A., Spain2
Bayerische Motoren-Werke AG Deutsche Bank AG Deutsche Post AG Franz Haniel & Cie. GmbH
Nokia Corporation, Finland (until June 2014) Wipro Ltd., India (until June 2014)
Anton van Rossum – Credit Suisse Groupe AG, Switzerland Royal Vopak NV, Netherlands (Chair) Solvay S.A., Belgium (until June 2014)
Dr. phil. Ron Sommer – Sistema Shyam Teleservices Ltd., India Tata Consultancy Services Ltd., India
Fixed components The fixed components of remuneration comprise basic remuneration plus remuneration in kind and fringe benefits.
Basic remuneration The basic remuneration comprises a fixed cash compensation for the calendar year, paid out as a monthly salary.
Objectives for the business fields – Reinsurance – ERGO – Munich Health Personal objectives Overall performance 0–200% (fully achieved = 100%)
b) Defined contribution plan (Board members appointed prior to 2009 who had not reached the age of 55 in 2008 and Board members first appointed as from 2009)
Variable remuneration The variable remuneration component is geared to the overall performance of the Group and defined organisational units and to the personal performance of the individual members of the Board of Management. The amount depends on the extent to which the annually set objectives for annual and multi-year performance are met, and how the component “Evaluation of overall performance” – which considers the overall performance of individual members of the Board and of the whole Board – is assessed.
Annual objectives, multi-year objectives, overall performance evaluation and invest- ment in shares together form a well-balanced and economic (i.e. strongly risk-based) incentive system, with great importance being attached to ensuring that the targets set for the members of the Board of Management do not have undesirable effects. No guaranteed variable salary components are granted.
The variable remuneration for annual performance is determined on the basis of evaluation by the full Supervisory Board and then paid out in the year after the one-year assessment period. Of the net payout amount, 50% must be invested in Munich Reinsurance Company shares that must be held for at least a four-year period.
Variable remuneration based on multi-year performance For the multi-year performance remuneration component, three-year targets based on the financial results of the reinsurance, ERGO and Munich Health segments and on individual performance are fixed every year. The Supervisory Board also assesses the overall performance of the whole Board of Management and the individual Board members. This allows for a response to developments during the three-year appraisal period that are beyond the influence of Board members, and which can also be taken into account along with performance not included in the agreement of objectives. Full achievement of the multi-year objectives (100%) allows for payment of 70% of the overall target amount for variable remuneration.
The variable remuneration for the multi-year performance is determined on the basis of evaluation by the full Supervisory Board and then paid out in the year after the threeyear assessment period. Of the net payout amount, 25% must be invested in Munich Reinsurance Company shares that must be held for at least a two-year period.
– Life reinsurance – Value added by new business – Change in the value of in-force business Personal objectives Personal objectives per Board member Special focal points such as – Pricing and cycle management – Client management – Individual leadership Overall performance evaluation 20% Overall performance of individual Assessment by Supervisory Board taking Board members and of the Board of into account Section 87 of the Stock Management as a whole Corporation Act (AKtG) and the German Corporate Governance Code
Pro-rata calculation of the variable remuneration Members of the Board of Management who have not been members of the Board for the full year receive a pro rata temporis amount of variable remuneration. The components based on annual performance are calculated for the months of the oneyear plan term in which the Board members have held their position. Only the first year of the respective three-year plan term is pertinent for the pro-rata calculation of variable remuneration for the multi-year performance, i.e. the Board members receive pro-rata variable remuneration only for those months of the first plan year in which they have held their position. Pro-rata calculation also applies for the pertinent year in case of retirement, occupational disability, or death.
– Property-casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in-force business – ERGO Value-based economic Economic earnings2 performance indicator – Munich Health3 Value-based economic Component of performance indicator economic earnings:2
Beginning in 2009, pension plans for Board members were changed to a defined contribution system. The main aim of this change was the fullest possible outsourcing of all pension-specific risks from Munich Reinsurance Company’s balance sheet. This major risk transfer was achieved by financing increases in entitlements exclusively by paying premiums into insurance policies concluded to cover these benefit obligations. This means the Company is no longer liable for the pension benefits, as these are covered by the aforementioned insurance policies. The longevity risk, the biometric risks of premature occurrence of a pensionable event (e.g. disability or death of a member of the Board during active service), and the capital market risk were thus transferred to the insurer and the individual Board members.
Munich Re Group Annual Report 2014 members newly appointed as from 2012). The insurance benefits that result from the contribution payments to the external insurer constitute the Company’s pension commitment to the Board member.
Board members who had not reached the age of 55 by the end of 2008 retained as a vested pension their pension entitlement under the previous defined benefit plan (fixed amount in euros) existing at the point of transition on 31 December 2008. For future service years as of 1 January 2009, these Board members receive an incremental pension benefit generally based on the defined contribution plan for Board members first appointed from 2009. Since the conversion of the pension system took place while Board members’ contracts were still in force, the pension contributions were calculated in such a way that the total of vested pension, pension-fund pension and incremental pension benefit results in an expected pension at age 60 equivalent to that of the previous pension benefit based on realistic estimates.
Board members who had already reached the age of 55 at the conversion date were not transferred to a defined contribution system and remain members of the previous system’s defined benefit plan. The defined benefits are fixed on the basis of “pensionable basic remuneration”, which corresponds to 25% of the target overall direct remuneration.
Benefits on termination of employment Occupational pension Board members appointed before 1 April 2012 are entitled to an occupational pension on retiring from active service with the Company after reaching the age of 60 or, at the latest, at the end of the calendar year in which they turn 65.
— In the case of a combination between defined benefit plans and defined contribution plans: Vested pension from the defined benefit plan up to 2008 and annuity or lump sum from the policy reserve under the defined contribution plan
— In the case of a combination between defined benefit plans and defined contribution plans: Vested pension from the defined benefit plan up to 2008 and 80% of the insured occupational pension benefit up to age 59, with subsequent occupational pension based on the defined contribution plan.
— In the case of a combination between 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 (Section 2 (1) of the Employers’ Retirement Benefits 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 (5a) of the Employers’ Retirement Benefits Act). This entitlement is paid out as an annuity or a lump sum.
Improved vested benefits Improved vested benefits are granted if the contract ends owing to non-extension of the Board member’s appointment (by the Company) but not due to gross violation of duties or to the Board member giving notice. A further precondition is that the Board member leaves the Board before reaching the age of 60 and has had at least ten years’ service with the Company.
Benefit amount: — For a period of six months after leaving the Board, previous monthly basic remuneration (only for Board members appointed prior to 2006)
Subsequently, surviving dependants of a Board member who dies during active service or after retirement receive the following benefits: — Widow(er)’s pension or pension for registered civil partner amounting to 60% of the defined benefit or insured occupational pension. If the spouse or registered civil partner is more than ten years younger than the Board member, the surviving dependant’s pension will be reduced by 2% for each year or part thereof of age difference, but by not more than 50%.
Adjustment of pensions and benefits for surviving dependants In the case of Board members appointed before 2009, occupational pensions and pensions for surviving dependants are reviewed for adjustment if salaries payable under pay-scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay-scale categories) since the pensions were last fixed or more than three years have passed since that date. The adjustment made will at least be in line with the increase in the cost of living in the meantime according to the consumer price index for Germany. This arrangement also applies to Board members newly appointed in the period from 1 January 2009 to 31 March 2012 who received a pension commitment from the Company for the first time before 1 January 1999. For Board members appointed as from 2009 who did not receive a pension commitment from the Company before 1 January 1999, and for Board members appointed as from 1 April 2012, occupational pension and benefits for surviving dependants are adjusted by 1% annually from the date when the pension or benefit starts being drawn, in accordance with Section 16 (3) no. 1 of the German Employers’ Retirement Benefits Act. Vested benefits are not adjusted.
The level of the target overall direct remuneration (= basic remuneration + variable remuneration on the basis of 100% achievement of objectives) for the individual members of the Board of Management is set by the full Supervisory Board, acting on recommendations from the Supervisory Board’s Personnel Committee. Criteria for the appropriateness of compensation are the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole, and the financial situation, performance and future prospects of Munich Re. Other criteria are the relevant comparative benchmarks for Board remuneration and the prevailing remuneration structure at Munich Reinsurance Company. The Supervisory Board takes account of the level of Board salaries in relation to the level of salaries paid to senior managers and to general staff members over a period of time, and also determines how senior managers and general staff are to be classified for the purpose of this comparison. The consideration of what level of remuneration is appropriate also takes into account data from peer-group (DAX 30) companies. New Board members are placed at a level which allows sufficient potential for development of the remuneration in the first three years.
Board of management remuneration under DRS 17 Under DRS 17, remuneration for annual performance 2014 is shown as the provisions set aside for that purpose taking into account the relevant additional/reduced expenditure for the previous year, since the performance on which the remuneration is based has been completed as at the balance sheet date and the requisite Board resolution is already foreseeable. Under DRS 17, remuneration for multi-year perform- ance 2011–2013 is recognised in the year of payment, i.e. in 2014.
1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for 2014. The amount shown for annual performance remuneration is based on estimates and the relevant provisions posted in the table on page 59.
Giuseppina Albo4, 5 2014 – – – 2013 – – –
The basic remuneration, remuneration in kind/fringe benefits and pension expenses (sum of personnel expenses for defined benefit plans and defined contribution plans) are in accordance with German Accounting Standard No. 17 (DRS 17). There are some deviations with regard to the variable remuneration for annual and multi-year performance. In addition, the German Corporate Governance Code requires the disclosure of proceeds from the exercise of stock appreciation rights under the longterm incentive plans. Under DRS 17, however, these proceeds are not disclosed.
2 Expenses for defined benefit plan, including provision for continued payment of salary for surviving dependants. 3 Entitled to a reduced occupational pension on early retirement, and to an occupational pension in the event of regular termination of employment. 4 Entitled to an occupational pension in the event of termination of employment owing to incapacity to work. 5 Entitled to vested benefits under the Employers’ Retirement Benefits Act in the event of premature or regular termination of employment. 6 Entitled to a reduced occupational pension on early retirement in the event of premature or regular termination of employment. 7 Entitled to vested benefits under the Employers’ Retirement Benefits Act in the event of premature termination of employment up to 7 March 2015, and to a reduced occupational pension on early retirement in the event of premature termination of employment as from 8 March 2015 or regular termination of employment. 8 No transfer to defined contribution system, as Board member had already reached 55 at the conversion date. Retired at 1 January 2015 and entitled to an occupational pension of €255,000 p.a.
9 Defined Contribution Plan within the meaning of IAS 19, Employee Benefits, so no present value shown.
Remuneration in kind/fringe benefits 31,669 31,669 31,669 30,992 61,323 61,323 61,323 –
Remuneration in kind/fringe benefits 46,133 46,133 46,133 46,856 40,860 40,860 40,860 37,862
Georg Daschner Doris Höpke Board member Board member Retired: 31.12.2014 Joined: 1.5.2014
Remuneration in kind/fringe benefits 34,678 34,678 34,678 32,692 17,086 17,086 17,086 –
Remuneration in kind/fringe benefits 36,180 36,180 36,180 177,690 34,585 34,585 34,585 33,695
Remuneration table – Inflow in accordance with the German Corporate Governance Code
Nikolaus von Bomhard Giuseppina Albo Ludger Arnoldussen Chairman of the Board of Management Board member Board member Joined: 1.10.2014 € 2014 2013 2014 2013 2014 2013
Multi-year variable remuneration Multi-year performance 2011–2013 2,569,560 – – 1,246,119 Multi-year performance 2012–20142 2,272,032 – – 1,228,222 Long-term Incentive Plan 20063 679,078 – – 61,184 Long-term Incentive Plan 20073 577,433 – – 208,088 Long-term Incentive Plan 20083 805,364 – – 318,501 Long-term Incentive Plan 20093 1,020,099 – –
Thomas Blunck Georg Daschner Doris Höpke Board member Board member Board member Retired: 31.12.2014 Joined: 1.5.2014
Multi-year variable remuneration Multi-year performance 2011–2013 1,287,720 1,414,140 – – Multi-year performance 2012–20142 1,228,222 1,260,544 – – Long-term Incentive Plan 20063 244,715 326,286 – – Long-term Incentive Plan 20073 242,774 312,119 – – Long-term Incentive Plan 20083 364,008 409,516 – – Long-term Incentive Plan 20093 698,796 – –
Multi-year variable remuneration Multi-year performance 2011–2013 1,885,520 1,246,119 Multi-year performance 2012–20142 1,842,332 1,228,222 Long-term Incentive Plan 20063 407,857 Long-term Incentive Plan 20073 381,490 52,029 Long-term Incentive Plan 20083 518,703 273,019 Long-term Incentive Plan 20093 856,600 392,406 227,590
The performance-related bonus is based on quantitative and qualitative objectives. We use indicators from operative planning for the quantitative objectives, while personal objectives are agreed on for the qualitative portion.
The Mid-Term Incentive Plan, with a duration of three years, is based on the same targets as the multi-year bonus of Munich Reinsurance Company’s Board of Management. In addition, the development of the total shareholder return is taken into account. Besides the senior executives in Munich, selected executives in Munich Reinsurance Company’s international organisation also participate in the Mid-Term Incentive Plan.
G3305 Remuneration of Supervisory Board members in accordance with Article 15 of the Articles of Association1 Result- related remuneration with Result- long-term Fixed related incentive remuneration2 remuneration function Financial For committee Name year Annual work Annual Annual Total
(from 30 April 2014) Hans Peter Claußen 2014 48,000 4,500 – – 52,500
(until 30 April 2014) Ann-Kristin Achleitner 2014 96,000 – – – 96,000
Result- related Fixed remuneration remuneration For committee Name Financial year Annual2 work2 Annual Total
Hans Peter Claußen 2014 4,932 – – 4,932 2013 – – – –
The US central bank began to gradually wind down its expansionary monetary policy. Step by step, it reduced the volume of its monthly bond purchases and ended the bond-buying programme in October. The European Central Bank (ECB) on the other hand relaxed its monetary policy. It lowered its key interest rate twice, bringing it down to 0.05%, introduced a negative interest rate for deposits at the central bank, and announced a new programme to buy private-sector bonds.
We write a large portion of our business outside the eurozone. Appreciation of the euro has an adverse effect on premium income development posted in euros, while depreciation increases it. The average exchange rate of the euro to the US dollar in 2014 was unchanged from the previous year. It was higher against the Canadian dollar (7.2%) and the Japanese yen (8.3%), but lower against the British pound sterling (–5.1%). Altogether, currency translation effects have slightly distorted premium income downwards compared with the previous year.
The value shown for investments on the other hand, which is translated at period-end exchange rates, was increased substantially by currency translation effects in 2014. On 31 December 2014, the exchange rate of the US dollar to the euro of US$ 1.21 was 12.0% lower than the rate at the end of 2013 (US$ 1.37). The euro was 3.7% down against the Canadian dollar, 6.5% down against the British pound sterling, and 0.1% higher against the Japanese yen.
According to provisional estimates, in primary insurance global premium income in the property-casualty and health segments grew moderately in 2014 when adjusted for inflation. Growth was muted in Europe, but solid in North America. However, worldwide premium development was buoyed by a further very dynamic increase in demand for insurance cover in many emerging markets. According to provisional estimates, global premium income in life primary insurance increased strongly in 2014 when adjusted for inflation, but there were hefty variations between individual markets. It was not only large emerging markets that managed to generate high growth rates, but some western European markets also achieved similar growth.
Price competition increased in the reinsurance market in 2014. There was already an abundance of capacity available in the property-casualty reinsurance renewals in January 2014. In the course of the year, most reinsurance groups saw their equity increase further as a result of the absence of major losses and the fall in interest rates. The latter tended to result in higher values for fixed-interest investments under international accounting standards. Prices also fell strongly for the renewals on 1 April and 1 July, and the trend continued for the 1 January 2015 renewals.
— Decline of 4.3% in gross premium income — Major-loss expenditure well below projected range — Increased investment result — Return on risk-adjusted capital (RORAC) of 13.2% (12.1%) after tax — Proposed dividend increase to €7.75 (7.25) per share
Last year’s consolidated profit exceeded the target we set ourselves. At €3.2bn, we again achieved a good result, partly thanks to tax income derived from a recalculation of taxes for prior years. In property-casualty reinsurance, our profit was really strong again at €2.5bn, with major losses remaining well below the volume to be expected. Life reinsurance contributed €0.4bn to the consolidated result, with some negative developments in the USA and Australia. The result contribution of the ERGO segments totalled €0.2bn, as it was adversely affected by goodwill impairments. At €0.1bn, Munich Health’s result met our expectations.
Economic earnings were attributable to factors from new and in-force business deriving from the field of underwriting and to the development of the economic parameters. The latter was strongly influenced by currency gains and positive effects from equities and credit risk spreads. These contrasted with the further fall in interest rates, and generally high interest-rate volatility. In addition, tax income from previous years was compensated for by more refined modelling.
We want our shareholders to participate in our gratifying result again. We will therefore propose to shareholders at the Annual General Meeting payment of a dividend of €7.75 (7.25) per dividend-bearing share.
Reinsurance property-casualty % 92.7 92.1 ERGO Property-casualty Germany % 95.3 96.7 ERGO International % 97.3 98.7 Munich Health2 % 98.8 98.3
Results from insurance-related investments €m 414 412 0.5 Operating result €m 4,028 4,398 –8.4 Taxes on income €m 312 –108 – Consolidated result €m 3,171 3,333 –4.9
In the financial year 2014, we posted a consolidated result of €3.2bn (3.3bn), i.e. roughly the same high level as the year before. The two reinsurance segments delivered the bulk of this figure. An adverse effect derived from the impairment losses of goodwill in the segment ERGO International.
Munich Re posted tax income of €312m (–108m) for the full year. A significant adjustment of €1,341m (946m) was made to the taxes for previous years, partly on account of court decisions at the highest level.
On 1 March 2015, the Austrian Financial Market Authority (FMA) initiated insolvency proceedings against Heta Asset Resolution AG, Klagenfurt (Heta) in accordance with the new EU Regulation on insolvency proceedings for banks. To be able to prepare an insolvency plan, FMA has imposed a deferral of Heta’s liabilities towards its creditors until 31 May 2016. For the first quarter of 2015, we expect a write-down of our fixedinterest portfolio in the two-digit million euro range, after taking into account policyholder participation.
Reinsurance property-casualty 2,483 2,372 4.7 ERGO Life and Health Germany 269 158 70.3 ERGO Property-casualty Germany 176 156 12.8 ERGO International –276 94 – Munich Health 109 150 –27.3
Thereof: External institutional investors 10.8 10.2 5.7 Thereof: Private-client business 3.1 2.7 17.8
— Technical result of €280m below expectations — Unchanged investment result of €811m — Pleasing consolidated result of €410m
Premium At €10,040m, gross premium volume in life reinsurance was below the previous year’s level (€10,829m), owing to currency translation effects. We generated around 89% of premium in foreign currencies, of which 37 percentage points were in Canadian dollars and 21 percentage points in US dollars. If exchange rates had remained unchanged, our premium income would have fallen by only 4.1%.
This year we saw largely stable premium income in our remaining traditional reinsurance business. The sluggish economy in many regions that are important to our business had some impact on our clients’ business and curbed demand for reinsurance.
Given the increasing volatility on the capital markets, for some years the demand for reinsurance of capital market risks embedded in life insurance products has been growing. We have therefore created the infrastructure necessary to provide our clients with comprehensive solutions for covering options and guarantees dependent on the capital markets. Our exposure related to this is transferred back to the capital markets.
Our business model is geared to the characteristics of the individual markets
In the USA, our subsidiary Munich American Reassurance Company posted an increase in gross premium income to €2.1bn (2.0bn), and we retained our position among the leading life reinsurance companies in this largest market worldwide. For the reasons mentioned previously, the technical result remained below expectations.
On the African continent, our South African subsidiary Munich Reinsurance Company of Africa Ltd. posted an increase in premium volume to €164m (156m). As in prior years, the technical result showed pleasing development.
— Very good combined ratio of 92.7% — Investment result up slightly to €1,785m — Very high consolidated result of €2,483m
In property-casualty reinsurance, we posted a slight decline in premium income of 1.7% to €16.7bn (17.0bn) in 2014. Approximately 14% of the portfolio is written in euros and 86% in foreign currency, of which 46 percentage points is in US dollars and 15 percentage points in pounds sterling. Compared with the previous year, the development of the euro against other currencies had a negative effect of €158m on our premium income. If exchange rates had remained unchanged, premium volume would have decreased by 0.8%.
The rise in premium adjusted for exchange rates is mainly attributable to the expansion of our motor business in Australia. Adverse effects came from portfolio reductions where it was no longer possible to achieve adequate prices, terms and conditions. A decline in prices in natural catastrophe business led to a deliberate reduction in property reinsurance. The capacity freed up was transferred to our stable specialty primary insurers operating in niche segments. The amount of premium income in the specialty class of agriculture is linked to development of commodity prices for agricultural products. As these prices have fallen, premium income has also declined.
Thereof: Major losses Percentage points 7.2 10.4 Expense ratio % 32.5 30.4 Combined ratio % 92.7 92.1 Operating result €m 2,824 2,999 –5.8
In light of this, it is not surprising that prices for reinsurance cover fell in all segments in our portfolio. In line with general market developments, non- proportional natural catastrophe covers even saw significant price falls.
At €2,483m, the consolidated result in property-casualty reinsurance was up against the previous year (€2,372m). The operating result, which includes the investment result and technical result, fell to €2,824m (2,999m). The technical result totalled €2,392m (2,468m), again benefiting from significantly lower-than-expected major-loss expenditure. Adjusted for commissions, Munich Re’s customary review of reserves resulted in a reduction in the claims provisions for prior years amounting to around €900m for the full year, which is equivalent to around 5.3 percentage points of the combined ratio. This positive development is spread across almost all segments of our portfolio. Over the year as a whole, the safety margin in the reserves remained unchanged at a high level, as Munich Re adhered to its careful approach to determining and adjusting loss reserves.
The environment of the renewal rounds was highly competitive in 2014
Overall, the division’s premium volume fell to €3,452m (3,677m), owing to deliberate portfolio reductions. We kept constant the capacity we provide for the coverage of natural hazards, particularly windstorm and earthquake, and successfully defended our strong market position in the Caribbean, Latin America and Europe with margins still remaining adequate.
Key figures 2014 Prev. year Change % Gross premiums written €m 6,702 6,471 3.6
Our Risk Trading Unit places insurance risks on the capital and retrocession markets. We mainly provide the unit’s services to clients, but also use them for our own purposes in order to buy retrocession cover on the basis of our defined risk strategy. We placed three transactions with investors in 2014: there were two client transactions amounting to €190m and US$ 250m, and an internal securitisation amounting to US$ 100m (Queenstreet IX).
The division’s premium income declined year on year to €2,988 (3,341m). As well as reduced premium income from declining commodity prices for agricultural goods, premium development was also impacted by strict cycle management triggering falls in premium. Due to the higher major-loss expenditure in comparison with the previous year, the division’s combined ratio has deteriorated to 103.1% (96.7%).
— Decrease in overall premium income to €10.7bn, with gross premiums written down to €9.8bn
At €10.7bn (11.0bn), overall premium income in the ERGO Life and Health Germany segment decreased by 2.3% in 2014, reflecting a decline in premium income across all three business segments. Gross premiums written also went down in the past financial year (–1.8 %). The decline in this segment was mainly attributable to lower regular premiums in life insurance and less business with the capitalisation product MaxiZins.
Life Germany 36% (37%) Health Germany 54% (53%) Direct business Germany 10% (10%)
ERGO has been marketing the new generation of life insurance products in two variants since July 2013. In the financial year 2014, these products accounted for 67% of annuity policies ERGO sold in private-client business not sponsored by the state.
The technical result showed a reduction to –€160m (–50m) compared with the previous year. The negative development was due in particular to much higher benefits and lower premium income. The result was also reduced by the reserve set aside for possible repayment claims as a consequence of the decisions by the Court of Justice of
Key figures 2014 Prev. year Change €m €m % Total premium income1 4,363 4,537 –3.8 Gross premiums written 3,553 3,706 –4.1 Technical result –160 –50 –220.0 Operating result 53 –119 –
New business Life Germany 2014 Prev. year Change €m €m % Regular premiums 207 236 –12.3
Annual premium equivalent1 292 320 –8.8 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
In Health Germany, we report on domestic health insurance with the exception of direct insurance business. Our worldwide travel insurance activities are also included under this category. Approximately 92% of the premium income in Health Germany derives from health insurance, and around 8% from travel insurance.
The technical result totalled €220m (360m). The decline is mainly attributable to higher benefits due to the participation of our policyholders in the anticipated tax refund. At €1.4bn (1.3bn), the investment result was gratifyingly high, one positive contributing factor being an increased result from disposals. The significantly decreased operating result of –€88m (240m) was also attributable to the participation of our policyholders in the anticipated tax refund. Without the effect of the afore- mentioned tax refund, the technical result would have been significantly higher and the operating result would have been positive.
Key figures 2014 Prev. year Change €m €m % Total premium income 5,250 5,288 –0.7 Gross premiums written 5,250 5,288 –0.7 Technical result 220 360 –38.9 Operating result –88 240 –
Overall premium income in direct insurance declined by 3.4% to €1.1bn (1.2bn). The decline in overall premium volume was solely attributable to the drop in single premiums from the MaxiZins capitalisation product. In accordance with the low capital-market interest rates, we too lowered the interest rates for our capitalisation product and thus realised €55m less premium than in 2013. Adjusted for premiums from the capitalisation product MaxiZins, however, overall premium income would have been up on the previous year by 1.6%. Some €560m (635m) of this figure was from life insurance (–11.8%), €406m (384m) from health insurance (+5.7%) and €151m (137m) from property-casualty insurance (+10.2%). Gross premiums written increased by 1.6% to €1,009m (993m).
The technical result for the financial year totalled €84m (73m). The increase is partly attributable to lower costs combined with an increase in premiums earned. At €165m (196m), the investment result was below that of the previous year, one negative contributing factor being a diminished result from disposals. The operating result climbed by 17.9% to €79m (67m).
New business direct life Germany 2014 Prev. year Change €m €m % Regular premiums 29 32 –9.4 Single premiums 131 177 –26.0
— Slight decrease in premium income to €3.1bn — Improved combined ratio of 95.3% — Investment result of €204m down on previous year — Consolidated result of €176m
In the ERGO Property-casualty Germany segment, we report on property-casualty insurance business in Germany with the exception of direct insurance business. Our main classes of business include personal accident and motor insurance. Approximately 22% of the segment’s premium income derives from personal accident insurance, and around 21% from motor insurance.
The technical result in the ERGO Property-casualty Germany segment improved to €214m (177m). The investment result dropped year on year to €204m (238m). The decline is mainly due to the decreased net gains on derivatives. Overall, the operating result thus increased to €304m (291m) and the consolidated result to €176m (156m).
At 95.3%, the combined ratio in 2014 was better than in the previous year (96.7%), particularly due to the favourable claims situation. Whilst bad weather across much of western Germany at the beginning of June caused considerable damage to buildings and motor vehicles, the effects on the combined ratio were much less pronounced than were those of the previous year’s events. In the previous year, we had posted natural hazard losses from the catastrophic flooding in eastern and southern Germany, and from windstorm and hail events. Paid claims and the change in claims provisions totalling –€1,942m (–2,010m), along with net operating expenses of –€994m (–1,026m), compared with net earned premiums of €3,080m (3,139m).
— Increase in overall premium income to €4.2bn — Improved combined ratio of 97.3% — Investment result of €662m up on previous year — Consolidated result of –€276m due to impairment of goodwill of –€445m
In the ERGO International segment, we bundle our life and property-casualty insurance business outside Germany. Approximately 48% of the segment’s premium income derives from life insurance, and around 52% from property-casualty insurance. Our biggest markets include Poland, which accounts for approximately 28% of the premium volume, Austria (approx. 18%) and Belgium (approx. 16%).
At €2.0bn (1.7bn), overall premium income from international life insurance business increased by 20.9% year on year. The marked year-on-year increase is due in particular to growth in Poland, Austria and Belgium. Gross premiums written showed a corresponding increase to €1.6bn (1.3bn). International new life insurance business grew robustly by 60.5% to €1,051m (655m). In terms of annual premium equivalent (APE, i.e. regular premium income plus one-tenth of single-premium volume), which is the performance measure more customary among investors, however, our new business volume was up 26.7%, mainly owing to the strong growth in Poland, where new business through banks developed pleasingly.
Key figures 2014 Prev. year Change % Total premium income1 €m 4,213 3,876 8.7 Gross premiums written €m 3,809 3,508 8.6 Share of gross premiums written by ERGO % 22.8 21.1 Loss ratio % 58.5 60.8 Expense ratio % 38.8 37.9 Combined ratio % 97.3 98.7 Operating result €m 278 210 32.4 Consolidated result €m –276 94 –
We posted premium volume of €2.18bn (2.20bn) in international property-casualty business. The decline is essentially attributable to lower premium volumes generated by our companies in Poland and Italy. In Poland, we had already posted the full premium from a major contract with a three-year term in 2013. Additionally, the difficult market conditions for Polish motor insurance are apparent from the figures. To benefit from existing synergies, our two Polish property-casualty companies were merged in 2014. Despite negative currency translation effects, particularly in Turkey and Russia, we posted gratifying premium growth of 3.1% in Turkey and 27.8% in Russia. In local currency, the growth in premium income was even more pronounced. Due to the acquisition of the property-casualty insurer ERGO Insurance in Singapore we posted an increase of €15m in gross premiums written in 2014.
In 2014, we acquired 100% of the shares in property-casualty insurer SHC Insurance Pte. Ltd (SHC) in Singapore. The company, which now operates under the name ERGO Insurance Pte. Ltd. (ERGO Insurance), offers a broad range of property-casualty insurance and generated premium equivalent to €45m in 2013. The Singapore property-casualty market has grown annually by about 10% in recent years and is profitable, its combined ratio amounting to just over 90%. Growth prospects for the next few years are also positive, making this acquisition an important element of ERGO’s international growth strategy. It offers a good platform for further activities in target markets in Southeast Asia.
New business Life International 2014 Prev. year Change €m €m %
With the exception of the German health insurers belonging to ERGO, Munich Re’s global healthcare insurance and reinsurance business is combined under the Munich Health brand. We offer our international clients across the world innovative insurance solutions and individual consultancy and services.
Reinsurance North America 55% (54%) Europe and Latin America 12% (9%) Middle East/Africa 7% (5%) Asia-Pacific 2% (3%)
— Net on- and off-balance sheet unrealised gains up; at a very high level of €32.0bn — Investment result reaches €8.0bn — Return on investment (RoI) of 3.6%
2014 was marked by further declines in capital-market interest rates and risk spreads. These developments were borne up by increasing speculation on an ECB governmentbond buying programme. The stock markets came under pressure at times as concerns over growth and deflation flared up, but still ended the year positively. In the period under review, the EURO STOXX 50 climbed by about 1%, the Dow Jones by 8% and the DAX 30 by around 3%. Interest rates on German government bonds in particular fell to a historic low. Yields on corporate bonds also dropped sharply owing to shrinking risk spreads.
Investment mix 31.12.2014 Prev. year Change €m €m % Land and buildings, including buildings on third-party land 3,732 3,762 –0.8 Investments in affiliated companies 274 214 28.0 Investments in associates and joint ventures 1,285 1,300 –1.2
Other securities held to maturity – 5 –100.0 Other securities available for sale
The carrying amount of our investment portfolio, which continues to be dominated by fixed-interest securities, loans and short-term fixed-interest investments, was up compared with the position at the beginning of the year. At 31 December 2014, the carrying amount of our investments amounted to €218.9bn (202.2bn). Falling riskfree interest rates, credit risk spreads and the development of exchange rates led to increasing market values.
Our on- and off-balance-sheet unrealised gains and losses (including owner-occupied property), which could be turned into realised gains upon disposal of the relevant investments, climbed from €15.6bn to €32.0bn.
An overview of the on-balancesheet unrealised gains/losses is available in the notes to the consolidated financial statements on page 217 1 Presentation essentially shows fixed-interest securities and loans, including deposits and cash at banks, at market value. The approximation is not fully comparable with IFRS figures.
In the period under review, we reduced our portfolio of covered bonds and structured credit products, and invested more in government bonds.
Half of our fixed-interest portfolio is invested in government bonds. In the current financial year, we have mainly made new investments in US, Spanish, Italian and Australian government bonds. The purchase of government bonds from emerging markets is also part of our balanced investment strategy. Reductions focused on our holdings of bonds from German issuers. The vast majority of our government bonds continue to come from countries with a high credit rating. As part of our risk management, we gear our risk capital requirements and limits to the ratings of the relevant issuers, but we do not treat any credit exposure as risk-free. Approximately 45% of our government bond portfolio is made up of German and US bonds, with Italian, Spanish, Portuguese and Irish issuers accounting for 9%. We do not hold any government bonds from Greece, Cyprus or Argentina.
Government bonds1, covered bonds and corporate bonds by country2 according to fair values3 €bn 31.12.2014 Prev. year Change Government bonds Germany 30.6 27.9 2.7
Our portfolio of government bonds, covered bonds and corporate bonds has a good rating structure: As at 31 December 2014, approximately 84% were rated AAA to A.
Periods to maturity of government bonds, covered bonds and corporate bonds1 according to carrying amounts €bn Carrying amounts Up to one year 11.2 Over one year and up to two years 11.4 Over two years and up to three years 12.8 Over three years and up to four years 10.3 Over four years and up to five years 12.9 Over five years and up to ten years 47.8 Over ten years 59.8 Total 166.2 1 Presentation based on approximation and not fully comparable with IFRS figures.
Rating of government bonds, covered bonds and corporate bonds by country1 according to carrying amounts €bn AAA AA A BBB Lower No rating Total
The carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies, associates and joint ventures at market value) rose in the course of the year. Our equity-backing ratio amounted to 5.2% (4.8%). The derivatives used to hedge our equity portfolio were increased. Including hedges, our equity-backing ratio was 4.3% (4.6%). Besides this, we are protecting ourselves against accelerated inflation in an environment of continuing low interest rates. For this, we hold inflation-linked bonds with a market value of €8.5bn (6.8bn) and inflation-linked swaps with an exposure of €5.9bn (4.4bn). We are suffering losses of market value here due to particularly low inflation rates. Real assets like shares, property, commodities, and investments in infrastructure, renewable energies and new technologies also serve as protection against inflation. Additionally, our investments in real assets have a positive diversification effect on the overall portfolio.
Senior bonds 81 84 Loss-bearing bonds 5 5 Subordinated bonds 14 11 1 Presentation essentially shows fixed-interest securities and loans at market value. The approximation is not fully comparable with the IFRS figures.
In the past financial year, we posted net write-downs of –€234m (–436m) on non- derivative investments, particularly on our share portfolio. The main reason for the lower write-downs is the write-downs we made on our portfolio of physical gold in the previous year.
In the 2014 financial year, through active asset management we posted net gains of €2,629m (1,759m) on the disposal of non-derivative investments. These derive primarily from our portfolio of fixed-interest securities – most notably on government bonds – and equities. The year-on-year improvement in our result from disposals was due chiefly to higher gains realised on fixed-interest securities and equities.
In the past financial year, we posted a negative balance totalling –€1,068m (–985m) from write-ups and write-downs of derivatives and losses on the disposal of derivatives. The adverse effects resulted mainly from equity, inflation and commodities derivatives. Losses on inflation and commodities derivatives were up on the previous year. The gains on interest-rate derivatives (particularly from ERGO’s interest-rate hedging programme) had a positive effect on the result.
1 Details of the result by type of investment are shown on page 259 f. in the notes to the consolidated financial statements. 2 Return in % p.a. on the average market value of the investment portfolio at the quarterly reporting dates.
Development of Group equity 31.12.2014 Prev. year Change €m €m % Issued capital and capital reserve 7,417 7,426 –0.1
The increase in equity was attributable not only to the consolidated result but also to a rise the reserve for currency translation adjustments and to higher net unrealised gains, which derived mainly from our fixed-interest securities available for sale. Above all, the equity was reduced by the dividend payment and share buy-back programme.
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. Supervisory authorities in some countries, for example, require foreign reinsurers to establish premium and reserve deposits to the benefit of primary insurers, or set up trustee accounts or guarantees with certain financial institutions. At the reporting date, this involved investments with a volume of €8.4bn (8.4bn). In addition, there were contingent liabilities.
The composition of our subordinated liabilities can be found in the notes to the consolidated financial statements on page 236 f.
Information on contingent liabil ities is provided on page 287 f. in the notes to the consolidated financial statements
In this approach, any deviations from the structure of our liabilities are made consciously, taking due account of our risk tolerance and the achievable risk spreads. These have the purpose of generating income in excess of the expected return on funds required to meet the liabilities. Therefore, we measure investment risks incurred not only in absolute terms, but also in relation to changes of values in our liabilities. In terms of currency positioning, exchange-rate fluctuations thus affect assets and liabilities in equal measure as a result of this approach. Currency translation losses on assets are largely offset economically by currency translation gains on underwriting liabilities, although owing to accounting regulations that are imperfect from an economic perspective, this relationship is not always adequately reflected in the financial statements. To a limited extent, we also align our investment portfolio in such a way that it increases in value in line with rising inflation rates. To achieve this, we invest in inflation-sensitive asset classes such as inflation-linked bonds and inflation-linked swaps, as well as in real assets.
To configure our economic ALM as effectively as possible, we also use derivative financial instruments in order to hedge against fluctuations on the interest-rate, equity and currency markets. Under IFRS accounting, we recognise fluctuations in the value of these derivative products in profit or loss, i.e. as income or expense in our income statement. However, such recognition in the income statement is not usually possible with regard to the related underlying transactions themselves. Despite our economically well-balanced underwriting and investment portfolios, accounting inconsistencies of this kind and other differences between the economic and balancesheet perspectives can give rise to considerable fluctuations in our IFRS investment, currency and consolidated result, particularly in times of greater volatility on the capital markets.
We derive our economic equity from IFRS equity by means of various adjustments. We return surplus capital to equity holders mainly through attractive dividends, within the scope permitted by the revenue reserves of the Group parent, Munich Reinsurance Company, as determined under German commercial law, and provided this does not
As at 31 December 2014, Munich Reinsurance Company’s share capital of €587,725,396.48 was divided into 172,942,618 registered, no-par-value, fully paid shares. The rights and obligations deriving from these shares follow from the applicable statutory requirements and the Company’s Articles of Association. With respect to the Company, the only parties deemed shareholders pursuant to Section 67 of the Stock Corporation Act are those entered as such in the Company’s register of shareholders.
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. If shareholders are entered under their own name for shares which belong to a third party and exceed at this time the upper limit of 2% of the share capital as stated in the Articles of Association, pursuant to Article 3 (5) of the Articles of Association, the shares entered shall not carry any voting rights.
Information relating to the remuneration report can be found on page 49 ff.
Most recently as at 12 October 2010, Warren E. Buffett and companies in his group notified us in accordance with Section 21 of the German Securities Trading Act (WpHG) of the following direct or indirect shareholdings in Munich Reinsurance Company exceeding 10% of the voting rights: Warren E. Buffett and the aforementioned companies in his group informed us in a letter dated 15 October 2010 that the objective of the investment is to generate trading profits and not to implement strategic objectives. In a statement from February 2015, Berkshire Hathaway Inc. reported that its participation in Munich Reinsurance Company as at 31 December 2014 was around 20 million shares, equivalent to an 11.6 % share of the voting rights. We have not been notified, nor have we otherwise learned, of any further changes.
The Stock Corporation Act contains special regulations on amendments to the Articles of Association where increases and reductions in share capital are concerned (Sections 182–240 of the Act). Under these regulations, resolutions on capital measures are generally to be made by the Annual General Meeting. Within a self-determined scope, however, the Annual General Meeting can authorise the Board of Management to initiate certain (capital) measures. The authorisations relating to Munich Reinsurance Company are listed below. In all such cases, a resolution of the Annual General Meeting is required that has been adopted by at least a three-quarter majority of the share capital represented in the vote. Where these resolutions are concerned, the Company’s Articles of Association again do not provide for other (i.e. higher) majorities or further requirements. Pursuant to Article 14 of the Articles of Association and Section 179 (1) sentence 2 of the Stock Corporation Act, the Supervisory Board is empowered to make amendments to the Articles of Association which affect only the wording.
Articles of Association are also available on the internet at www.munichre.com/ articles-of-association
Significant agreements which take effect, alter or terminate upon a change of control following a takeover bid, and resultant implications Based on our underwriting guidelines, our reinsurance agreements generally include a clause that grants both parties to the agreement a right of extraordinary cancellation in the event that “the other party merges with another company or its ownership and control undergoes a material change”. Such or similar clauses are typical of the industry. Munich Reinsurance Company’s Long-Term Incentive Plan also provides for special exercise options in the event of a change of control. This plan is for members of the Board of Management, senior management and top executives in Munich Re’s international organisation, and is explained in detail in the remuneration report.
In the consolidated cash flow statement, the consolidated profit of €3,171m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is adjusted by €5,193m 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 and to derivatives.
The cash outflows for financing activities stem mainly from the dividend payment in 2014 and the share buy-back programme.
In reinsurance, we do business with over 4,000 corporate clients from more than 160 countries. ERGO serves over 35 million (mainly private) clients in over 30 countries, with the focus on Europe and Asia. The Munich Health business segment has over six million clients in primary insurance and around 400 in reinsurance. In Germany, our asset manager MEAG offers its competence not only to well over 100,000 private investors, but also to over 50 institutional investors outside the Group, e.g. insurers, utilities, pension funds, church organisations, foundations, local authorities and industrial enterprises.
ERGO’s brand proposition “To insure is to understand” expresses the primary insurance group’s aim of focusing systematically on customers’ actual requirements, with an approach that sets it apart from the competition. We report annually on the implementation of the brand proposition in the ERGO customer report, which was published for the third time in May 2014.
You will find the ERGO customer report for 2014 at www.ergo.com/en/ Unternehmen/Overview/
Munich Re’s global healthcare insurance and reinsurance expertise is combined under the Munich Health brand, enabling a very broad spectrum of clients to be served. Munich Health devises integrated solutions tailored precisely to clients’ needs in order to tap the strongly growing business potential in each market. Increasing digitalisation of our interaction with clients provides us with further tools for offering even more customised solutions in the future. In primary insurance, we offer individual policies (for private individuals) and group policies (e.g. for companies, employees or public servants). In some cases, brokers provide assistance with selling products and client care. For providers that do not operate their own health business, such as banks, Munich Health develops health insurance products and handles their administration. Munich Health’s comprehensive core expertise in the health sector flows into the development of global offerings to meet current client requirements and address new trends. These include services for the management of severe medical conditions, and support in the standardisation and automation of processes.
Our clients can also outsource all elements of their business operations to Munich Health – from claims handling to management of medical networks (hospitals, medical centres, etc.). Our MedNet service units act as specialist Third Party Administrators (TPAs), particularly in the Middle East and southern Europe.
Munich Health offers its expertise to a broad spectrum of clients
MEAG handles the investment activities of Munich Re and ERGO as their asset manager. Its range of services includes advice on strategic asset allocation, the tactical implementation of this, and the selection of the individual investments. It also offers its competence to other institutional and private investors. MEAG is represented in Europe, North America (MEAG New York) and Asia (MEAG Hong Kong) and manages all important asset classes. As well as the more traditional classes such as bonds, equities, currencies and real estate, these now also include forestry, infrastructure, renewable energies and new technologies.
One cornerstone of this strategy is uniform succession planning across the entire top management level of the Group. There is systematic development towards defined target positions based on coordination across business-field boundaries. The resulting transparency also improves the use of internal potential.
Rotation of managers and staff members within the Group supports the pooling of expertise and the transfer of knowledge. Depending on business requirements, these changes take place on the basis of flexible models – as exchanges, for extended periods and also on a project basis. We continued and expanded the initiative launched in reinsurance in the previous year to promote job changes to other areas and business fields and to other countries as part of the staff development process. This is intended to enhance both professional expertise and intercultural competences.
Rotation and exchange programme promotes practical experience and know ledge transfer
The challenges of today’s working world are characterised by rapidly-changing trends, internationalisation, dynamic team structures, increased mobility and rapid changes in the market. Staff also want to enjoy more individuality and a better work-life balance at the various stages of their lives. In order to meet these demands, Munich Re has developed a series of new models aimed at organising more flexible working hours and locations for its staff in Munich. At the same time, the IT infrastructure and working environment is being adapted to reflect these requirements when offices are renovated or under construction. An important aim is optimising client service in conjunction with flexible recognition of staff needs. ERGO also has a number of supporting measures in place, including childcare and time out for providing care to relatives, that promote the work-life balance.
The number of staff in the Group decreased by 3.1% (1,349) in comparison with the previous year. The main reason for this was the socially acceptable implementation of ERGO’s “Future of Sales” quality and efficiency initiative launched in Germany in 2012.
At the end of the year, our register of shareholders listed around 180,000 shareholders (previous year: 155,000). The vast majority of shares were held by institutional investors such as banks, insurers or investment companies; around 14.3% (12.0%) were in the hands of private investors. At around 67%, the percentage of foreign investors was at around the same level as in the previous year. Our shareholders include sustainability-minded investors, with whom we have an active dialogue.
Rest of Europe 33.7% (33.4%) North America 12.4% (11.9%) Asia and Australasia 1.8% (1.5%) Africa, Middle East 1.2% (1.1%) Latin America 0.3% (0.3%)
Over 41 36–40 31–35 26–30 21–25 16–20 11–15 6–10 1–5 Below 1 length of service of staff
Our corporate strategy geared to a sustained increase in value is accompanied by ongoing and open communication with all capital market participants. The main task of Investor and Rating Agency Relations at Munich Re is to cultivate contact with existing shareholders and attract new ones. At the same time, we ensure that due account is taken of our investors’ opinions and preferences in internal decision-making processes. We chiefly use roadshows and investor conferences to initiate and intensify dialogue with institutional investors, our main focus being on financial centres in Europe and the USA. We regularly supplement our investor relations activities with special events, such as the analysts’ meeting we organised in London on the topic of Solvency II. We also offer regular forums for focused exchanges between investors who systematically gear their investment strategy to sustainability criteria.
Around 4,500 shareholders and shareholder representatives participated in the 127th Annual General Meeting on 30 April 2014. Some 44.3% of the voting share capital was represented in the votes. All the motions were adopted with a clear majority in each case. With online participation in the Annual General Meeting and (electronic) postal voting, Munich Reinsurance Company again offered its shareholders all the facilities for casting their votes on agenda items.
North America 33.8% Germany 33.0% Rest of Europe 21.4% UK 10.3% Other countries 1.5%
1 Percentage of share capital. Status: 31 December 2014. Source: Munich Re share register
We regulate the protection of natural resources in our companies with Group-wide environmental guidelines; these are the cornerstones of our environmental management. We have set clear Group-wide targets that must be met at both Group level and in the local business units.
We report on corporate responsibility in core business on page 17 in the strategy section, on page 136 in the risk report, and on page 141 ff. in the opportunities report
Our charitable commitments allow us to make a contribution to society, and these are governed by the clearly defined sponsorship guidelines set out in our corporate citizenship concept. In addition to basic assistance for social and cultural projects at corporate locations, we focus on topics that are related to our business activities. Above all, these are projects to prevent natural catastrophes, protect natural resources, and promote research and science. With this end in view, Munich Re enters into partnerships with charitable and non-profit organisations at national and international level, with the aim of establishing long-term sustainable partnerships geared to adding something of value to society. Our three corporate foundations – the Munich Re Foundation, the Dr. Hans-Jürgen Schinzler Foundation, and the ERGO Foundation “Youth & Future” – support both long-term projects and missions which show a measurable effect in meeting societal challenges and which are regularly evaluated with regard to their effectiveness. Examples of our non-profit projects and information about progress can be found in our corporate responsibility portal.
A partnership between our companies Munich Reinsurance America and American Modern and the Institute for Business and Home Safety (IBHS). Independent experts and scientists use natural disaster and hazard scenarios to verify the safety and building standards of private and commercial buildings The results of this research are then used as recommendations for the US building commissions and regulations. This allows for damage to be prevented and minimises risks. Higher resiliency standards mean better life and asset protection for property owners.
Projects related to the issue of disaster prevention and resiliency building: the Munich Re Foundation sponsors the RISK Award in cooperation with the Global Risk Forum in Davos (GRF) and the Secretariat of the International Strategy for Risk Reduction of the United Nations (UNISDR). The award is worth €100,000, and the winners can use the money to finance an innovative disaster management project. In 2014, the award went to an interdisciplinary integration project in South America. The Chilean NGO Inclusiva developed a comprehensive concept to ensure barrier-free access across the city of Penaflor for people with physical disabilities during emergency and catastrophe situations. The results are to be published in a manual and distributed across Latin America so that other towns and local authorities can benefit from the findings.
Organisational structure As required for Solvency II, Munich Re has set up an efficient risk management function (RMF) at Group level in addition to the key functions of Compliance, actuarial and Group Audit. It is part of the Integrated Risk Management Division (IRM) and reports to the Chief Risk Officer (Group CRO). In addition to the Group functions, there are risk management units in the fields of business, each headed up by its own CRO. Our extensive documentation, guidelines and instructions ensure that staff in our risk management structure and the Group as a whole are kept informed of our risk strategy and the RMF’s organisation and processes. This provides the basis for active management of the risks we incur.
The Group Committee meets as the Group Risk Committee, on which it is joined by representatives from the fields of business with responsibility for risk management and the Group CRO. The Group Risk Committee is responsible for ensuring that risk management and risk governance systems are in place and continuously enhanced both at Group level and in the fields of business.
— Risk situation manageable and under control. — Capital position still comfortable — Integrated, Group-wide system for managing operational risks
Field-of-business level We have created further committees in our fields of business with risk governance responsibilities. The Group CRO is also a member of those committees, notably the Global Underwriting and Risk Committee, which is responsible for setting up appropriate risk management processes in the reinsurance field of business and ensuring that they are followed, the Munich Health Risk Committee and the ERGO Risk Committee. Munich Re’s CRO is also a member of these committees.
— Supplementary criteria are used to limit the amount of losses incurred for individual risk types and resultant accumulations, such as natural hazards, terrorism and pandemics, and also to limit market, credit and liquidity risks that could endanger Munich Re’s ongoing viability.
Maintain our financial strength, thereby ensuring that we can meet our liabilities to our clients
Implementation of strategy and the risk management cycle The risk appetite defined by the Board of Management is reflected in our business planning and integrated into the management of our operations. If capacity shortages or conflicts with our system of limits and rules arise, defined escalation and decisionmaking processes must be followed. These have been designed to ensure that the interests of the business are reconciled with risk management considerations. If necessary, risks are ceded or hedged by means of reinsurance, derivatives or other forms of risk relief.
We compare our internal risk model with the Solvency II standard formula and take part in stress tests (e.g. the European Insurance Stress Test).
Risk limits are derived from the risk strategy. Taking the defined risk appetite as a basis, limits, rules and any risk-reducing measures required are approved and implemented. We also have a comprehensive early-warning system that draws our attention to any potential shortages of capacity. If a business unit identifies attractive business that exceeds its risk limits, the risk management departments responsible and IRM analyse its potential impact on the Group portfolio and the risk appetite of the Group as a whole. Taking these results and the expected earnings from the business into consideration, we devise a solution that enables us to take the risk onto our books if appropriate.
However, notwithstanding the careful design and diligent use of our ICS, which has now developed into a high-quality system, it cannot provide total certainty that all operational risks have been covered. We are nevertheless certain that the controls and documentation requirements in place justify the maximum possible confidence on the part of our stakeholders.
The identification, management and control of risks arising out of the accounting process is indispensable for the production of reliable annual financial statements at both consolidated and individual-company level. It is essential for all items in the accounts to be shown correctly and valued appropriately, and for the information provided in the notes and the management report to be complete and correct.
Our general definition of risk is possible future developments or events that could result in a negative deviation from the Group’s prognoses or targets. According to our classification, significant risks are risks that 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 riskbearing capacity. There are significant risks in the following risk categories: Underwriting risk: Property-casualty The property-casualty risk category encompasses the underwriting risks in the property, motor, third-party liability, personal accident, marine, aviation and space, and credit classes of insurance, together with special classes also allocated to propertycasualty. Underwriting risk is defined as the risk of insured losses being higher than our expectations. The premium and reserve risks are significant components of the underwriting risk. The premium risk is the risk of future claims payments relating to insured losses that have not yet occurred being higher than expected. The reserve risk is the risk of technical provisions established to cover losses that have already been incurred being insufficient.
Further information on propertycasualty insurance can be found in the notes to the consolidated financial statements on page 274 ff.
We calculate the reserves for losses and claims settlement costs in accordance with actuarial practice based on substantiated assumptions, methods and assessments. The assumptions are regularly reviewed and updated. Application of Group-wide reserving rules guarantees that the process is reliable and consistent. In addition, internal audits are carried out Group-wide to verify compliance with these rules and the appropriateness of the reserves.
Underwriting risk: life and health The underwriting risk is defined as the risk of insured benefits payable in life or health insurance business being higher than expected. Of particular relevance are the biometric risks and the customer behaviour risks, for example lapses and lump-sum options. We differentiate between risks that have a short-term or long-term effect on our portfolio.
We use appropriate limit and early-warning systems in our asset-liability management to manage market risks. By means of stress tests and sensitivity and duration analyses, we simulate market fluctuations and devise strategies for counteracting them where necessary. Derivatives such as equity futures, options and interest-rate swaps, which are used in particular for the hedging of exposures, also play an important role in our management of the risks.
Our investments must comply with Group-wide minimum standards as defined in our General Investment Guidelines. We also take account of risk restrictions on investments resulting from our risk strategy.
Information on derivative financial instruments can be found on page 218 ff.
Sensitivity analyses of the market -price risks associated with financial instruments can be found on page 280 f.
Operational risks are managed via our internal control system, complemented by the results of scenario analyses. In addition, our Security and Continuity Risk Management Framework (SCRM) defines the rules for a standard Group-wide procedure for, in particular, identifying, assessing and managing security risks for people, information and property. Our aim is to protect our employees, ensure the confidentiality, integrity and availability of information, and guarantee the smooth operation of our businesses. To this end, we have put in place an all-embracing business continuity management system, which is an integral component of our business strategy. It includes contingency and recovery plans to ensure that processes and IT operations continue to function. The system is in place at all of the Group’s locations and is subjected to regular tests.
Strategic risk We define strategic risk as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment. The existing and new potential for success in the Group and the fields of business in which it operates creates strategic risks, which we manage by discussing significant strategic issues and decisions in our Strategy Committee and regularly monitoring the implementation of the decisions taken. The Strategy Committee comprises the members of the Group Committee, the Chief Executive Officers (CEOs) of the fields of business and the Head of Group Development. IRM is additionally involved in the operational business planning and in the processes for mergers and acquisitions.
Actual reputation issues arising out of specific incidents are evaluated in the fields of business either by their own Reputational Risk Committee (RRC) or through a comparable procedure in which the opinions of experts are obtained. A legal entity’s Compliance Officer can always be consulted on any matter relating to the assessment of reputational risks.
There is also a Group Compliance Committee, which deals with compliance and reputational issues and risks at Group level, with a view to standardising the way they are handled throughout the Group. The Committee considers mainly reputational risks that have actually arisen in the business units. We have also set up the Group Corporate Responsibility Committee, which concerns itself with identifying and undertaking a general analysis of sensitive issues and defining our position on them. The assessments it makes are used as a basis for strategic decisions taken by units in the Group.
We use our risk management to assess our risk situation on the basis of qualitative and quantitative factors. Throughout the entire period under review, the risk situation was manageable and under control. Our tried and tested, modern risk management processes combined with our solid level of capitalisation at all times ensure the solvency and viability of the Group expected by our clients and shareholders. In addition to the underwriting and capital market risks inherent in our business model, there are inevitably a large number of other risks to which Munich Re – like every other undertaking – is exposed. The incidence of these risks is random and their occurrence probability and impact are generally difficult to estimate. We therefore closely monitor our business and the environment we operate in to identify even these risks in good time and to take suitable measures to avert loss or damage.
We manage our business on the basis of a consolidated Group view, using an internal risk model to determine the capital needed to ensure that the Group is able to meet its commitments even after extreme loss events.
The distribution of economic losses between the individual legal entities in Munich Re may vary, but the ability of one unit to support another financially in the event of a loss is in some cases subject to legal constraints. In determining Munich Re’s capital requirements, restrictions of capital fungibility resulting from legal or regulatory requirements are therefore taken into account.
The table shows Munich Re’s economic risk capital and risk categories as at 31 December 2014. The economic risk capital was €3.2bn up on the previous year. The following factors contributed to the increase: — The main reason for the rise of €1.0bn in the economic risk capital for the propertycasualty category was currency translation effects, which affected both the basic loss risk and the large and accumulation loss risk. The depreciation of the euro against most of the main currencies resulted in an increase in the risk capital expressed in euros.
— The economic risk capital for market risks rose by €0.9bn. In the reinsurance field of business, the increase resulted from the globally lower interest rates and the depreciation of the euro. The risk capital decreased in the ERGO field of business, where the lower interest rates led to improved diversification between life and health insurance business.
5030 A+Beconomic risk capital (eRC) Reinsurance eRGO Munich Health 31.12.2014 Prev. year 31.12.2014 Prev. year 31.12.2014 Prev. year €bn €bn €bn €bn €bn €bn
— The economic risk capital for credit risks increased by €0.4bn, due mainly to the lower interest rates in the eurozone and the resultant rise in market values and durations. In the reinsurance field of business, the rise was more pronounced due to the depreciation of the euro against the main currencies, but reduced in the ERGO field of business by the more refined depiction of the risk-mitigating effect of profit sharing.
We manage our risk exposure actively. This includes restricting our exposure, for example by setting limits and budgets for natural catastrophe risks, with our experts developing scenarios for possible natural events taking into account the scientific factors, occurrence probabilities and potential loss amounts. On the basis of these models, the impact of various events on our portfolio is calculated and represented in mathematical terms in the form of a stochastic model. These models form the basis for the ERC calculation for the “large and accumulation losses” category. Apart from natural hazard scenarios, this includes man-made losses, and the limits and budgets for accumulation losses. Our internal risk model treats the accumulation-risk scenarios as independent events.
The up-to-date exposure figures for each scenario are used for the quarterly ERC calculations, and the data are used to adjust the stochastic models for the natural hazards. The current limit utilisation is determined by a bottom-up process. As ERGO’s portfolio is more stable, its exposure is only updated annually.
The underwriting risk capital for property-casualty is made up as follows:
Reinsurance eRGO Segment diversification 31.12.2014 Prev. year 31.12.2014 Prev. year 31.12.2014 Prev. year €bn €bn €bn €bn €bn €bn
Market risks Market risks are established using a scenario-based simulation calculation. The calibration of the scenarios, which depict the possible future values and dependencies of the financial instruments concerned, is based on historical weekly capital- market data (going back to 1999).
Equity risk The market value of our investments in equities, including participating interests, was €12.4bn (10.1bn) as at 31 December 2014. As at that date, on a market-value basis the ratio of equities to total investments was 5.2% (4.8%) before taking derivatives into account and 4.3% (4.6%) after derivatives. The main reason for the risk capital required for equities being lower than for the previous year was the increased use of equity options for hedging purposes.
Interest-rate risks As a result of the significantly lower interest rates, the market values of Munich Re’s interest-bearing securities and its sensitivity to movements in interest rates were higher than for the previous year.
Group 31.12.2014 Prev. year Change €bn €bn €bn % Equity risk 5.8 6.5 –0.7 –10.8 General interest-rate risk 5.3 5.1 0.2 3.9 Specific interest-rate risk 5.2 4.6 0.6 13.0 Property risk 2.2 2.4 –0.2 –8.3
The reasons for the rise in the specific interest-rate risk in the Group were, in addition to the fall in interest rates, the increase in spread exposure and the more refined spread modelling.
Currency risk Our underwriting liabilities are essentially covered in the currencies in which they are denominated. The currency risk was higher than in the previous year, partially as a result of the appreciation of the US dollar against the euro.
In our internal risk model, we calculate and allocate risk capital even for highly rated government bonds.
Operational risks We use scenario analyses to quantify operational risks. The analyses are produced or updated annually by experienced staff from the fields of business and affected companies. The results are fed into the modelling of the economic risk capital for operational risks and are validated using various sources of information, such as the ICS and internal and external loss data.
Information on the ratings of the securities can be found in the notes to the consolidated financial statements on page 216 ff.
We compare the available financial resources with the economic risk capital requirement. The available financial resources are based on economic valuations. Investments are essentially valued using market prices where available or justifiable parameters. The valuation of underwriting liabilities is based on a yield curve used to determine and discount future cash flows. The available financial resources are calculated as the sum of the economic equity and the available hybrid capital. The economic equity is based essentially on the IFRS equity with various appropriate economic adjustments.
The unrealised gains and losses not accounted for in the financial statements include economic adjustments to items in property-casualty and Munich Health that have not been measured at market value. They relate primarily to land and buildings, and to loans. We perform various valuation adjustments for property-casualty and life and health, using pure swap curves, which incorporate neither the permitted nor the required credit-risk, volatility and matching adjustments, to discount and project cash flows. Neither is the extrapolation of the yield curve to the long-term target interest rate (the ultimate forward rate – UFR) taken into account. Overall, we assume that the adjustments to the curve currently used required for Solvency II will result in a rise in the available financial resources.
Available financial resources2 38.8 38.2 0.6 1 The value adjustments are mainly due to a decline in MCEV amounts in life and health insurance owing to lower interest rates. 2 The capital measures included in the available financial resources amount to €2.6bn (these mainly concern the dividend payment and share buy-backs).
Hybrid capital comprises subordinated liabilities and the funds financing new business of German life primary insurance companies. Attributable neither to shareholders nor to policyholders, they are available for the preliminary financing of new business by business in force.
The economic capital buffer is the amount by which the available financial resources exceed the economic risk capital. The economic solvency ratio is the ratio of the available financial resources (less announced, but not yet completed, capital measures such as the dividend payment for the year just ended) to the economic risk capital. The following table shows the changes in the figures: The economic solvency ratio of 138% (153%) was down by 15 percentage points on the previous year, but continues to emphasise Munich Re’s financial strength. Munich Re’s economic risk capital, which produces the solvency ratio described above, corresponds to 1.75 times the capital that is likely to be necessary under Solvency II according to our internal risk model. Were we not to apply the safety cushion of 75% to the value at risk with a confidence level of 99.5% and merely comply with the Solvency II standard, the economic solvency ratio would be 242% (267%).
(B) minus (D): Economic capital buffer €bn 11.9 14.5 –2.6 (C) divided by (D): Economic solvency ratio % 138 153
The low-interest-rate environment continues to present life insurance companies in the eurozone in particular with major challenges. The fluctuations in the capital markets gave rise to considerable volatility in our investments and liabilities at the valuation dates. We counter these risks with various risk management measures.
Pandemic Another example of an overarching accumulation is a serious pandemic, which would expose Munich Re – like other companies in the insurance industry – to risks resulting from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk by analysing our overall exposure in detail (scenario analysis) and defining appropriate measures to manage the risks.
Munich Re Group Annual Report 2014 pertinent experience and expertise of our scientists, specialist underwriters, lawyers, economists and actuaries as appropriate for the risk situation. If new findings in climate research or actual claims trends necessitate adjustments in risk assessment, we are able to make these changes promptly because most of our natural-hazard covers are contracted for only one year.
One example of an emerging risk is cyber risk. The growing use of information technology in society and the economy is having serious repercussions. The rapid progress is changing our working life and social behaviour, and creating new conditions for industry, trade, transport, energy and raw materials. Healthcare systems, international economic and political relations and military systems are likewise changing constantly as a result of the rapid advances in IT. In our management of emerging risks, we monitor these developments very closely, at the same time both devising appropriate risk management methodologies and creating new business opportunities.
We also systematically capture risks potentially arising out of environmental, socialresponsibility and governance (ESG) issues. The Group Corporate Responsibility Committee identifies and prioritises especially sensitive issues, and commissions an analysis involving all relevant experts in the Group.
Risks arising out of environmental, social and governance issues are also systematically captured
Munich Re Group Annual Report 2014 and at least partially quantified. With CARE, we can improve the identification and structuring of complex accumulation risks for our own risk management and provide support for our clients, which also enables us to meet the rising demand for reinsurance of these types of risk.
Legal disputes In December 2009, Munich Re’s Spain and Portugal branch lodged an appeal against the Spanish antitrust authority (Comisión Nacional de la Competencia – CNC) in respect of an administrative order imposing a fine of €15.9m for alleged collusion restricting competition. The appeal was upheld. The CNC then appealed against the court’s judgment within the prescribed period. We now expect to see a decision in May 2015.
Former minority shareholders of ERGO Versicherungsgruppe AG are seeking to gain increased squeeze-out cash compensation by way of shareholder compensation complaint proceedings. The material risk is limited by the number of shares eligible for compensation (approx. 237,000) and the upper end of the scale within which the corporate value of ERGO Versicherungsgruppe AG as at the date of valuation can be set.
The legal actions contesting and seeking annulment of resolutions adopted at the 2012 and 2013 Annual General Meetings of Munich Reinsurance Company ended in our favour following dismissal of the complaints and rejection of the plaintiffs’ appeals during the year under review.
The ongoing discussions regarding the German healthcare system may result in further changes to the statutory parameters, notably the “citizens’ insurance scheme”. If, unlike now, all citizens were to be compulsorily included in the German public health insurance system, new business for private health insurers in comprehensive health insurance would dry up. We have been monitoring this risk for many years. Similar proposals have been put forward for citizens’ long-term care insurance.
Supervisory risks In the European Union, supervision for primary insurers and reinsurers is set to undergo profound changes with the Solvency II regulations. In particular, capital requirements will increase.
After many years of negotiation, the institutions involved in the EU legislation process (Council of the European Union, European Parliament, and European Commission) have agreed on standards which are scheduled to come into effect as at 1 January 2016 and will already impact supervisory practice before that date. The delegated acts were finalised in January 2015. The technical implementation standards are currently undergoing a public consultation phase and will be completed successively in the course of 2015. The European Insurance and Occupational Pensions Authority (EIOPA) has introduced a preparatory phase for 2014 and 2015, and published Preparatory Guidelines that include a stipulation for national supervisory authorities to bring forward the reporting requirements on selected areas. The German Federal Financial Supervisory Authority (BaFin) has substantiated the EIOPA Guidelines with further publications of its own. Implementing these will cause more extensive reporting requirements. With interest rates remaining low, the new capital requirements under Solvency II especially set a particular challenge for life insurance companies, and also for the Group. Low interest rates will mean much higher capital requirements at the level of insurance companies, whilst equity pertinent for regulatory solvency purposes will be reduced significantly. This may mean that in 2015 we will already have to provide support through intra-Group transactions or apply for statutory transitional relief for some individual units.
In February 2015, the German Bundestag passed a new Insurance Supervision Act (VAG) to translate the requirements of the Solvency II directive into national law. In addition to the Solvency II requirements, the new Act will retain many of the old rules, including in particular requirements added by the Life Insurance Reform Act in 2014 aimed at safeguarding the performance of life insurances in Germany and providing consumers with even better protection. Of particular note at European level in 2014 was the adoption of the revised financial markets directive (MiFID2) and the regulation on key information documents for investment products (PRIPs Regulation). Consultations on the European Commission’s proposals on a new version of the Insurance Mediation Directive (IMD2) continue. Controversy remains, especially on the issues of transparency of remuneration and prohibitions on commission. The Scandinavian countries, the Netherlands and the United Kingdom are all seeking to establish the predominance of their own national regulatory environment across the EU. However, the German government favours minimum harmonisation that leaves room for national distribution structures.
Information on the treatment of goodwill can be found in the notes to the consolidated financial statements on page 182, and the results of the impairment tests on page 202 ff.
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. During the whole of 2014, risk exposures were regularly quantified and compared with the risk appetite. We consequently assess Munich Re’s risk situation as manageable and under control.
Munich Re has undertaken to integrate environmental, social and governance aspects even more strongly into its core business
— Technical progress, demographic trends and regulatory changes offer avenues for profitable growth
There are long-term opportunities for expansion in reinsurance’s core business. The demand for insurance is rising, since values and insurance density are increasing steeply as a result of growing industrialisation, in particular in many regions exposed to natural hazards. We are excellently positioned with our competence in the analysis of major loss events and possible product solutions on this basis.
Another example of innovations introduced by Munich Re is a cover concept for reputation risks and the new launch-plus-life cover for the entire useful life of satellites.
Niche and specialty insurers that are part of the “Risk Solutions” unit, e.g. Hartford Steam Boiler, Corporate Insurance Partners and American Modern, are expected to generate promising synergies in product development as well as significant, sustained growth
Munich Re Group Annual Report 2014 thanks to their international innovation networks and high levels of expertise. In addition, this segment offers Munich Re valuable diversification effects, as its cycle is insulated from that of the reinsurance market and its exposure to natural hazards is minor.
We provide active and forward-looking support through public-private partnerships in the area of sustainable disaster management. We can increase risk awareness and develop risk transfer solutions that are politically and economically sustainable, and we can guarantee these solutions are implemented thanks to our strong capital base. In this way, we can support a paradigm change from ex-post disaster financing to ex-ante risk financing, thus helping countries to better handle the costs of natural catastrophes in future.
Additional opportunities exist in attractive niche markets. Crop failure insurance, for example, is seeing strong growth based on public-private partnerships (SystemAgro), since the provision of food to a growing world population and the consequences of climate change are increasing farmers’ need to protect themselves against financial risks. A market leader in this area, Munich Re has built up competence and established sustainable insurance concepts together with supervisory authorities and primary insurers.
In the present economic environment, life insurance presents challenges and opportunities, with rising demand for old-age provision due to greater life expectancy on the one hand, and volatile capital markets with low interest rates on the other. As a reinsurer, we are a competent partner for life primary insurance companies thanks to our tailored offering of asset protection solutions. We also see growth potential in the coverage of longevity risk, although we are adopting a very prudent and selective approach here, given the difficulties involved in robust trend estimates.
“Digitaler Leuchtturm” (digital lighthouse) prize, which is awarded by the German daily Süddeutsche Zeitung and its cooperation partner Google for outstanding digital customer service. ERGO intends to continue pursuing its path of increasing digital isation.
Demographic change is increasing the strain on state pension schemes, which is leading to a rise in customer demand for private provision. The growing need for private provision offers opportunities ERGO intends to seize. For years there has been an increasing trend towards pension insurance, and this trend is likely to continue. At the same time, people have a strong need for secure and reliable old-age provision. In the current capital market environment, the return opportunities available in traditional life insurance are limited. ERGO is thus focusing on pension products with guarantee components that offer customers enhanced return opportunities. In 2013, ERGO introduced a new product line: its innovative annuity insurance covers – ERGO Annuity Guarantee and ERGO Annuity Opportunity – offer private clients two variants of the product. As well as guarantees, the new product line also provides return opportunities and high flexibility, and was expanded in 2014. Since the beginning of 2015, a special company pension product has been added to ERGO’s range.
Growth opportunities will also derive from the not-yet-saturated markets of eastern Europe, and from China, India and Southeast Asia. With its internationalisation strategy primarily focused on these high-growth markets, ERGO reached further significant milestones in 2014. ERGO’s entry into the Singapore market has enabled it to further expand its presence in Southeast Asia. Singapore is also designed to serve as a platform for ERGO’s expansion into further property-casualty markets in Southeast Asia.
As a global health insurer and reinsurer, we have a variety of opportunities for expanding our business, depending on the level of development in the international health markets. With its broad set-up and combination of primary insurance and reinsurance know-how, Munich Health is in a position to meet many different client needs.
The developing and emerging countries are facing the challenge of swiftly establishing healthcare systems that provide large sections of the population with access to adequate, affordable healthcare. Private-sector insurance products, which may be closely intermeshed with state schemes, can play a valuable part in this situation. We have come up with successful ideas for expanding internationally, and these are continually being improved further and are transferable to new markets. For instance, a market-specific model has been developed for the Middle East. Its successful implementation in the United Arab Emirates enabled us to expand Munich Health’s presence to Saudi Arabia and Qatar after a short period of time.
As in industrialised countries, digitalisation is also playing a major role in developing and emerging countries. Mobile solutions for smartphones are helping to offset weaknesses in healthcare infrastructure. They can be used, for instance, for ensuring that patients are quickly referred to the right physician in a network of doctors. The opportunities that digitalisation and advanced data management provide play a major part in the service concepts we develop and the way we expand our business. Our aim is to continue to take advantage of the new digital opportunities for the sustainable insurability of health risks and to expand the disease management and prevention programmes already in use by our health primary insurers to improve healthcare in the interests of our clients and comply with legal data protection requirements.
The prolonged low-interest-rate phase presents our asset management with the challenge of generating returns with manageable risks. Our asset manager MEAG is always on the look-out for additional returns, but MEAG only takes advantage of higher-interest bond opportunities if the risks can be kept within reasonable bounds. To this end, MEAG has been continually expanding its competence in the assessment of credit risks. We take a very selective approach to investing in infrastructure credits and ensure that they are high quality. Given a tightening of regulations in this field, banks are currently reducing their investments. With our risk competence as an insurer, we can benefit from the freed-up capacities. In addition, there are improved return opportunities available in asset classes such as renewable energies, infrastructure, agricultural land and forestry.
MEAG not only provides its products and services to the insurance companies within our Group, but also achieves above-average performance in managing retail funds for private clients and investment portfolios for institutional investors in accordance with our sustainable investment strategy. On the basis of the methods and processes established for the Group companies in terms of portfolio management, reporting and risk management, we continue to see significant growth opportunities in business with institutional clients, whose conservative and safety-oriented requirements are similar to those of insurance companies on account of specific needs and preferences: to achieve steady returns whilst protecting capital. Institutional investors include pension funds, municipalities, church institutions, foundations, selected banks, and manufacturing companies.
Stonger focus on prevention key to sustainable insurability of health risks
It is not only the obvious fluctuations in the incidence of major losses that make an accurate forecast of IFRS results impossible. The pronounced volatility of the capital markets and exchange rates as well as the special features of IFRS accounting also make this difficult. Thus, there may be significant fluctuations in the investment result, currency result and consolidated result, despite the fact that our assets are geared to the characteristics of our liabilities. In particular, based on our position at the beginning of the year, a moderately rising interest-rate level will initially tend to lead to slightly lower results – and falling interest rates to higher results – than those forecast in this outlook. Changes in the market value and net gains or losses on the disposal of derivatives used by us as hedging instruments and for fine-tuning investments can also substantially impact the result. Changes in exchange rates influence our premium income and results in different directions, depending on which foreign currencies are affected. There may be significant swings if exchange-rate fluctuations are strong, although economically speaking – relative to the volume of our business and our investments – we hold few open currency items on our books.
Information on the special features of IFRS accounting can be found on page 102
Gross premiums written €bn Around 50 48.8 Consolidated result €bn 3 3.2 Technical result €bn 3.7 3.2 Return on investment1 % Around 3.3 3.6 Return on risk-adjusted capital (RORAC) % 15 13.2
At €48.8bn, gross premiums were below our target, due to currency effects and the reduction in large-volume reinsurance treaties.
With a consolidated result of €3.2bn, we beat our target of €3bn, in part because major-loss expenditure in property-casualty reinsurance was lower than expected. We were also able to release claims reserves for prior accident years and posted tax income, mainly as a consequence of the release of tax provisions for tax audits and an advantageous decision in a long-standing legal issue. By contrast, we had to write-off goodwill in the segment ERGO International.
Economic earnings amounted to €3.2bn, and so we slightly surpassed our target in line with the expected IFRS result of €3bn.
The combined ratio of 92.7% in property-casualty reinsurance was better than the figure of around 94% envisaged. Above all, this was due to major-loss expenditure that was below our expectations and to the release of loss reserves.
At the beginning of the year, we had aimed for a result of €400–500m for the ERGO field of business, and €350–450m for the ERGO Group. Our result for the ERGO Group was much better than expected at €620m. In the ERGO field of business, the result of €169m did not meet our target due to the write-off of goodwill in the segment ERGO International.
At €5.3bn, gross premiums were below the forecast level of just over €5.5bn. The combined ratio – 99.8% – bettered our target of around 99%, and Munich Health’s consolidated result was €109m, meaning that we met our original target of “around €100m”.
Gross premiums written €bn 47–49 Consolidated result €bn 2.5–3 Combined ratio property-casualty reinsurance % 98 Combined ratio ERGO Property-casualty Germany % 93 Combined ratio ERGO International % 97 Return on investment1 % At least 3 1 Excluding insurance-related investments.
Munich Re offers its cedants specialist consulting services and extensive solutions, also for issues in connection with accounting, risk modelling and asset-liability management. Reinsurance provides primary insurers with efficient and flexible protection against major claims and accumulation losses, and strengthens their capital base. In addition to this, we devise innovative coverage concepts that go beyond the scope of traditional reinsurance and, to an increasing extent, also beyond the conventional boundaries of insurability. Thus, for example, we cover performance guarantees for solar modules, offer coverage for internet risks, and for the effects of weather fluctuations on the financial position of companies. This allows us to already take advantage of new profit potential, and balance out some of the reductions in traditional business. In connection with alternative risk transfer, we exploit the advantages of the dynamic market environment and securitise insurance risks on the capital markets both for our clients and for us. We also partner our clients in the often challenging task of adjusting to changes in regulatory requirements, which are currently being revised in many countries.
Gross premiums in reinsurance as a whole should be around €26–27bn overall in 2015, i.e. roughly the same as last year, although currency translation effects could potentially have a considerable impact on this estimate. For 2015, we expect the consolidated result in reinsurance to be at least €2bn, up to €0.9bn below the excellent result for 2014. This anticipated lower result will be due to the absence of one-off tax effects, the reduction in prices in property-casualty reinsurance, and pressure on our investment income in a continuing low-interest-rate environment.
We expect increasing demand for the management of investment risks in life insurance portfolios. Particularly in life reinsurance, there will also continue to be demand for solutions geared to the optimisation of capital and balance sheets. Despite a principally intact growth trend, premium volume in primary insurance has seen short-term stagnation in many important regions for us due to the weak economy and reduced readiness to purchase insurance because of the financial crisis, which has also had a dampening effect on the demand for reinsurance.
For 2015, we project that gross premiums written in life reinsurance will be in the region of around €9–10bn. We are adhering to our objective of achieving a technical result of around €400m. This is ambitious because we expect the results from parts of our US portfolio written over the past decade to be subdued in the coming years as well.
In property-casualty reinsurance, which is traditionally heavily exposed to pricing cycles and random fluctuations in major losses, Munich Re will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions. We are currently experiencing unrelenting competition. On the one hand, given their good capitalisation, primary insurers are ceding fewer risks to reinsurance. On the other hand, reinsurers are able to provide ample capacity, since their capital base has also steadily improved thanks to the good results posted over the last few years. There is thus currently appreciable surplus capacity on the supply side. Last but not least, insurance-linked securities and other forms of reinsurance-like transactions are also increasingly being favoured by institutional investors such as pension funds in their search for a reasonable return. This capital is mainly being channelled into non- proportional catastrophe business, such as covers for hurricane losses in the USA, so reinsurers
For 2015, we anticipate that gross premiums written in property-casualty reinsurance will total around €17bn, i.e. a somewhat higher figure than last year. We expect the combined ratio to be around 98% of net earned premium. The increase of more than 5 percentage points on the ratio achieved in 2014 is mainly due to the fact that in 2014 there were randomly fewer major losses than expected. In 2015, we anticipate major losses in the order of €2bn, which corresponds to 12% of net earned premium.
On balance, we had to accept a slight reduction of 1.3% in the price level for the portfolio as a whole. Price reductions were seen mainly in natural catastrophe business, with North America showing somewhat greater declines than Europe and Asia, and in marine business. Price levels in casualty business and in credit and bond reinsurance were only marginally down overall, whilst they remained stable in aviation business, despite the aircraft crashes in the previous year. The fact that the price erosion for Munich Re was relatively low compared with the rest of the market underscores the importance of our consistently profit-oriented underwriting policy, and recognises the importance that individual clients are attaching to stable reinsurance relationships. Munich Re’s comprehensive service and financial strength are valued more highly than an ever lower price.
Munich Re’s consolidated financial statements show the business transacted by ERGO in the three segments Life and Health Germany, Property-casualty Germany, and ERGO International.
We see good opportunities for ERGO, not only in evolving foreign markets but also in various sectors of the German market.
Total premium income in 2015 in the ERGO field of business should be in the range of €17.5–18bn, with gross premiums written of €16–16.5bn, somewhat below the level of the previous year. We project a consolidated result for 2015 of around €500m for the ERGO field of business, which is much better than the low 2014 result, which was mainly caused by the write-off of goodwill in the segment ERGO International.
Owing to medical advances, generally higher life expectancies and the increasing prosperity of broad sectors of the population, the international healthcare market offers diverse growth opportunities for Munich Health. We intend to utilise these opportunities even better in future, following some individual adjustments to our strategic orientation. In reinsurance, we see avenues for growth from our clients’ increasing numbers of insureds and a strong demand for customised solutions. We expect to see a slight increase in profitability in light of changes to our reinsurance portfolio. We expect stable growth of our primary insurance business.
Gross premiums written should be a good €5bn in 2015, somewhat below the level of 2014, and the combined ratio is likely to be around 99%. Overall, we anticipate that we will achieve a profit in the range of €50–100m in 2015. The decrease is due to a reduction in investment income and to the absence of one-off tax effects.
The global economy is marked by a high level of geopolitical risks and subdued growth expectations in many economies, with the corresponding low inflation rates. In addition, the ample supply of liquidity made available by central banks is resulting in very low interest rates. We will continue to hedge the associated uncertainties and resultant volatilities in the capital markets by means of a widely diversified investment portfolio. The ongoing low-interest-rate environment will continue to have an impact on the whole insurance industry and other major investors.
Thanks to our strongly diversified investments, we are well prepared for a great variety of capital market scenarios, each of which involves potential losses in individual asset classes. Given the regional diversification of our portfolio, however, we are proceeding on the assumption that these losses will be absorbed by increases in value in other asset classes. This balanced investment strategy has proved its worth in recent years. For 2015, we are planning to further reduce our portfolio of government bonds in individual industrialised countries, and to moderately build up investments in corporate and emerging-market bonds.
As regards the economic value added in terms of economic earnings, we anticipate a pleasing albeit lower figure than in 2014, in line with the IFRS results anticipated for the Group and the fields of business. This forecast is based on the assumption of unchanged capital markets and modelling parameters, and a normal major-loss incidence. On the basis of current interest-rate developments, we anticipate poorer result contributions in life primary insurance than those of the other segments.
The consolidated profit is likely to fall short of the particularly good result in 2014, mainly due to falling prices in reinsurance, a decreased investment result, and the absence of one-off tax effects. Nevertheless, we still hope to achieve a consolidated result for 2015 of €2.5–3bn, and the effective tax rate should be much higher than in 2014, but below the generally expected rate of 20–25% for our Group. This profit guidance is subject to claims experience with regard to major losses being within normal bounds and to our income statement not being impacted by severe currency or capital market movements, significant changes in fiscal parameters, or other special factors.
Information on economic earnings can be found on page 39 f.
List of shareholdings as at 31 December 2014 pursuant to section 313 (2) of the german Commercial Code (hgb) 292
V. Deposits retained on assumed reinsurance (10) 8,750 9,636 –886 –9.2
D. Ceded share of technical provisions (12) 5,328 5,305 23 0.4 E. Receivables i. Current tax receivables 981 602 379 63.0
Consolidated financial statements Consolidated balance sheet 1 Previous year’s figures adjusted owing to iAs 8; see “Changes in accounting policies and other adjustments”. 2 this item includes investments for unit-linked life insurance contracts and other insurance-related investments, see “Changes in accounting policies and other adjustments”.
C. Gross technical provisions i. unearned premiums (21) 8,373 7,994 379 4.7 ii. Provision for future policy benefits (22) 112,648 111,427 1,221 1.1 thereof: held for sale 48 – 48 – iii. Provision for outstanding claims (23) 56,342 53,061 3,281 6.2
Consolidated income statement for the financial year 20141 1 Previous year’s figures adjusted owing to iAs 8; see “Changes in accounting policies and other adjustments”.
161Consolidated financial statements statement of recognised income and expense statement of recognised income and expense for the financial year 2014 €m 2014 Prev. year Consolidated result 3,171 3,333 Currency translation gains (losses) recognised in equity 1,428 –709 Recognised in the consolidated income statement – –
unrealised gains and losses on investments gains (losses) recognised in equity 3,889 –1,572 Recognised in the consolidated income statement –1,228 –1,040
Change resulting from valuation at equity gains (losses) recognised in equity 9 35 Recognised in the consolidated income statement – –
group statement of changes in equity for the financial year 2014
Allocation to retained earnings – – 1,936 – – – – –1,936 – –
income and expense recognised directly in equity – – 196 – –2,578 –705 7 – –21 –3,101
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Issued Consolidated capital Capital reserve Retained earnings Other reserves result Retained earnings before Unrealised Reserve from Valuation result deduction of Own shares gains and currency from cash flow €m own shares held losses translation hedges 31.12.2012 as originally recognised 585 6,836 11,015 –77 5,946 –292 –4 3,188 242 27,439 Change from retrospective adjustment – – –37 – – – – 3 – –34
Currency translation – – – – – –705 – – –4 –709 unrealised gains and losses on investments – – – – –2,599 – – – –13 –2,612 Change resulting from valuation at equity – – 6 – 21 – 8 – – 35 Change resulting from cash flow hedges – – – – – – –1 – – –1 Remeasurements of defined benefit plans – – 188 – – – – – –4 184 other changes – – 2 – – – – – – 2 total recognised income and expense – – 196 – –2,578 –705 7 3,304 8 232 Change in shareholdings in subsidiaries – – 2 – – – – – –4 –2 Change in consolidated group – – – – – – – – – – Dividend – – – – – – – –1,255 –3 –1,258 Purchase/sale of own shares –4 9 24 –218 – – – – – –189 Retirement of own shares – – – – – – – – – –
Change from retrospective adjustment – – –34 – – 5 – –9 – –38
income and expense recognised directly in equity – – –505 – 2,658 1,431 –5 – 22 3,601
Currency translation – – – – – 1,431 – – –3 1,428 unrealised gains and losses on investments – – – – 2,645 – – – 16 2,661 Change resulting from valuation at equity – – 2 – 13 – –6 – – 9 Change resulting from cash flow hedges – – – – – – 1 – – 1 Remeasurements of defined benefit plans – – –523 – – – – – 2 –521 total recognised income and expense – – –505 – 2,658 1,431 –5 3,153 40 6,772 Change in shareholdings in subsidiaries – – 1 – – – – – –3 –2 Change in consolidated group – – 1 – – – – – –6 –5 Dividend – – – – – – – –1,254 –3 –1,257 Purchase/sale of own shares –30 – – –1,383 – – – – – –1,413 Retirement of own shares 21 – –1,000 1,000 – – – – – 21
Additional information income tax paid (net) – included in the cash inflows from operating activities 45 –1,223 Dividends received 511 519 interest received 6,256 6,496 interest paid –479 –552
Discretionary judgements and estimates are of significance for the following items in particular and are described in more detail in the respective explanatory notes: — Consolidated group — Goodwill and other intangible assets — Fair values and impairments of financial instruments — Deferred acquisition costs — Technical provisions — Pension provisions — Deferred tax — Contingent liabilities
IAS 27 (rev. 05/2011), Separate Financial Statements, now deals only with balance sheet recognition of investments in subsidiaries, joint ventures and associates in separate single-entity financial statements in accordance with IFRS, including the relevant disclosures in the notes. The definition of control and balance sheet recognition of subsidiaries in consolidated financial statements is now regulated by IFRS 10. The standard is not applicable to Munich Re.
In June 2012, the IASB adopted IFRS Consolidated Financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities – Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) (06/2012), which clarifies that the requirement to provide adjusted comparative information on first-time application is limited to the preceding comparative period only. Insofar as first-time application results in a change in the need to consolidate an entity only for the comparative period, no adjusted comparative information for prior periods is necessary. In addition, the requirement to provide information for prior periods was removed for unconsolidated structured entities.
IAS 36 (rev. 05/2013), Recoverable Amount Disclosures for Non-Financial Assets, affects corrections and extensions of required disclosures if the recoverable amount of impaired assets is based on fair value less costs of disposal. We already applied the amendments in advance in the financial year 2013.
The amendments in IAS 39 (rev. 06/2013), Financial Instruments: Novation of Derivatives and Continuation of Hedge Accounting, determine that the novation to a central counterparty of a derivative that is designated as a hedging instrument will not lead to a discontinuation of hedge accounting where that novation is required by legislation or regulation. The involvement of a central counterparty is not mandatory for existing business transactions. The amendments currently do not have any effects on Munich Re.
Previously, the monitoring and management of the ERGO Insurance Group had been based on three segments geared to the different main products, i.e. life, German health (including global travel insurance) and property-casualty.
Munich Re Group Annual Report 2014 under German life and health primary insurance business. ERGO’s German propertycasualty primary insurance business (with the exception of direct property-casualty insurance business) is now reported under the segment ERGO Property-casualty Germany.
b) In previous years, the amount of claims paid for a reinsurance portfolio was set too low as part of the fast-close process. The amounts for claims paid and accounts payable were corrected retrospectively in the third quarter.
The effects on the consolidated income statement for the financial year 2013 are as follows: Standards or changes in standards not yet entered into force
Unless otherwise stated, all standards or amendments to standards that have not yet entered into force will be applied by Munich Re for the first time as from the mandatory effective date for entities domiciled in the European Union.
The following standards are mandatory for Munich Re for the first time in the financial year 2015. They were adopted into European law in June and December 2014 respectively.
IFRIC Interpretation 21 (05/2013), Levies, clarifies the point of recognition of a liability within the scope of IAS 37 for levies imposed by governments, other than income taxes, that do not fall within the scope of application of other IFRSs. As well as determining the point of recognition, the Interpretation clarifies how to interpret the definition of “present obligation” within the meaning of IAS 37 with respect to such levies. As mandated by the IASB, application of this Interpretation should have been mandatory for the 2014 financial year. However, it was not adopted into European law until 13 June 2014, and may thus only be applied by companies domiciled in the European Union with respect to financial years beginning on or after 17 June 2014. It has no material effects on Munich Re.
Changes 2013 as due to originally adjustments recognised in 2013 2013 €m b) c) 3. Expenses for claims and benefits Gross –40,698 –11 – –40,709 Net –39,916 –11 – –39,927 7. Insurance-related investment result – – 412 412 13. Other non-operating result –673 2 – –671
The amendments published in December 2013 under the project Annual Improvements to IFRSs 2010–2012 Cycle refer to: IFRS 2, Share-based Payment; IFRS 3, Business Combinations; IFRS 8, Operating Segments; IFRS 13, Fair Value Measurement; IAS 16, Property, Plant and Equipment; IAS 24, Related Party Disclosures; and IAS 38, Intangible Assets. The amendments mainly concern clarifications of individual provisions that have turned out to be unclear in practice; they are unlikely to be relevant for Munich Re.
IFRS 14 (1/2014), Regulatory Deferral Accounts, is an interim standard that is only to be used by companies that are subject to rate regulation and are preparing IFRS financial statements for the first time. The rules are not applicable to Munich Re.
The amendments of IFRS 11 (05/2014), Accounting for Acquisitions of Interests in Joint Operations, clarify the accounting for acquisitions of interests in joint operations when the operation constitutes a business. The acquirer of such interests is required to apply all of the principles on business combinations accounting in IFRS 3 and other IFRSs, with the exception of those principles that conflict with the guidance in IFRS 11. This amendment is unlikely to have any material effects on Munich Re.
As part of the Disclosure Initiative, in December the IASB published the amendment Disclosure Initiative, Amendments to IAS 1 (12/2014), which is designed to eradicate uncertainties in the exercise of discretion when drawing up financial statements. It makes clear which considerations need to be taken into account with respect to materiality, the line items in the financial statements, and the order of the notes. Munich Re will analyse if these amendments have any effect on our reporting requirements.
The consolidated financial statements include Munich Reinsurance Company (the parent) and all the entities over which Munich Reinsurance Company directly or indirectly exercises control (subsidiaries).
We include a small number of entities in the consolidated group even though Munich Reinsurance Company does not directly or indirectly hold a majority of the voting rights in those entities. The inclusion is generally made on the basis that contractual rights are taken into consideration that result in determination of power over the relevant business activities.
On behalf of our policyholders, in the area of unit-linked life insurance we invest in numerous retail funds that are mainly managed by companies which are not related parties of Munich Re. We do not generally control these companies, as we cannot determine the business activities that are relevant for the investee’s returns. In the case of the other investment funds for unit-linked life insurance, we take the above criteria into account in determining whether there is control.
Cash flows and net assets from obtaining and losing control of consolidated subsidiaries or other operations are shown below: Further information on our gains and losses from losing control can be found in the notes to the consolidated balance sheets under Assets (17) Non-current assets and disposal groups held for sale that were sold in the reporting period.
Other assets 66 46 Technical provisions (net) –101 – Other liabilities –29 –51
Cash flows arising from losing control €m 2014 Prev. year Total consideration for losing control – 98 Non-cash consideration for losing control – – Cash consideration for losing control – 98 Cash over which control was lost – –132 Total – –34
Net assets lost €m 2014 Prev. year Goodwill – – Other intangible assets – – Investments – 42 Cash – 132 Other assets – 126 Technical provisions (net) – –82 Other liabilities – –60 Total – 158
On 1 August 2014, via its subsidiary ERGO International AG, Düsseldorf, Munich Re acquired 100% of the voting shares in SHC Insurance Pte. Ltd., Singapore, which in October was renamed ERGO Insurance Pte. Ltd. (ERGO Insurance), Singapore. The purchase price was S$ 117m (€69m). It was paid in cash and fully financed from internal resources. ERGO Insurance offers a broad spectrum of property- casualty policies, including motor, liability, bond, personal accident, fire, marine, and engineering insurance. Market entry in Singapore ties in perfectly with ERGO’s international growth strategy, which is focused on the highly attractive property- casualty markets of Southeast Asia.
Growth prospects for the next few years are also positive, one reason being the local supervisory authority’s endeavours to turn Singapore into an international insurance hub similar to the London market by 2020. ERGO Insurance itself is well positioned for further growth.
In connection with the acquisition of ERGO Insurance, its existing client sales channels and software have been identified as other intangible assets. As part of the transaction, goodwill of approximately €21m and other intangible assets of around €19m were capitalised. The goodwill derives from anticipated synergies, the growth potential of ERGO Insurance and the further geographical spread of the ERGO Group in the desired growth regions. ERGO is already present in this region in Vietnam, where it owns a 35% share of the voting rights in Global Insurance Company (GIC). The singleentity national companies are led and supported by a regional management team, which can draw on the comprehensive expertise of the ERGO Group in the area of risk management and its vast experience in developing innovative products and sales channels. The goodwill includes the value assigned to ERGO Insurance’s staff and is not tax-deductible.
The fair value of the receivables acquired as part of the transaction largely corresponds to the carrying amount. No material defaults were anticipated at the time of acquisition.
On 23 December 2014, via its subsidiary Munich Holdings of Australasia Pty Limited, Sydney, Munich Re acquired 100% of the voting shares in Calliden Insurance Pty Limited (Calliden), Sydney for a cash payment. Calliden specialises in commercial insurance, including niche products. Calliden has been an important partner of Munich Re since establishment in 2005. As part of this transaction, our newly-established subsidiary Calibre Commercial Insurance Pty Limited, Sydney, purchased via an asset deal, the distribution rights to certain commercial insurance portfolios of the Calliden Group Limited, Sydney, and its related IT underwriting platforms. The purchase price was also settled in cash. With these transactions, Munich Re will seek to develop niche products specifically tailored to current-market commercial insurance needs.
The balance sheet date of the consolidated companies is generally 31 December. Some of the investment funds have different balance sheet dates. These funds are consolidated on the basis of interim accounts as at 31 December. Acquisitions are accounted for by the purchase method. In order to determine the equity capital at the time of acquisition, we measure the acquired identifiable assets and liabilities of the subsidiary at fair value. The consideration transferred in exchange for the acquired shares is netted against the equity capital apportionable to the Group at the time of acquisition. Any residual positive amount is capitalised as goodwill. Profits earned by the subsidiaries after their first consolidation are included in Group equity. Amounts relating to intra-Group transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as not being material.
Pursuant to IAS 28, associates are generally all entities which are not subsidiaries or joint ventures but on whose financial and operating policies the investors can exercise a significant influence. In the case of shareholdings amounting to between 20% and 50% of the voting power, the entities in question are deemed to be associates unless it can be clearly demonstrated that there is no significant influence.
Information on the measurement of investments in associates and joint ventures can be found in the notes under Assets B – Investments.
We measure joint operations on the basis of the corresponding attributable assets, liabilities, income and expenses in accordance with the relevant IFRSs.
Investment funds As part of its investment activities Munich Re invests in investment funds on its own behalf and on behalf of policyholders under unit-linked life insurance. Investment funds are mainly financed by issuing redeemable shares or units.
On behalf of our policyholders, we invest in numerous investment funds for unit-linked life insurance that are mainly managed by companies which are not related parties of Munich Re. These funds are usually equity and bond funds which can be found under C – Insurance-related investments – Investments for unit-linked life insurance contracts.
Size of structured entities For investment funds, including investments in forestry, infrastructure (including renewable energies and new technologies) and private equity, investment funds for policyholders under unit-linked life insurances, and investments in debt securities, the carrying amount gives an indication of the size of the structured entity. For the securitisation of underwriting risks, the total emitted volume (nominal
Maximum exposure to loss With the exception of investment funds for investments for unit-linked life insurance, 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.
Financial support Munich Re has not provided any non-contractual financial or other support to the unconsolidated structured entities presented above, nor does it have the intention to do so in the foreseeable future.
At fair value through profit or loss – – – 2 2
Securities at fair value through profit or loss are accounted for at fair value at the balance sheet date. If no quoted prices in an active market are available, fair values (particularly with derivatives) are based on recognised valuation methods. Munich Re uses a range of valuation models for this purpose. Information on the valuation models and processes can be found in the Notes to the consolidated balance sheet – Assets (4) Hierarchy for the fair value measurement of investments.
All unrealised gains or losses from such valuation are included in the investment result.
In the case of Level 1, valuation is based on unadjusted quoted prices in active markets for identical financial assets which Munich Re can refer to at the balance sheet date. A market is deemed active if transactions take place with sufficient frequency and in sufficient quantity for price information to be available on an ongoing basis. Since a quoted price in an active market is the most reliable indicator of fair value, this should always be used if available. The financial instruments we have allocated to this level mainly comprise equities and equity funds for which either a stock market price is available or prices are provided by a price quoter on the basis of actual market transactions. We have also allocated exchange-traded derivatives and exchange-traded subordinated bonds to Level 1.
For assets allocated to Level 3, we use valuation techniques not based on inputs observable in the market. This is only permissible insofar as no observable market data is available. The inputs used reflect Munich Re’s assumptions regarding the factors which market players would consider in their pricing. We use the best available information for this, including internal company data. The financial instruments allocated to this level of the fair value hierarchy largely comprise land and buildings, real-estate funds, investments in private equity, certain credit structures, and investments in subsidiaries, associates and joint ventures measured at fair value. Insurance-linked derivatives are also allocated to Level 3.
In the case of loans and investments in associates and joint ventures accounted for using the equity method, as well as bank borrowing and bond and note liabilities not traded on an active market, we have decided on a case-by-case basis to which level of the fair value hierarchy to allocate the respective fair values.
Investments for unit-linked life insurance contracts Investments for policyholders under unit-linked life insurance are measured at market value. Unrealised gains or losses from changes in market value are included in the insurance-related investment result. They are matched by corresponding changes in the technical provisions (see Equity and liabilities – D Technical provisions for unit-linked life insurance), which are included in the technical result. The change in technical provisions also includes changes from additional premium components to be recognised on the liabilities side of the balance sheet. Recognising these investments at market value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding provisions.
Munich Re Group Annual Report 2014 derivatives also include retrocessions in the form of derivatives to hedge insurance risks assumed. Insurance risks are defined as risks which – in a modified form – can also be assumed under an insurance contract within the meaning of IFRS 4. Other insurance-related investments are accounted for at fair value, although we recognise changes in value in profit or loss. For physical gas, the fair value is reduced by estimated costs to sell. If no quoted prices in an active market are available, fair values are based on recognised valuation methods. Munich Re uses a range of valuation models for this purpose. Information on the valuation models and processes can be found in the Notes to the consolidated balance sheet under Assets (4) Hierarchy for the fair value measurement of investments.
Under IAS 12, deferred tax assets must be recognised in cases where asset items have to be valued lower, or liability items higher, in the consolidated balance sheet than in the tax accounts of the Group company concerned and these differences will be eliminated at a later date with a corresponding effect on taxable income (temporary differences). Also included are tax assets deriving from tax loss carry-forwards. Deferred tax assets are recognised to the extent that, on the basis of tax result planning, it is sufficiently probable that they will be utilised. As a rule, a five-year forecast period is considered. We take into account the tax rates of the countries concerned and the consolidated company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries. Changes in tax rates and tax legislation that have already been adopted by the government at the balance sheet date are taken into account.
Other reserves contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and from investments in unconsolidated affiliated companies, and in associates and joint ventures that we do not value at equity. These reserves also include unrealised gains and losses from the valuation of associates and joint ventures at equity, differences resulting from the currency translation of foreign subsidiaries’ figures, and the valuation result from the hedging of cash flows. In addition, reversals of impairment losses on equity investments available for sale are recognised in this equity item, without impact on profit or loss.
The technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; see the explanatory remarks on Assets – D Ceded share of technical provisions. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs for insurance contracts are capitalised and amortised over the terms of the contracts; see notes on Assets – G Deferred acquisition costs. The measurement of technical provisions is based on US GAAP FAS 60, FAS 97 and FAS 120. Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
In primary insurance, measurement is generally carried out individually for each risk. For German life primary insurance, biometric actuarial assumptions based on the tables of the German Association of Actuaries (Deutschen Aktuarvereinigung e. V.) are used. We also largely use the tables of the national actuarial associations for the rest of the 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.
In the case of contracts as per FAS 120, the provision for future policy benefits comprises the net level premium reserve and liabilities for terminal dividends. The net level premium reserve is calculated from the present value of guaranteed policy benefits (including acquired bonuses but excluding claims adjustment expenses) less the present value of future net level premiums. The net level premium is the net premium less the portion of the premium envisaged for covering claims adjustment expenses. The actuarial assumptions are generally the same as those used for premium calculation. The provision for terminal dividends is built up proportionally with a fixed share of the expected gross profit margins. The same method is used for this as for determining the amortisation of the deferred acquisition costs.
The provision for outstanding claims is for payment obligations arising from insurance 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 (e.g. because they have not been reported yet or have not yet manifested themselves). A third class of provisions covers claims which 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). 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, which we discount. For determining the provision for outstanding claims, Munich Re uses a range of actuarial projection methods, including the chain ladder and the Bornhuetter-Ferguson method. In applying the statistical methods, we regard large exposures separately. The standard actuarial methods we use are applied both to the run-off triangles for the payments and to the run-off triangles for the reported claims, so that we obtain a range of estimates for the ultimate loss. Within this range, a realistic estimated value for the ultimate loss is determined.
Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the valuation differences between IFRS and local GAAP on the basis of the expected future participation quotas. For unrealised gains and losses on investments available for sale, which are recognised directly in equity (see Assets – B Investments), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in this provision are recognised in the income statement.
This item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance). The value of the provision for future policy benefits essentially corresponds to the market value of the relevant investments shown under Assets C – Insurance-related investments – Investments for policyholders under unit-linked life insurance. Besides this, as with the provision for future policy benefits in accordance with FAS 97, they may include additional premium components; see the notes on Equity and liabilities C – Gross technical provisions. Changes in this provision are fully recognised in the technical result. Insofar as these changes derive from unrealised gains and losses from alterations in the market values of the related investments, they are matched by opposite changes of the same amount in the insurance-related investment result. Recognising these provisions at market value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding investments.
Munich Re Group Annual Report 2014 staff member is promised a particular level of retirement benefit either by the companies or by a pension fund. The companies’ contributions needed to finance this are not fixed in advance. If pension obligations are covered by assets held by a legally separate entity (e.g. a fund or a contractual trust agreement in the form of a two-way trust) – assets that may only be used to cover the pension commitments given and are not accessible to creditors – the pension obligations are shown less the amount of these plan assets. If the fair value of the assets exceeds the related outsourced pension commitments, this reimbursement right is recognised under “other receivables”.
Pension obligations are recognised in accordance with IAS 19, using the projected unit credit method and based on actuarial studies. The calculation includes not only the pension entitlements and current pensions known on the balance sheet date but also their expected future development.
This item comprises bonds and notes issued, deposits retained on ceded business, current tax liabilities, and other liabilities. Financial liabilities are generally recognised at amortised cost. Derivatives (derivative financial instruments) are recognised at fair value. Details of how the fair value is determined are provided under Assets – B Investments – Determining fair values.
The non-controlling interests in investment funds and partnerships are recognised at fair value.
Under IAS 12, deferred tax liabilities must be recognised if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company, and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); see notes on Assets – H Deferred tax assets.
The object of our asset-liability management, on which we report on page 102, is to economically minimise excess or insufficient cover in foreign currencies within the Group. Insofar as this is done across Group companies with different functional currencies, it produces economically non-existent fluctuations in the consolidated result. Where exchange gains or losses occur in the translation of foreign-currency transactions into the national currencies of the consolidated companies, they are accounted for under “other non-operating income” and “other non-operating expenses” respectively.
In accordance with the management approach, the segmentation of our business operations is based on the way in which Munich Re is managed internally. Segment reporting was changed in the fourth quarter of 2014 in connection with changes to internal management, see Recognition and measurement – Changes in accounting policies and other adjustments.
— ERGO Property-casualty Germany (German property-casualty insurance business, excluding direct business)
Munich Re uses different performance indicators and measures. The main performance metrics at Group level are economic earnings and the return on risk-adjusted capital (RORAC). Besides this, IFRS result contributions are the basis of planning and strategy in all segments. Therefore the uniform assessment basis used for measuring the segment result is the operating result adjusted to eliminate non-operating components. The operating result is split into a technical result and a non-technical result, with an interest component allocated to the underwriting business in the form of technical interest (see Notes to the consolidated income statement – (31) Income from technical interest). The non-technical result also separately discloses the insurancerelated investment result and the result of other investments. The segments reported under IFRS 8 are now shown after elimination of all intra-Group transactions (mainly dividend payments, sales, reinsurance transactions, receivables and corresponding interest income). Our segment reporting has no consolidation column.
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. €m 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year
D. Ceded share of technical provisions 1,129 1,096 1,966 1,932 8 44 76 112 1,940 1,950 209 171 5,328 5,305 1 Previous year’s figures adjusted owing to IFRS 8 and IAS 8; see “Changes in accounting policies and other adjustments”.
1 Previous year’s figures adjusted owing to IFRS 8 and IAS 8; see “Changes in accounting policies and other adjustments”.
B. Gross technical provisions I. Unearned premiums 24 28 5,973 5,587 174 159 443 449 1,363 1,287 396 484 8,373 7,994 II. Provision for future policy benefits 13,902 13,633 26 27 84,896 84,375 428 426 12,328 11,990 1,068 976 112,648 111,427 Thereof: Held for sale – – – – – – – – – – 48 – 48 – III. Provision for outstanding claims 6,687 5,948 39,868 37,847 2,653 2,598 3,866 3,766 2,231 2,065 1,037 837 56,342 53,061
C. Gross technical provisions for unit-linked life insurance contracts – – – – 4,742 4,109 – – 3,094 2,933 1 1 7,837 7,043
B. Investments I. Land and buildings, including buildings on third-party land 252 263 1,204 1,217 2,016 2,028 140 131 110 113 10 10 3,732 3,762 II. Investments in affiliated companies, associates and joint ventures 30 23 892 841 335 362 70 94 143 100 89 94 1,559 1,514 Thereof: Associates and joint ventures accounted for using the equity method 6 4 774 750 272 301 35 57 105 86 88 93 1,280 1,291
Thereof: Held for sale – – – – – – – – – – 79 – 79 – 3. At fair value through profit or loss 77 84 481 1,017 1,159 846 32 29 416 321 4 3 2,169 2,300
V. Deposits retained on assumed reinsurance 7,082 7,847 1,286 1,279 39 115 8 5 14 14 321 376 8,750 9,636
D. Ceded share of technical provisions 1,129 1,096 1,966 1,932 8 44 76 112 1,940 1,950 209 171 5,328 5,305
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national €m 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 3. Net expenses for claims and benefits –7,895 –8,098 –9,728 –10,013 –12,923 –12,136 –1,971 –2,043 –2,816 –2,572 –4,360 –5,065 –39,693 –39,927 4. Net operating expenses –2,135 –2,600 –5,239 –4,939 –1,517 –1,567 –994 –1,022 –1,179 –1,075 –887 –1,161 –11,951 –12,364 8. Other operating result 53 39 –67 –47 –50 –68 –15 –21 –40 –20 –9 –23 –128 –140 9. Deduction of income from technical interest –683 –683 –1,209 –1,183 –4,823 –4,177 –99 –103 –652 –579 –37 –39 –7,503 –6,764 12. Other non-operating result, net finance costs and impairment losses of goodwill –95 –109 –235 –454 –188 –185 –94 –119 –553 –87 –4 –3 –1,169 –957 1 Previous year’s figures adjusted owing to IFRS 8 and IAS 8; see “Changes in accounting policies and other adjustments”.
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national €m 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 2014 Prev. year 3. Net expenses for claims and benefits –7,895 –8,098 –9,728 –10,013 –12,923 –12,136 –1,971 –2,043 –2,816 –2,572 –4,360 –5,065 –39,693 –39,927 4. Net operating expenses –2,135 –2,600 –5,239 –4,939 –1,517 –1,567 –994 –1,022 –1,179 –1,075 –887 –1,161 –11,951 –12,364 8. Other operating result 53 39 –67 –47 –50 –68 –15 –21 –40 –20 –9 –23 –128 –140 9. Deduction of income from technical interest –683 –683 –1,209 –1,183 –4,823 –4,177 –99 –103 –652 –579 –37 –39 –7,503 –6,764 12. Other non-operating result, net finance costs and impairment losses of goodwill –95 –109 –235 –454 –188 –185 –94 –119 –553 –87 –4 –3 –1,169 –957
Investments in non-current assets per segment1 €m 2014 Prev. year Reinsurance life 49 105 Reinsurance property-casualty 165 380 ERGO Life and Health Germany 33 33 ERGO Property-casualty Germany 72 45 ERGO International 179 488 Munich Health 35 46 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.
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.