Primary insurance 1 Previous years’ figures adjusted owing to 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.
Comparability with the years 2009 and 2010 is thus limited. 3 Up to and including 2010 and for 2013, this contains own shares earmarked for retirement. 4 Including those apportionable to minority interests and policyholders. 5 The figures for 2011 are not adjusted for relief of 1.4 percentage points from economic risk transfer to the capital markets. 6 Excluding health insurance conducted like life insurance.
Europe Austria Belgium Belarus Croatia Cyprus Czech Republic Denmark Estonia France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta
Netherlands Norway Poland Portugal Romania Russia Sweden Switzerland Slovakia Slovenia Spain Turkey United Kingdom Ukraine
Asia Bahrain China Hong Kong India Japan Jordan Malaysia Qatar Saudi Arabia Singapore South Korea United Arab Emirates Vietnam
Countries in which Munich Re (Group) is represented by a subsidiary or branch:
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Overview of Munich Re Key figures Front cover flap Munich Re’s global presence Inside front cover flap Quarterly figures Inside back cover flap Our brands Back cover flap Important dates Back cover
To our shareholders 001 Letter to shareholders 003 Notable events in 2013 007 The Board of Management 008 Munich Re shares 010 Our strategy 014
Management report 029 Munich Re 031 Macroeconomic and industry environment 063 Business performance 065 Financial position 092 Stakeholders 100 Risk report 109 Opportunities report 131
Consolidated financial statements and notes 143 Consolidated balance sheet 146 Consolidated income statement 148 Statement of recognised income and expense 149 Group statement of changes in equity 150 Consolidated cash flow statement 152
Letter to shareholders 003 Notable events in 2013 007 The Board of Management 008 Munich Re shares 010 Our strategy 014
The world does not stand still, and this certainly continues to be the case in the twenty-first century. If anything, it seems that the tempo of change has increased still further. The main driver of this acceleration in pace is digitalisation. It affects not only the mode of economic activity – and often in a fundamental way – but also customer behaviour. It entails the emergence of entirely new risks, and a complete reappraisal of known and familiar risks as a result of the changed environment. For primary insurers and reinsurers to correctly assess the increasing demand for risk in times of such prevalent uncertainty, they need to recognise and understand the main trends in these transformations. Satisfying the sharply changing demand for risk cover requires a great deal of creativity and innovation capacity. This is the key to future growth in the insurance industry, including for Munich Re.
All Group companies are in constant contact with their clients. This close working relationship means that we are able to identify the need for risk cover at an early stage, and to develop innovative coverage models for those requirements. As a result, we often come up with completely new products and opportunities: from performance guarantee insurance for photovoltaic modules, to coverage for cyber risks, through to a holistic risk assessment of industrial and construction projects (project risk rating), which provides potential investors with a valuable decision-making aid.
Munich Re is increasingly successful in exploiting the potential for innovation across the whole Group. The combination of primary insurance and reinsurance under one roof – working in close cooperation with colleagues responsible for investment – widens the scope for innovative products. With the acceptance of very varied risks, the Group not only leverages diversification benefits but also, through mutual exchange, strengthens its potential for innovation. This, in turn, generates competitive advantage.
The most obvious example of this innovation potential is the totally new ERGO product generation in life insurance. In conjunction with colleagues in reinsurance and at MEAG, ERGO has launched a forward-looking, innovative insurance product on the German market. This new product – among the first of its kind in Germany – was initially introduced last summer for private-client business that is not state-sponsored. About half of ERGO’s customers in this segment are now choosing the new-generation product. At the start of 2015, we will extend the product line to company pension schemes and “Rürup” pension plans.
In the USA, we have created a cross-cutting product development platform which draws particularly on the know-how of Hartford Steam Boiler, American Modern and Munich Re America to develop new, innovative products for the North American market. Naturally, we also make use of all the other synergies which can be achieved via our business units in the US market. Here too, it is apparent that we are stronger and more innovative as a group than individual companies could be.
Overall, Munich Re can be very satisfied with the 2013 financial year. The profit of €3.3bn is the third highest in the company’s history. In view of the excellent earnings position, we already decided last year to buy back shares worth €1bn. We are proposing to the Annual General Meeting to increase the dividend to €7.25 per share in order to allow you, our shareholders, to participate commensurately in the Group’s success. At the same time, our capital base remains strong enough to finance future growth. We thus consider ourselves well prepared for the challenges of the years to come.
Ladies and gentlemen, on behalf of my colleagues on the Board of Management and all employees in the Group, I thank you for the confidence you have shown in us. We will make every effort to fulfil your expectations again this year.
Q1/2013 Q2/2013 Q3/2013 Q4/2013 2 January 2013 Together with GE Energy Financial Services and EDF Energies Nouvelles, MEAG purchases 32 wind farms in France with a total installed capacity of 321.4 megawatts per year. The 40% stake acquired by MEAG on behalf of Munich Re is part of the RENT programme (Renewable Energy and New Technologies) with a currently envisaged volume of €2.5bn. Through this programme, Munich Re invests in renewable energy and new technologies in order not only to promote sustainable energy production but also to benefit from it.
25 April 2013 HSB offers HSB CyberOneTM, a new cyber risk insurance coverage for small businesses. Hacker attacks are a serious problem for smaller commercial organisations, which often have limited information security and technical resources. The new policy is designed to protect these organisations from cyber crime.
23 May 2013 MEAG acquires three wind farms in Sweden that are connected to the grid, with a total installed capacity of 30 megawatts. This investment totalling €47m is also part of our RENT (Renewable Energy and New Technologies) programme.
3 September 2013 Munich Re and the reinsurer Renaissance Re Holdings Ltd., Bermuda, conclude an agreement under which Munich Re is to acquire RenRe Energy Advisors Ltd. (REAL), Renaissance Re’s weather risks unit.
5 September 2013 Munich Re announces the sale of the Windsor Health Group (WHG) to US health primary insurer WellCare Health Plans, Inc. The transaction is concluded as expected at the end of the fourth quarter of 2013.
5 September 2013 ERGO now also provides life insurance policies in the Chinese market. ERGO China Life focuses on the economically attractive province of Shandong, which with its roughly 97 million inhabitants is the third-largest Chinese insurance market.
21 November 2013 MEAG acquires a 50% stake in Marchwood Power Limited (MPL). MPL owns and operates a natural gas-fired combined cycle power station in Southampton, UK. This investment is part of the infra structure programme with a currently envisaged volume of €1.5bn.
Although shares of reinsurance companies performed particularly well in 2012, the very pleasing price gains in the year under review remained behind those of the primary insurance sector. The discussion on excess capacities and the associated mounting intensity of competition in the reinsurance sector gave rise to unease amongst market
— Munich Re shares again with convincing performance: The share price increased by 17.8% in the year under review, giving a total return (including dividends) of 23.3%
— Board of Management and Supervisory Board to propose payment of an increased dividend of €7.25 per share at the Annual General Meeting
— Munich Re shares and sustainability: Since 2001, the share has been an ever-present member of sustainability indices such as the DJ Sustainability Indices and the FTSE4Good
Munich Re Group Annual Report 2013 participants. Thus, an increasingly critical view is being taken not only of the declining investment income but also of the growth prospects in core business. Also in view of reinsurers’ comfortable capital situation overall, the capital market focused on the return of capital in the form of higher dividends, share buy-backs or special dividends.
Munich Re shares closed the year at €160.15, a price gain of 17.8%. Taking into account the dividend paid for the financial year 2012, the total return on Munich Re shares was 23.3%, exceeding that of the European share price index by 2.5 percentage points. The other benchmark indices performed even better: the DAX 30 gained 25.5%, and the European insurance index even rose by 36.7%. However, taking a longer period as a basis, the return on Munich Re shares including dividends has developed more strongly than the European insurance index over the last three- and five-year periods.
Munich Re shares also developed very well from a sustainability perspective. Besides being listed in the FTSE4Good, they were again included in the Dow Jones Sustainability Index with an annual assessment that put them among the best in the insurance sector. The specialised sustainability rating agencies oekom, Sustainalytics and Vigeo also rated Munich Re very highly. Their ratings flow into the weightings of various sustainability indices such as the Ethibel Sustainability (ESI) and STOXX Global ESG Leaders indices.
With a dividend yield of approximately 4.5% (in relation to the year-end share price), Munich Re shares remain an attractive equity investment, which is also included in the DivDAX, a subindex of Deutsche Börse AG featuring the 15 DAX companies with the highest dividend yields.
Munich Re shares are no-par-value registered shares. First admitted for trading on the stock exchange in Munich on 21 March 1888, they are today traded on all the German stock exchanges, meanwhile almost exclusively on the Xetra electronic trading platform.
DJ EURO STOXX 50 1.3 DJ EURO STOXX Insurance 10.6 MSCI EURO 1.2 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 2013, the outlook for all Munich Re’s ratings remained stable at a high level.
The confidence in our financial strength is reflected in trading in credit default swaps (CDSs), which are used on the capital market to hedge against the risk of an issuer’s default – the lower the CDS spread, the higher the assessment of the issuer’s security. By both national and international standards, Munich Re continues to be among the companies with a very low spread.
An overview of Munich Re’s ratings can be found on page 92
We combine primary insurance and reinsurance in one group. This set-up allows us to cover the relevant 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 cycles in individual lines of insurance business and regional markets. We thus aim to secure an attractive return while simultaneously maintaining relatively low volatility. Our actions always focus on our clients and their needs.
The risks that we cover differ greatly in nature. Their predominant non-correlation in terms of potential loss occurrence enables us to balance the risks over time, across regions and across fields of business – a diversification benefit that is key to our success. The size and mix of our risk portfolio mean we can cover comparatively more risks with the capital available.
An important success factor is the constant improvement of the value-based methods and processes we use to control and manage our business. One important performance indicator in this context is return on risk-adjusted capital (RORAC), which relates the profit earned to the required risk capital, allowing the management of all activities in the Group to be geared to economic value added.
New, previously unknown risks pose a particular challenge. We have to identify and evaluate these as swiftly as possible, with a view to maintaining our competitive advantage. In so doing, we aim to expand the boundaries of insurability, correctly structure the conditions, and calculate technically adequate prices. Essential pre requisites for this are our broad risk knowledge, our experience in the markets and intensive dialogue with our clients. With new insurance solutions, we aim to generate profitable growth, clearly set ourselves apart from the competition, and win our clients’ loyalty.
ERGO gears itself consistently to the needs and requirements of its clients and aims to measurably 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. 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 service 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.
Details of our RORAC calculation can be found on page 38 f.
Munich Re Group Annual Report 2013 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.
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 profitable growth potential in our business field Munich Health, where our specialists for international health business from primary insurance and reinsurance are pooled in a separate organisation. We support our clients with needs-based products and innovative solutions in risk management. To this end, we frequently collaborate closely with those in charge of social security systems, together making it possible for high-quality medical care to remain affordable.
In the financial year 2013, 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.
Collaboration between Supervisory Board and Board of Management The Board of Management satisfied its reporting obligations towards the Supervisory Board in all respects, both verbally and in writing. The Supervisory Board was involved in all important business transactions and decisions of fundamental significance for the Group. During meetings, we held in-depth discussions with the Board of Management about the information provided to us. Cooperation with the Board of Management was characterised in every regard by responsible and focused action aimed at promoting the successful development of Munich Re.
Outside of Supervisory Board meetings, the Board of Management informed us promptly about important events in the Group, including the change in Chief Risk Officer, the sale of the Windsor Health Group (WHG), the acquisition of RenRe Energy Advisors Ltd. (REAL), and the planned share buy-back programme. The shareholder representatives and the employee representatives met with the Chairman of the Board of Management before the meetings for separate discussions of strategic issues and other matters of essential importance.
On 25 April, directly prior to the Annual General Meeting, we heard the Board of Management’s report on the present status of business performance in 2013.
On 17 July, the Supervisory Board requested a presentation of Munich Re’s Core Principles, i.e. the pillars of its strategy. We dealt with the focal points of human resources work in the Group and were briefed on the 2012 compensation report in accordance with the German Remuneration Regulation for Insurance Companies (VersVergV).
At the meeting on 17 October, we made adjustments to the Board of Management’s distribution of responsibilities owing to planned changes involving individual Board members with effect from 1 January 2014 and 1 January 2015 respectively. We also determined the reference groups on the basis of which the appropriateness of the Board of Management’s compensation was to be reviewed in vertical terms. The annual efficiency review was also on the agenda, as was the resolution regarding the Declar ation of Conformity. In addition, we discussed Munich Re’s asset management with the CEO of MEAG. The President of the Specialty Markets Division of Munich Reinsurance America reported on new developments in the reinsurance market. As part of the request for proposals for our audit mandate that had been initiated by the Audit Committee, we considered a comprehensive report by the Chair of the Committee and conferred at length on the benefits and drawbacks of a change in auditor. Our resolution to re-appoint KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft as external auditor for 2014 was then adopted by written consent in lieu of a meeting in November.
The Personnel Committee met six times in 2013. 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. In addition, it passed resolutions on the extension of the appointment of one member of the Board of Management and looked at fringe benefits for members of the Board of Management. The Committee also adapted the rules of the deferred compensation scheme to take account of revised statutory age
At its four meetings in 2013, the Standing Committee dealt with the preparation of Supervisory Board meetings and topics of corporate governance. It agreed to an informal review of the efficiency of the Supervisory Board’s work in 2013, and determined that the measures proposed in 2012 for improving efficiency had been implemented. The Committee regularly obtained information on changes in shareholder structure and took delivery of the annual report on expenditure for donations and sponsoring.
The Audit Committee held nine meetings in the period under review. At the beginning of the year, the Committee performed a self-evaluation of its work on the basis of a comprehensive questionnaire. In the presence of the auditor, it discussed the Company and Group financial statements, the Company and Group management report, the auditor’s report and the Board of Management’s proposal for the appropriation of the net retained profits for the financial year 2012. It also concerned itself in detail with the quarterly financial reports in 2013 and discussed the half-year financial report for 2013 with the auditor.
Another key task of the Committee consisted in monitoring the Group’s risk situation and risk management on an ongoing basis. In addition to the quarterly and written reports, it also obtained detailed verbal information from the Chief Risk Officer on several occasions. Further issues discussed were the internal control system and risk strategy. Apart from this, the Audit Committee gained an overview of the Group’s IT security, and its se cur ity and continuity management. The Head of Group Audit informed the members of the Committee about the outcome of the audits for 2012 and the audit planning for 2013. Besides the Group Chief Compliance Officer’s annual report, the Committee regularly dealt with compliance and corporate governance issues. The Committee received regular updates about compliance cases brought to its attention, or commissioned reviews of its own accord. The members of the Audit Committee also 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 Chief Risk Officer and the external auditors. The Committee closely considered the management-level changes with regard to three of the internal control functions that took place in the year under review. The new Head of Group Audit has already attended a meeting of the Committee to respond to its questions.
The Audit Committee reviewed and monitored the auditor’s independence. In this connection, the Committee obtained reports from the auditors on their auditing and non-audit-related services. Likewise, the Audit Committee prepared a report for the full Supervisory Board on the appointment of the external auditor for the financial year 2013, determined the main points of the audits, and set the auditor’s fees. Following a resolution by the full Supervisory Board, the Chair of the Committee commissioned KPMG with the audit for the financial year 2013 and also commissioned the auditor’s review of the 2013 half-year financial report. At the same time, after intensive prep aration, the Audit Committee issued a tender for proposals for the external audit 2014, the result of which was submitted to the full Supervisory Board for resolution.
The Nomination Committee prepared the election of shareholders’ representatives to be held at the Annual General Meeting in 2014. At three meetings, 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 to the full Board, the Committee took account of the catalogue of criteria adjusted in the year under review, and the objectives determined by the Supervisory Board for its composition.
Munich Re offered all the members of the Supervisory Board an internal information event again in 2013. Nearly all of them took advantage of the opportunity to enhance their understanding of the core elements of Munich Re’s financial planning and control.
Changes on the Board of Management At the end of the year under review, Dr. Wolfgang Strassl left Munich Re’s Board of Management, of which he had been a member since 2005. We would like to thank Dr. Strassl for his long service on the Board, with which he helped to shape Munich Re’s development over many years. Dr. Joachim Wenning took over responsibility for personnel and welfare matters from Dr. Strassl with effect from 1 October 2013.
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 19 March 2014. The financial statements were thus adopted. Having carefully weighed all relevant aspects, the Supervisory Board followed the proposal of the Board of Management for appropriation of the net retained profits.
Words of thanks to the Board of Management and employees The Supervisory Board wishes to thank all the members of the Board of Management and staff worldwide. With their work, they have once again contributed to another gratifying result for Munich Re.
As a result of its international organisation, Munich Re has to consider corporate governance rules in different national legal systems. We observe not only the respective national standards, but also internationally recognised best practices. In Germany, where Munich Reinsurance Company has its headquarters, corporate governance rules are set out in the Stock Corporation Act (AktG) and the German Corporate Governance Code. The Insurance Supervision Act (VAG) standardises specific requirements for the business organisation of insurance companies and the “fit and proper” criteria for their Board members and members of the Supervisory Board. The Act also provides particular rules for insurance companies’ remuneration systems. These rules formed the basis for the Remuneration Regulation for Insurance Companies (VersVergV) issued by the German Federal Ministry of Finance.
We have underscored our approach to corporate responsibility by adopting international guidelines. First and foremost among these is the UN Global Compact, which we joined in 2007. Its ten principles provide the fundamental framework for our corporate responsibility strategy. Since signing up to the agreement, we also report annually in our “Communication on Progress” on our progress in implementing the principles. Guidelines for investments geared to sustainability criteria are provided by the Principles for Responsible Investment (PRI), which we have implemented via our asset manager MEAG since 2006. In 2012, we signed up to the Principles for Sustainable Insurance (PSI). We also report annually on our progress with these two initiatives.
Munich Reinsurance Company is a joint-stock company (Aktiengesellschaft) within the meaning of the German Stock Corporation Act. It has three governing bodies: the Board of Management, the Supervisory Board and the Annual General Meeting. Their functions and powers are derived from the Act, the Articles of Association and the codetermination agreement. The principle of parity co-determination on the Supervisory Board has been upheld in the co-determination agreement, and strengthened by taking into account staff employed in the rest of Europe.
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 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 instig ation 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.
Objectives of the Supervisory Board for its composition, diversity and independence In accordance with Section 5.4.1 para. 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 sustained corporate profitability, personal abilities, talents, experience (especially of an international nature), independence, professional knowledge and enterprise of the nominated persons.
— In selecting candidates for membership, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. By the beginning of the next term of office (scheduled for 2014), at least 20% of the members should be women, with this figure increasing to at least 30% by the start of the following term of office (scheduled for 2019).
The aforementioned objectives apply to the Supervisory Board as a whole. Shareholder and employee representatives will each contribute towards meeting these objectives, and the bodies responsible under the co-determination agreement for election pro posals to the European Electoral Board are requested to take due consideration of the objectives within the framework of the current rules. This objective has been achieved with the adoption by the European Electoral Board, on 18 November 2013, of a set of criteria for employee representatives on the Supervisory Board of Munich Reinsurance Company.
An overview of the composition of the Supervisory Board can be found on page 42 f. More details about the work of the Supervisory Board can be found in the Statement on Corporate Governance and in the Report of the Supervisory Board on page 19 ff.
The regular responsibilities of the Annual General Meeting include reaching a resol ution on the appropriation of profits, and approval of 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.
The total number of Munich Reinsurance Company shares and related financial instruments held by all members of the Board of Management and Supervisory Board amounts to less than 1% of the shares issued by the Company.
Munich Re 031 Group structure 031 Important tools of corporate management 037 Governing bodies of Munich Re 042 Remuneration report 046
Macroeconomic and industry environment 063 Capital markets 063 Insurance industry 064
Prospects 135 Comparison of the prospects for 2013 with the result achieved 135 Outlook for 2014 137
Munich Re combines primary insurance and reinsurance under one roof. This enables the Group to cover large stretches of the value chain in the risk market. At the same time, it leverages synergies in revenue and costs, whilst reducing the risk-based capital required through broad diversification. Almost all reinsurance units operate worldwide under the uniform brand of Munich Re. The ERGO Insurance Group (ERGO) is active in nearly all lines of life, health and property-casualty insurance. Our international health reinsurance business and health primary insurance outside Germany are combined under the Munich Health brand. Munich Re is also active in the field of asset management.
Munich Health operates on a global basis in reinsurance and exploits business opport unities in the field of health primary insurance outside Germany in selected growth markets such as the Gulf region and India, and in established markets such as Spain.
Current information on Munich Re is also provided on our website at www.munichre.com
— Reinsurance offers full range of products, from traditional reinsurance to innovative solutions
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 under the motto “NOT IF, BUT HOW” are key to our success.
The Germany, Asia Pacific and Africa Division conducts property-casualty business with our clients in Germany, Africa, Asia, Australia and the Pacific Islands. As is already the case in the Global Clients/North America Division, facultative business (reinsurance of single risks) will now also be pooled in the two other regional divisions – Europe and Latin America, and Germany, Asia Pacific and Africa.
Health primary insurance1 Property-casualty primary insurance Munich Health2 Asset management 1 Health primary insurance in Germany and travel insurance business. 2 Health reinsurance business worldwide and health primary insurance business outside Germany.
Life Munich American Reassurance Company, Atlanta, Georgia Munich Re, Tokyo (Life Branch) Munich Re, Toronto (Life Branch) Munich Reinsurance Company of Australasia Ltd. – New Zealand Branch, Auckland Munich Reinsurance Company of Australasia Ltd., Sydney Munich Re, London (Life Branch)
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
Primary insurance 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, with various business models in all forms of life, annuity and health insurance and in nearly all lines of property-casualty 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.
Our primary insurer transacts life and property-casualty insurance under the ERGO brand. This broad offering is supplemented by legal protection insurance from D.A.S., health insurance from DKV, and travel protection insurance from ERV or ERGO Direkt, ERGO’s specialist for direct sales. ERGO’s many different sales channels include not only its companies’ own successful intermediary organisations and direct selling by phone and via the internet but also broker relationships and marketing cooperations, such as the extensive collaboration with the UniCredit Group.
Integrated management of the segments With its largely integrated management of all segments and administration processes, ERGO is striving in its German business for high-quality service for its clients and sales partners and for high profitability. A single back office supports the various ERGO companies and sales organisations. Corporate functions such as accounting, finance, human resources, information technology and sales management are organised in divisional units and divisions with central responsibility. With the exception of travel insurance, international business is managed under one Board member’s area of responsibility.
Great Lakes, Zurich Great Lakes, Dublin Great Lakes, Milan Munich Re of Malta p.l.c., Ta’ Xbiex3
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 healthcare-sector value chain and has been shown as a separate segment since 2010.
Munich Re’s objective is to analyse risks from every conceivable angle and to assess and diversify them, creating lasting value for shareholders, clients and staff through high profits in relation to the risks assumed. A guiding principle of our entrepreneurial thinking and activity is to increase Munich Re’s share price on a sustained basis. This is the aim of our active capital management and the consistent application of valuebased management systems.
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 also observe a range of important additional conditions in managing our business. These conditions may even determine a unit’s short-term orientation in a particular situation. They include rules of local accounting systems, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
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. Our business activities are multi-faceted, and the parallel use of different performance indicators is unavoidable.
Details of our risk strategy are available on page 110 ff.
At Group level, the main performance metrics are economic earnings and the return on risk-adjusted capital after tax (RORAC).
Central performance measurement is conducted separately for our underwriting and investments. The main factors here, besides value changes from our new business, are in particular the changes from the market risk (interest, shares and exchange rates), changes from the credit risk (risk spreads, credit ratings and defaults), changes from the market environment of health and life insurance business (mortality, morbidity, longevity and lapses) and the development of claims and costs in property-casualty business.
Information on the internal risk model is provided on page 118 ff.
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 by the internal risk model, and assigned return requirements. If the risk capital exceeds the available economic equity, we set the adjustment item in the RORAC formula to zero.
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.
We compare the result adjusted in this way with the requisite cost of capital on the basis of risk capital.
IFRS consolidated result The IFRS consolidated result is a performance measure derived from our external group 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 liabilities in the same way. For this purpose, we mirror important features of the liabilities – such as maturity patterns, currency structures and inflation sensitivities on the assets side of the balance sheet – by acquiring investments with similar characteristics, where possible. This reduces our vulnerability to the effect of capital market fluctuations and stabilises our equity.
For us, the combined ratio by itself is not a sufficiently informative performance measure. It is only of limited suitability for comparing the financial performance of competitors owing to differing calculation methods and portfolio mixes. Generally, however, we aim to keep the combined ratio as low as possible by means of good underwriting and claims management.
Dr. oec. publ. Wolfgang Strassl (until 31 December 2013) (Labour Relations Director) (until 30 September 2013) Health (from 1 October 2013 together with Dr. von Bomhard) Human Resources (until 30 September 2013)
Dr. oec. publ. Joachim Wenning (Labour Relations Director) (since 1 October 2013) Life Human Resources (since 1 October 2013)
Dr. jur. Hans-Jürgen Schinzler (Honorary Chairman) Member from 2 January 2004 until
Frank Fassin Member since 22 April 2009 Regional Section Head Financial Services, ver.di North Rhine-Westphalia
Christian Fuhrmann Member since 22 April 2009 Head of Divisional Unit, Munich Reinsurance Company
Peter Löscher Member since 22 April 2009 President of the Board of Trustees of the Siemens Foundation and former Chairman of the Board of Management of Siemens AG
Wolfgang Mayrhuber Member since 13 December 2002, last re-elected 22 April 2009 Chairman of the Supervisory Board of Deutsche Lufthansa AG
Marco Nörenberg Member since 22 April 2009 Employee of ERGO Versicherungsgruppe AG
Anton van Rossum Member since 22 April 2009 Former Chief Executive Officer and former member of the Board of Fortis
Richard Sommer Member since 22 April 2009 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 22 April 2009 Chairman of the Supervisory Board of MTS OJSC, Russia
Personnel Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Herbert Bach Wolfgang Mayrhuber
Conference Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Herbert Bach Hans Peter Claußen Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann
Wolfgang Mayrhuber Bayerische Motoren-Werke AG Infineon Technologies AG (Chairman) Deutsche Lufthansa AG (Chairman) Lufthansa-Technik AG (until June 2013)
Silvia Müller ERGO Versicherungsgruppe AG2 – Marco Nörenberg ERGO Versicherungsgruppe AG2 – Reinhard Pasch – – Anton van Rossum – Credit Suisse Groupe AG,
Andrés Ruiz Feger – – Richard Sommer ERGO Versicherungsgruppe AG2 – Dr. phil. Ron Sommer – Sistema Shyam Teleservices Ltd.,
In accordance with Section 4 of the German Corporate Governance Code, the remuneration system for the Board of Management is determined and regularly review ed by the full Supervisory Board. The Personnel Committee of the Supervisory Board, comprising the Chairman of the Supervisory Board, one shareholder represen­ tative and one employee representative, prepares the resolutions for the full Supervisory Board.
The remuneration system for members of the Board of Management focuses strongly on long­term objectives, and thus creates a pronounced incentive for sustainable corporate development. Adjustments were made to the variable remuneration component as at 1 January 2013. Particular attention was paid to simp lifying the current system of objectives by focusing on the most important personal objectives. In addition, the Supervisory Board was given the possibility to react to developments during the year.
Group objective Business field objectives Divisional objectives Personal objectives Overall performance 0–200% (fully achieved = 100%)
Pension a) Defined benefits plan (Board members appointed prior to 2009 who had reached the age of 55 in 2008)
Fixed > Retirement > Insured event > Premature termination or non­extension of employment con­ tract under certain circumstances
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 indiv idual members of the Board of Management. Its amount depends on the extent to which the annually set objectives for annual and multi­year performance are met, and how the component newly introduced in 2013 “Evaluation of overall performance” – which considers the performance of individual members of the Board and of the whole Board – is assessed.
Processes have been laid down for specifying objectives and assessing their achieve­ ment, and these processes require review by the external auditor, who checks the criteria for measuring the envisaged financial objectives and whether their achieve­ ment has been assessed in accordance with the guidelines established by the Company. The outcome of this review is notified to the Supervisory Board.
Variable remuneration based on annual performance Firstly, annual targets for the variable remuneration component geared to annual performance are set on the basis of the consolidated result of Munich Re (Group), the results from the business fields reinsurance and primary insurance, divisional results and personal objectives. In addition, for financial years as from 2013 the Supervisory Board assesses overall performance – particularly performance not taken into account in the objectives – of the Board of Management and the individual Board members, and it also takes into account developments during the appraisal period that are beyond the influence of the Board. Full achievement of the annual objectives (100%) allows for payment of 30% of the overall target amount for variable remuneration.
Details of the assessment bases for the annual performance can be seen in the following table:
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 one­year assessment period. Payment is effected on condition that 50% of the net payout amount is invested in Munich Reinsurance Company shares that must be held for at least a four­year period.
Full and pro­rata calculation of the variable remuneration for annual and multi­year performance The basis for the full and pro­rata calculation of the variable remuneration is the first year. Only the “eligible” months in this year are taken into account (pro rata temporis). In the case of retirement, occupational disability, death or premature departure from the Company for other reasons, the rules for the full and pro­rata calculation apply.
Share­based remuneration agreements in force during the reporting period Long­Term Incentive Plan This remuneration component, with a long­term perspective, is linked to the sustained appreciation of Munich Re’s share price. The Long­Term Incentive Plan, launched each year since 1999, was set up for the last time in 2009 for members of the Board of Management. The participants were granted a certain number of stock appreciation rights. These could only be exercised if, after a two­year vesting period, Munich Re’s share price had risen by at least 20% since inception of the plan and the shares had outperformed the EURO STOXX 50 at least twice over a three­month period during the term of the plan.
Category of objective Share1 Assessment basis Parameters Collective contribution 20%–60% to corporate success Business field objectives (three­year average) – Reinsurance Value­based economic Components of economic earnings:2 performance indicators: – Property­casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in­force business – Primary insurance Value­based economic Economic earnings2 performance indicator – Munich Health Value­based economic Component of economic earnings:2 performance indicator – Value added Individual contribution 20%–60% to corporate success Personal objectives Personal objectives Special focal points such as (three­year period) per Board member – Staff development, including diversity – Sustainable development, social tasks Overall performance evaluation 20% Performance of individual Assessment by Supervisory Board taking Board members and the Board as a into account Section 87 of the German Stock whole that is not considered in the Corporation Act and the German objectives or subject to developments Corporate Governance Code during the year 1 The objectives are weighted individually according to the responsibilities of the individual Board members. 2 Further information on economic earnings is provided on page 38.
All in all, the remuneration system for members of the Board of Management conforms with the recommendations of the German Corporate Governance Code for 2013. In particular, it also complies with the German Remuneration Regulation for Insurance Companies (VersVergV) of 6 October 2010 concerning the supervisory law require­ ments for remuneration schemes in the insurance sector.
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 recommen­ dations from the Supervisory Board’s Personnel Committee. Criteria for the appro­ priateness 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 peer­group companies. New Board members are generally placed at a level which allows sufficient potential for development of the remuneration in the first three years.
Other remuneration In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular remuneration computation. This excludes remuneration for board memberships explicitly recognised by the Company as private.
The members of the Board of Management have no contractual entitlement to severance payments. If the Board member’s activities on the Board are terminated prematurely, payments due may not surpass the equivalent of two years’ total remuner­ ation (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29 para. 2 of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is to be based on the overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
As of 2009, members of the Board appointed for the first time have become members of a defined contribution plan. For this plan, the Company provides the Board members with a pension contribution geared to their target overall direct remuneration for each calendar year (contribution year) during the term of their contract. The pension contri­ bution is paid over to an external pension insurer. The insurer’s guaranteed interest rate is 2.25% (or 1.75% for Board members first 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. For Board members first appointed as from 1 January 2009, a uniform pension contribution rate of 25.5% of the target overall direct remuneration has been set.
The defined benefits are fixed on the basis of “pensionable basic remuneration”, which corresponds to 25% of the target overall direct remuneration. In the case of the defined contribution plan, the rate is fixed on the basis of the target overall direct remuneration. The Supervisory Board determines the relevant target pension level for pension commitments from defined benefit plans and defined contribution plans – also considering length of service on the Board – and takes account of the resultant annual and long­term cost for the Company.
— For Board members transferred from the old system to the new: 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 defined benefit plans: Defined benefit of between 30% and 60% of pensionable basic remuneration
— Under the defined contribution plan for members first appointed as from 2009: 80% of the insured occupational pension up to the age of 59, with subsequent occupational pension
— For Board members transferred from the old system to the new: Vested pension from defined benefit plan up to 2008 and 80% of the insured occupational pension up to age 59 with subsequent occupational pension based on the defined contri­ bution plan
Reduced occupational pension on early retirement Board members are entitled to an occupational pension if the contract of employment is terminated as a result of non­extension or revocation of their appointment without their having given cause for this through a gross violation of their duties or at their own request. The precondition is that the Board members have already passed the age of 50, have been in the employment of the Company for more than ten years when the contract terminates, and have had their appointment to the Board of Management extended at least once.
— For Board members transferred from the old system to the new: Entitlement of between 30% and 60% of pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 65th birthday; the Company assumes payment of the difference between the monthly occupational pension and the monthly incremental pension from the external insurance
Improved vested benefits: Improved vested benefits are granted if the contract ends owing to non­extension 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 pre condition is that the Board member leaves the Board before reaching the age of 60 and has at least ten years’ service with the Company.
Provision for surviving dependants In the event of the death of a Board member during active service, the surviving dependants receive the previous monthly basic remuneration for a period of six months if the deceased was appointed to the Board of Management prior to 2006. In the case of Board members appointed as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. If the Board member’s death occurs after retirement, the surviving dependants receive the previous monthly occupational pension for a period of three months, provided the marriage/registration of the civil partnership took place and/or the child was born before the Board member started drawing the occupational pension. If the Board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
Pension adjustment In the case of Board members appointed prior to 2009, occupational pensions and pensions for surviving dependants are reviewed for adjustment if salaries payable under pay­scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay­scale 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 first appointed between 1 January 2009 and 31 March 2012 who received a pension commitment from the Company for the first time before 1 January 1999. For Board members first appointed as from 2009 who did not receive a pension commitment from the Company before 1 January 1999, and for Board members first 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 para. 3 (1) of the Employers’ Retirement Benefits Act. Vested benefits are not adjusted.
Munich Re Group Annual Report 2013 amount paid out for annual performance is projected to decrease by €1.6m, as the overall achievement of objectives was lower than in the previous year according to current estimates.
2 The amounts paid out in 2013 were for multi­year performance 2010–2012. 3 Remuneration in kind/fringe benefits for 2013 including anniversary payment.
Remuneration of individual Board members as per DRS 17 (revised 2010) (in accordance with Section 285 sentence 1 (9a) sentences 5–8 of the German Commercial Code (HGB) and Section 314 para. 1 (6a) sentences 5–8 of the German Commercial Code)
Remuner­ Basic ation in Annual Multi­year Financial remuner­ kind/fringe perform­ perform­ Name year ation benefits ance1 ance2 Total
The Company result bonus allows employees to share in corporate success. The key indicator used for the Company result bonus is RORAC. The targets correspond to the Group objective for the variable remuneration of members of the Board of Management. Depending on the degree to which the RORAC target is met, an aggregate amount is
Georg Daschner 6 2013 – – – – 2012 – – – –
1 In the case of Board members transferred from the old system to the new, the amount corresponds to the value of the annual vested pension at 31 December 2008; in the case of Mr. Daschner, it corresponds to the defined benefit at 31 December.
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 vested benefits under the Employers‘ Retirement Benefits Act in the event of premature termination of employment, and to a reduced occupational pension on early retirement in the event of regular termination of employment. 5 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. 6 No transfer to defined contribution system, as Board member had already reached 55 at the conversion date. Entitled to an occupational pension in the event of premature or regular termination of employment. 7 Entitled to a reduced occupational pension on early retirement in the event of premature or regular termination of employment. 8 Left the Company as at 31 December 2013 owing to regular termination of employment and is entitled to a reduced occupational pension on early retirement of €175,560 p.a. 9 Entitled to vested benefits under the Employers‘ Retirement Benefits Act in the event of premature termination of employment up to 2 January 2015, and to a reduced occupational pension on early retirement in the event of premature termination of employment as from 3 January 2015 or regular termination of employment. 10 Entitled to an occupational pension in the event of termination of employment owing to incapacity to work.
11 Defined contribution plan within the meaning of IAS 19, Employee Benefits, so no present value shown.
Members of the Supervisory Board committees receive an additional 50% of their fixed remuneration, with the Chairs of the committees receiving an additional 100% of their fixed remuneration. This takes account of the substantial workload involved.
The resolution passed by the Annual General Meeting 2013 to switch the remuneration of the Supervisory Board to a purely fixed remuneration will not be effective until the financial year 2014.
1 Plus turnover tax in each case, in accordance with Article 15 para. 6 of the Articles of Association (version 09/2013). 2 Including attendance fees in the case of members of the Audit Committee and/or Nomination Committee, as per Article 15 para. 4 of the Articles of Association (version 09/2013). 3 After capping in accordance with Article 15 para. 5 of the Articles of Association (version 09/2013).
Result­ related Fixed remuneration remuneration For committee Name Financial year Annual2 work2 Annual Total
In primary insurance, global premium income for 2013 in the segments property- casualty and health showed somewhat stronger growth after adjustment for inflation than in the previous year. Whilst the weak eurozone economy dampened demand for insurance and thus also business potential for reinsurance, premium development was buoyed by a further very dynamic increase in demand for insurance cover in many emerging markets. A further positive contribution came from price increases on the US market, by far the largest property-casualty insurance market in the world. Rate development varied globally: industrial insurance in particular saw prices decline in many regions. In 2013, growth in global premium income in life primary insurance was only moderate after adjustment for inflation, mainly owing to weak premium development in a number of large emerging markets.
Last year’s consolidated profit exceeded our expectations. At €3.3bn, the result we achieved was again very good, partly thanks to a particularly low tax burden. In property-casualty reinsurance, our profit was really strong again at €2.4bn, with major losses remaining below the volume to be expected. Life reinsurance also accounted for a gratifying €0.4bn, despite various adverse factors. ERGO’s result contribution of €0.4bn can be regarded as very positive in that it was higher than projected and a number of negative factors had to be absorbed. Munich Health’s result of €0.15bn was respectable, with the sale of the Windsor Health Group (WHG) ultimately turning out better than anticipated.
The return on risk-adjusted capital (RORAC) totalled 12.2% for the 2013 financial year, compared with 13.2% in 2012. The RORAC for 2013 was thus below our long-term target of 15%. This target, which we set for the first time in 2006 when market interest rates were significantly higher, is very difficult to reach in the current low-interest-rate environment. We thus significantly exceeded our profit target of close to €3bn for 2013, which is equivalent to a RORAC of around 11%.
The economic earnings in the year under review were mainly due to effects from new and existing business in the field of underwriting. These effects were chiefly influenced by parameter changes, particularly the adjustment to the evaluation of customer behaviour in life primary insurance and adjustments in health primary insurance. While in 2012 economic value added was substantially influenced by interest-rate effects, during the year under review the positive impact from equities and interest rates was offset by currency losses and other negative effects.
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 €7.25 (7.00) per dividend-bearing share.
Dividend proposal: €7.25 per share 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 Excluding health insurance conducted like life insurance.
Key figures1 2013 Prev. year Change % Gross premiums written €bn 51.1 52.0 –1.7 Combined ratio
Technical result €m 3,656 3,859 –5.3 Investment result €m 7,657 8,442 –9.3 Operating result €m 4,409 5,349 –17.6 Taxes on income €m 108 878 –87.7
% 2013 Prev. year Reinsurance life 97 97 Reinsurance property-casualty 95 96 Primary insurance life 25 25 Primary insurance health 4 4 Primary insurance property-casualty 40 42 Munich Health 99 98
— Decline in premium income of 2.7% to €10.8bn influenced by currency translation effects
The positive development in premium volume in recent years was significantly influenced by a number of large-volume treaties where reinsurance primarily serves as a capital substitute. As a financially strong partner, we provide customised solutions that improve our clients’ capital structure and solvency. In 2013, we were once again able to conclude or renew a number of such treaties. It is in the nature of this business segment, however, that premium development can be volatile.
We also saw a moderately positive development in our core business – the systematic acceptance of underwriting risks. One of the reasons for this lay in the continuing dynamic expansion of the primary insurance markets in Asia, in which we participate thanks to our good position as a reinsurer. Growth in our North American business was slightly positive, despite the stagnating trend in primary insurance. On the other hand, the sluggish economy in many developed regions impacted our clients’ business development and hence reduced reinsurance business potential.
In Australia, group disability business saw a market-wide increase in claims. On top of this, we had to make additional provision for more frequent and more costly claims under individual contracts. In the USA, we posted increased expenses – especially in the first three quarters of the year – for mortality covers, particularly under treaties written in the past decade. Moreover, expenditure involving policies with high sums insured was greater than in previous years.
In life reinsurance, we operate on a global basis and have local presences in most of the important markets. Our business model is geared to the clients’ requirements in the individual markets. Our focus is on traditional reinsurance solutions involving the assumption of underwriting risks and, where required, we can provide a wide range of services along our clients’ entire value chain. These include software solutions for automating the risk assessment process that are available worldwide from our sub sidiary Munich Re Automation Solutions Limited. We also offer tailor-made structured concepts geared to optimising liquidity or specific items on our clients’ balance sheets. These concepts have met with particular success in Europe, Asia and Canada. For several years now, there has been increasing demand for the management of capital market risk embedded in life insurance products. We have therefore created the infrastructure necessary to provide our clients with comprehensive solutions for covering options and guarantees dependent on the capital markets. We hedge the exposure related to this on the capital markets as well. In all fields of our business activity, our clients benefit from our global expertise relating to insurance products and biometric risks, from our structuring know-how and, in particular, from our capital strength.
2013 was another very successful year for our Canadian branch. Munich Re, Toronto (Life) consolidated its position as market leader in all lines in which it conducts business: life, disability, health, critical illness and long-term care. The premium income1 accounted for in the life reinsurance segment totalled €4.3bn (4.5bn). The decrease is solely attributable to currency translation effects; in original currency, premium volume increased by 3.2%. The high premium level and very favourable claims experience contributed to an outstanding technical result again.
Good results in Canada and Asia 1 €3.1bn (3.2bn) is posted in the Munich Health segment, on which we report on page 81 f.
Asia is one of the most dynamic economies in the world. We are expecting it to lend sustainable positive impulses to our business development. In recent years, we have positioned ourselves as one of the leading reinsurers in the region by means of a broad regional infrastructure with branch offices especially in the core markets of China, Singapore and Japan. The positive trend in new business continued in 2013. Although premium declined to €0.7bn (1.2bn), this decrease is explained by currency translation effects and the planned termination of a number of large-volume treaties for strengthening our clients’ balance sheets. The factors responsible for this success are our broad product range and comprehensive expertise with which we can respond flexibly to the different requirements of our clients and the various markets. The technical result was again very satisfactory.
— Slight decline in premium income of 0.2% to €17.0bn influenced by exchange rate effects
The renewals for 2013 took place in a very competitive market environment. Given the primary insurers’ good capitalisation, demand for reinsurance cover remained relatively stable overall. At the same time, growth on the primary insurance side continued to be impacted by the difficult economic environment, but nevertheless remained largely constant. Reinsurers, on the other hand, provided ample capacity. In the area of nonproportional natural catastrophe covers, we are currently seeing an increase in capacity from capital providers new to the market. Especially pension funds regard reinsurance as an attractive investment alternative for diversifying risks and meeting return requirements in the present low-interest-rate environment. This is raising the pressure on rates, particularly in the US market.
As a consequence of our profit-oriented underwriting policy, we were again prepared to withdraw from business in 2013 that did not meet our return requirements. For example, we continued to reduce European property business for cycle-related reasons.
The consolidated result in property-casualty reinsurance was down on the previous year at €2,384m (2,559m). The operating result, which includes the investment result and technical result, fell to €2,993m (3,597m). The technical result totalled €2,468m (2,788m), benefiting from lower-than-expected major-loss expenditure. Munich Re’s customary review of reserves resulted in a reduction in the claims provisions for prior years amounting to around €800m for the full year, which is equivalent to around 4.7 percentage points of the combined ratio. This positive development essentially concerned property and marine business. 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.
Major-loss expenditure totalling €1,689m (1,799m) after retrocession and before tax was lower than in the previous year. 2013 was hit by a large number of major losses, but there were no individual occurrences of exceptional volume.
At €925m (515m), man-made major losses were much higher than in the previous year, or 5.7 (3.1) percentage points of net earned premium. Sizeable losses resulted from the evacuation of and loss of production in a mine in the USA (€93m) and an explosion in a Chinese chip-manufacturing plant (€90m). We made provisions totalling €75m for a damaged hydroelectric power station in Russia. A loss resulting from the bond insurance covers for residential housing in Spain led to expenditure of €68m. A liability claim totalling €65m also impacted our result.
The investment result amounted to €1,762m (2,148m), the reduced figure being attributable to lower interest income from fixed-interest securities owing to the still low interest-rate level. Moreover, we posted high write-downs, especially on our inflation and equity derivatives and on our portfolio of physical gold.
The division’s premium volume was up marginally to €3,524m (3,508m) overall, mainly owing to our portfolio in China and Australia, where profitable new business more than offset a certain attrition due to lower reinsurance cessions under individual large- volume treaties and from some major clients. In addition, business in the German market was expanded and the portfolio in Japan successfully renewed, despite some increasing pressure on prices. By contrast, our premium volume in Africa was down year on year.
The division’s premium volume decreased to €3,677m (3,861m) in total, chiefly owing to portfolio reductions in cases where it proved impossible to achieve adequate prices, terms and conditions. We succeeded in further optimising our portfolio through profitable new business and the expansion of natural catastrophe covers. 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 and Latin America.
The Europe and Latin America Division posted below-average major-loss expenditure, the biggest loss events being Hurricanes Manuel and Ingrid in Mexico, Windstorm Christian in northern Europe and damage to a hydroelectric power station in Russia. Further enhanced by our rigorous portfolio optimisation and the release of loss reserves for prior underwriting years, the previous year’s already low combined ratio improved even further to 88.5% (92.7%).
The Global Clients and North America Division writes the international business of defined global clients (around 20%), worldwide Lloyd’s business (around 20%) and property-casualty business in the USA and Canada (around 60%).
The Special and Financial Risks Division writes business in the specialty classes of agriculture (around 35%), credit and bond (around 20%), and aviation and space (around 10%). This division also comprises Corporate Insurance Partner (around 20%), the Risk Trading Unit, and our Swiss subsidiary New Re Insurance Company Ltd. (New Re)(around 15%).
Total premium income in life primary insurance – including the savings premiums from unit-linked life insurance and capitalisation products – dropped to €6.9bn (7.3bn) in 2013, a decline of 5.7% compared with the previous year. Gross premiums written amounted to €5.5bn (5.8bn), 5.3% less than in 2012. These developments reflect the widespread economic uncertainty in Germany and abroad, and low interest rates.
At €5.1bn, overall premium income from Germany was down 5.6% on the previous year (€5.4bn). Single-premium income declined by 19.0%, notably in business generated by the capitalisation product MaxiZins and in group life business, owing to lower premium from the German insolvency fund for pensions. New regular-premium business also decreased by 23.8% year on year. Since January 2013, new business fell by 20.2% to €1,144m (1,433m) overall. In terms of annual premium equivalent (APE, i.e. regular premium income plus one-tenth of single-premium volume, the performance measure customary among investors) our new business volume was 22.5% lower than in the same period last year. Gross premiums written in Germany declined overall by 5.1% to €4.1bn (4.4bn).
1 Total premium income includes not only gross premiums written but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the statutory accounting guidelines applicable in the insurer’s home country.
At €1.7bn (1.8bn), overall premium income from international business decreased by 6.0% year on year. In Poland, we generated less premium income from sales through banks. In Austria, we earned lower single-premium income, especially in unit-linked life insurance. Inter national new business declined by 0.3% to €792m (794m). Measured in terms of APE, however, the decrease came to 2.0% owing to lower regular premium income (–2.7%), with Turkey and Austria seeing the biggest decline. Gross premiums written in international business fell by 6.0% to €1.35bn (1.44bn).
ERGO now also provides life insurance policies in the Chinese market through the joint venture ERGO China Life, which commenced operations at the beginning of September 2013. This joint venture, launched by ERGO and the Chinese state-owned financial investor SSAIH, is focusing on the economically attractive province of Shandong. With roughly 97 million inhabitants, Shandong is China’s third-largest insurance market. As the company is accounted for using the equity method, its business is not included in the consolidated premiums written, but it is an important initiative for gaining a foothold in the Chinese market.
4051New business in life insurance 2013 Prev. year Change €m €m % Germany
Annual premium equivalent1 243 248 –2.0 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
The technical result for the financial year totalled €400m (384m), the increase being partly attributable to an improved claims situation in travel insurance in Germany and abroad. At €1,321m (1,245m), the investment result also developed favourably, especially due to higher regular income. We improved the operating result to €284m compared with the previous year (€240m). The consolidated result rose to €130m (89m).
Key figures 2013 Prev. year Change % Gross premiums written €m 5,507 5,554 –0.8 Share of gross premiums written in primary insurance % 33.1 32.5 Loss ratio % 62.5 64.7 Expense ratio % 34.7 34.0 Combined ratio % 97.2 98.7 Operating result €m 427 290 47.2 Consolidated result €m 169 –4 –
In international business, we recorded an improved combined ratio of 98.7% (99.8%), essentially owing to a further amelioration in claims experience in Turkey and to the sale of ERGO Daum. The result improvement measures we have taken in recent years are paying off.
— Gross premiums of €6.6bn slightly below level of last year — Improved combined ratio of 98.3% in the year under review — Decreased investment result of €95m — Increased consolidated result of €150m
Owing to adverse currency translation effects, gross premiums written fell slightly as against the previous year by 2.3% to €6.6bn (6.7bn).
Premium volume in reinsurance amounted to €4.6bn (4.7bn), including premium income from large-volume treaties providing capital relief for our clients in North America. They are written by our Canadian subsidiary, Munich Re, Toronto (Life). The decrease in premium was due to negative currency translation effects. In primary insurance, there was a fall in premiums of 4.4%, particularly with respect to the US
The combined ratio improved to 98.3% (100.2%). This ratio relates only to short-term health business, not to business conducted like life insurance, with the figure for the latter amounting to 7.8% (7.3%) of gross premiums written in the year under review.
In reinsurance, the combined ratio amounted to 99.8% (99.1%), while the figure for primary insurance in the year under review was 93.5% (103.3%). The improvement is due in particular to the discontinuation of WHG’s US Medicare business with pure cost reimbursement products.
— Investment result reaches €7.7bn — Return on investment (RoI) of 3.5%
Designated as at fair value through profit or loss Fixed-interest – – – – 163 167 – – – – – – – – 163 167
Despite the uncertainty over the development of the sovereign debt crisis, the capital markets calmed further in the course of 2013. Risk spreads for fixed-interest securities fell, and stock market volatility was also down on the previous year. In the period under review, the EURO STOXX 50 climbed by about 18%, the Dow Jones and the DAX 30 both by around 26%. Starting from a historical low, particularly yields on German, US and UK government bonds and covered bonds rose. We also saw higher yields on corporate bonds, despite shrinking risk spreads.
We select our investments according to economic criteria and gear them to the characteristics of our technical provisions and liabilities. In addition, we use derivative financial instruments for portfolio management and hedging against fluctuations on the interest-rate, equity and currency markets. Volatilities on the capital markets result in changes in the values of derivatives, which under IFRS accounting we recognise in profit or loss.
Other investments 12% (10%) Shares and equity funds 4% (3%) Real estate 2% (2%) Participating interests 1% (1%)
Deposits retained on assumed reinsurance 7,847 7,240 1,279 1,181 128 147 1 1 5 4 376 394 – – 9,636 8,967
Our on- and off-balance-sheet unrealised gains and losses (excluding owner-occupied property), which could be turned into realised gains upon disposal of the relevant investments, fell from €22.5bn to €15.2bn.
1 Including other public-sector issuers and government-guaranteed bank bonds. 2 Presentation based on approximation and not fully comparable with IFRS figures. 3 Country exposures with more than €1.5bn each within these asset classes. 4 Especially EU and EFSF.
Our portfolio of government bonds, covered bonds and corporate bonds has a good rating structure: as at 31 December 2013, approx. 85% were rated AAA to A.
The carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies and associates at market value) rose in the course of the year. Our equity-backing ratio was 4.6% (3.7%). The derivatives used to hedge our equity portfolio were reduced. Including hedges, our equity-backing ratio was 4.5% (3.4%). 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 volume of €6.8bn (6.8bn) and inflation-linked swaps for a notional amount of €4.5bn (5.2bn). Real assets like shares, property, commodities, and investments in renewable energies and infrastructure also serve as protection against inflation. In the year under review, we invested around €0.4bn in physical gold. Additionally, our investments in real assets have a positive diversification effect on the overall portfolio.
Senior bonds 84 82 Loss-bearing bonds 5 6 Subordinated bonds 11 12 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 €670m (–8m), particularly on our inflation and equity derivatives and swaptions. The latter are used in hedging longterm interest-rate guarantees extended to life insurance clients. Owing to the negative development in gold prices in the 2013 financial year, we had to make write-downs of €108m on our gold portfolio. The original acquisition cost of the portfolio was around €400m.
1 Details of the result by type of investment are shown on page 243 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.
Write-ups/write-downs –670 –0.3 8 0.0 Net realised capital gains 1,059 0.5 652 0.3 Other income/expenses –230 –0.1 21 0.0
Under insurance-linked derivatives, we subsume the derivative portions of natural catastrophe bonds and of securitisations of mortality and morbidity risks, individually structured insurance-linked derivatives, and derivative components separated from their host contract. This category also includes retrocessions concluded in the form of derivatives used to hedge assumed insurance risks, and embedded derivatives in variable annuities and their derivative hedging instruments. All income and expenditure arising from our insurance-linked derivatives is shown as a result from derivatives in the investment result.
Insurance derivatives 31.12.2013 Prev. year Change €m €m % Insurance derivatives in investments 569 532 7.0 Liabilities from insurance derivatives 427 461 –7.4 2013 Prev. year Change €m €m % Result from insurance derivatives 4 17 –76.5
Assets under management for third parties 31.12.2013 Prev. year Change €bn €bn % Third-party investments 12.9 11.5 12.1
Thereof: External institutional investors 10.2 9.3 10.5 Thereof: Private-client business 2.7 2.2 18.4
Our primary insurance and reinsurance operations have a significant influence on our balance sheet: as we have consistently geared our Group toward value creation in its core business, investments on the assets side of the balance sheet serve to cover technical provisions (76% of the balance sheet total). Equity (10% of the balance sheet total) and bonds classified as strategic debt (2% of the balance sheet total) are the most important sources of funds.
Development of Group equity 31.12.2013 Prev. year Change €m €m % Issued capital and capital reserve 7,426 7,421 0.1
The decline in equity was attributable not only to the dividend distribution but also largely to the decrease in unrealised gains, which derived mainly from our fixed-interest securities available for sale. The consolidated result was the chief factor in increasing equity.
Our subordinated bonds are recognised in part as own funds by the German Federal Financial Supervisory Authority (BaFin). When this is considered in calculating the strategic debt, the latter is reduced to €685m and the debt leverage amounts to only 2.5%.
Reinsurance business accounts for approximately 32% of technical provisions, primary insurance for about 67%, and Munich Health for around 1%. In contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. This is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar and the British pound sterling.
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 (9.5bn). In addition, there were contingent liabilities.
In this approach, any deviations from the structure of our liabilities are made conscious ly, 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 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.
Through active capital management, we ensure that Munich Re’s capital is maintained at an appropriate level. Munich Re’s available financial resources must always be sufficient to cover the capital requirements determined both by our internal risk model and by the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of profitable opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group economic equity as one which does not lastingly exceed that required. Such a needs-based, risk-commensurate capital level makes a decisive contribution to financial discipline in all our business processes.
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 Munich Reinsurance Company’s revenue reserves as determined under German commercial law, and provided this does not impair our strategic
More details on ALM as a tool of corporate management are available on page 40
On 21 June 2013, we called our subordinated bond 2003/2023 on the first ordinary call date and repaid the outstanding nominal value of around €1bn after previous partial buy-backs.
Information in accordance with Section 315 para. 4 of the German Commercial Code (HGB) and explanatory report of the Board of Management
The listed registered shares are subject to transfer restrictions. The issuing of restrictedly transferable registered shares by Munich Reinsurance Company dates back to the Company’s foundation in 1880. Restricted transferability means that these shares may be transferred to another holder only with the Company’s consent, which, according to Article 3 para. 2 of Munich Reinsurance Company’s Articles of Assoc iation, is granted at the Company’s discretion. Since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. In recent decades, it has been granted without exception.
In a statement from March 2014, Berkshire Hathaway Inc. reported that its partici pation in Munich Reinsurance Company as at 31 December 2013 was around 20 million shares, equivalent to an 11.2% share of the voting rights. We have not been notified, nor have we otherwise learned, of any further changes.
Munich Re Group Annual Report 2013 requisite majority is not obtained in the initial resolution, the appointment or dismissal of the Board of Management requires a simple majority of the votes cast. The second resolution is only possible following a suitable period of reflection and after the issue has been dealt with in the competent committee, but is thereafter also possible by written consent in lieu of a meeting. In exceptional cases, members of the Board of Management may also be appointed by a court of law, pursuant to Section 85 of the Stock Corporation Act.
The German 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 AktG). 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 para. 1 sentence 2 of the German Stock Corporation Act, the Supervisory Board is empowered to make amendments to the Articles of Association which affect only the wording.
Munich Re Group Annual Report 2013 amount of €3bn with or without a limited maturity period. Shareholders are generally entitled to a subscription right in respect of these bonds, but the Board of Management is authorised, with the consent of the Supervisory Board, to exclude this subscription right in the cases specified in the authorisation. The holders of such bonds may be granted conversion or option rights in respect of shares issued by the Company up to a maximum amount of €117m of the share capital, in accordance with the respective bond or warrant conditions; as a precautionary measure, capital of €117m was conditionally authorised under Article 4 para. 3 of the Articles of Association (Contingent Capital 2010).
— Under Article 4 para. 2 of the Articles of Association, the Board of Management is authorised to increase the share capital at any time up to 19 April 2016 by an amount of up to €10m by issuing new shares against cash contribution (Authorised Capital Increase 2011). The subscription right of shareholders is excluded insofar as this is necessary to allow the shares to be issued to employees of Munich Reinsurance Company and its affiliated companies.
Furthermore, Munich Reinsurance Company as the parent has introduced suitable control methods and, when reporting to BaFin, which is also responsible for the Group, includes supplementary aspects at Group level, such as shareholdings, consolidated financial data and intra-Group transactions.
Solvency in the case of insurance companies is generally understood to be the ability of an insurer to always meet the obligations assumed under its contracts. In concrete terms, this means an insurance company must fulfil specific minimum capital requirements. The aim of the “adjusted solvency” rules is to prevent the multiple use of equity to cover risks from underwriting business at different levels of the Group hierarchy. To calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the IFRS consolidated financial statements. To determine the
Munich Re’s eligible capital 2.6 times higher than the legal requirement
Munich Re Group Annual Report 2013 eligible capital elements, the IFRS equity is adjusted; in particular, it is increased by portions of the subordinated liabilities and reduced by intangible assets. Munich Re’s eligible capital is 2.6 times higher than the legal requirement.
In the consolidated cash flow statement, the consolidated profit of €3,342m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is adjusted by €4,049m to take account of the higher technical provisions. The net gains on the disposal of investments – which in adjusting the consol id ated profit have to be deducted from the cash flows – are essentially attributable to the disposal of securities available for sale and to derivatives.
Inflows from the sale and/or maturity of investments were determined by cash flows from investing activities. They exceeded the outflows for the acquisition of investments by €752m. With economic effect from the fourth quarter of 2013, we sold the fully consolidated subsidiary Windsor Health Group, Inc., Atlanta, Georgia, including its subsidiaries. In the cash flow statement, we have reduced the sales price by the cash held by the entity sold. In the 2013 financial year, via its subsidiary MR RENT- Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in a wind park in Sweden for a total of €47m. In the cash flow statement, we have reduced the purchase prices by the cash held by the company acquired.
The product we sell is invisible and sometimes difficult to understand, so we need to be close to clients, understand their needs, and give them comprehensive advice. All three business fields focus particularly on close consultation and successful cooperation with our clients and sales partners with the objective of offering them optimum solutions. We want to be a competent, reliable and transparent partner, whom they can trust.
Depending on the clients’ wishes, we work directly with them or via the reinsurance brokers they commission. We maintain relationships with all relevant reinsurance brokers at local operating and strategic level, and develop these contacts system atically in order to adapt them to changing circumstances. We view brokers as competent client representatives and key know-how partners in developing new, client-centric solutions.
Specialised client managers are responsible for determining clients’ needs as precisely as possible and offering tailor-made solutions and support. To this end, we bring all our knowledge and innovative strength to bear and do not shy away from taking unusual approaches – true to our claim NOT IF, BUT HOW. We regularly assume a pioneering role in new coverage concepts, such as preparing European cedants for the intro duction of Solvency II. In addition, we offer our clients consultancy and other risk-related services. We reach new client groups through our operating field Risk Solutions, where we provide customised solutions for corporate clients and industrial firms. Predom inantly in North America, but also in the Asia-Pacific region, we generate business via managing general agencies (MGAs). Beyond this, our target groups include public- private partnerships and insurance pools. With branches and subsid iaries around the world, we ensure that our clients can always find us where they need us.
Since 2011, ERGO has responded to consumer demand for clear and comprehensible communication with its “clear language” initiative. Insurance conditions and product information have been simplified and shortened, letters to clients revised and binding writing rules issued. As the first German insurer, ERGO underwent extensive testing by TÜV Saarland for comprehensibility, and received the TÜV certification for understandable communication in 2013. The TÜV experts will also monitor and evaluate the further results of the “clear language” initiative.
You will find the ERGO customer report for 2013 (in German) at www.ergo.de/de/ERGO/ Verstehen/Kundenbericht
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 precisely tailored to clients’ needs in order to tap the strongly growing business potential in each market.
In reinsurance, our cedants around the world are serviced locally by our client managers in regional units. We provide our clients with tailor-made data models and reinsurance models. Alongside specialised client managers, further specialists are available to advise our clients directly on business development and offer specific service packages. These include underwriters for product design, actuaries for pricing and claims specialists for processing operative business. For mission-critical business processes such as claims handling, Munich Health offers clients supporting computer programs with automated test algorithms. Feedback from our clients plays a major role in the further development of our range of products.
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 have for some years now also included commodities, forestry, renewable energies and infrastructure as well as two sustainability funds.
MEAG’s Mandate Management Division is the interface between MEAG’s various units on the one hand, and the Group’s insurance companies and MEAG’s external clients on the other. The Division advises the Group on strategic investment issues and is responsible for tactical asset management. Around 70 experienced portfolio managers select highquality securities. The disciplined investment process means that MEAG’s retail funds also achieve a generally above-average performance, leading to corresponding recognition from independent fund-rating agencies.
Munich Re’s position as a knowledge leader is promoted by the systematic development of outstanding specialists in business-relevant knowledge areas. The existing expert career path in reinsurance has been supplemented by the establishment of Leading Expert positions, creating career paths parallel to those in management functions up to senior management level. Potential candidates for these higher-level specialist functions are prepared for their roles via development programmes. A training programme for Leading Experts with individual development measures has been offered as of this year.
New rotation and exchange programme promotes practical experience and know ledge transfer
The extensive development of the management culture and competences is the focus of the two-year initiative “ERGO – Focus on Leadership” launched last autumn. All of ERGO’s approximately 2,600 managers in Germany are currently completing this “manager triathlon” – a mandatory, multi-stage development programme. In parallel, staff are giving systematic feedback on their managers in the form of upward appraisals. The basis for this comprehensive initiative is the existing “ERGO – Guiding Principles of Leadership”, which was developed out of the 2012 employee survey. This also demonstrates our willingness to invest in staff development.
A long-term and important issue for both staff and the Group is the maintenance of health. In all areas of the Group, staff benefits include measures to promote good health. Since April, reinsurance staff in Munich have been able to anonymously seek advice for professional and private crisis situations from external specialists. This Employee Assistance Programme goes beyond established internal corporate healthsupport initiatives. At MEAG, top managers receive healthcare management training in special workshops, while more than 1,000 ERGO staff have already taken part directly in new group coaching and stress prevention training.
Taking account of professional and private needs also plays an important role in other areas of life. How this can change in different phases of life, and how to react to such changes, were the topics of ERGO generation workshops and diversity projects. These events, which were part of the ERGO diversity communication campaign, are an example of expanded diversity management across the whole Group. As part of this programme, a Diversity Council for reinsurance in North America was set up in 2013. ERGO also piloted an initiative for part-time employment of senior managers. Senior managers of the reinsurance group in Germany already have an established entitlement to part-time work.
Internationality is a key focus of diversity management, especially in reinsurance. In this connection, the number of international assignments, job rotations and international project teams was further increased in 2013. Another directly measurable success of diversity management is the continually increasing number of women in management positions in the Group over the past three years. This is also illustrated by the fact that in 2013, 41.9% of all new managers in our German reinsurance business were women.
The number of staff in the Group decreased by 1.7% (772) in comparison with the previous year. The main reason for this was the restructuring and sale of the Windsor Health Group , which still employed 968 staff in the Munich Health segment at the end of 2012.
Shareholders At the end of the year, our register of shareholders listed around 155,000 shareholders (previous year: 143,000). The vast majority of shares were held by institutional invest ors such as banks, insurers or investment companies; around 12.0% (11.4%) were in the hands of private investors. At around 74%, 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.
Over 61 56–60 51–55 46–50 41–45 36–40 31–35 26–30 21–25 Up to 20
Our largest shareholder at the end of the year was still Warren E. Buffett, who holds a stake of around 11.2% in Munich Reinsurance Company via several companies in his group (Berkshire Hathaway Inc., OBH Inc., National Indemnity Co.). Asset manager BlackRock is our second-largest shareholder with around 6.2%. The People’s Republic of China, represented by the People’s Bank of China/SAFE, China, is the third-largest shareholder with around 3%.
We continued to work intensively in 2013 to make sure that our Group-wide environmental management system is applied consistently and that we reach our target of covering 75% of all Munich Re staff. We attach great importance to a continual improvement in the quality of data collection. Seventeen of our locations have been certified to international standard ISO 14001. We have set Group-wide targets to reduce CO2 emissions – from 2009 to 2015 we will reduce CO2 emissions by 10% and the whole Group will be carbon-neutral by 2015. Most of our CO2 emissions derive from our energy consumption and our business travel.
We report on corporate responsibility in core business in the strategy section, in the risk report, in the opportunities report and in the prospects section of the management report
In the environmental field, in a public–private partnership (PPP) founded by Water Benefit Partners (WBP) and the Swiss Agency for Development and Cooperation (DEZA), we have joined together with 14 other partners to develop an innovative financing mechanism – the Water Benefit Standard – for projects in regions where there are severe water shortages.
Detailed information about Group-wide activities in the area of corporate respons ibility and our approach to the subject can be found in our corporate responsibility portal. The figures listed there in detail, and the description of the projects we are involved in, demonstrate our commitment in these areas and explain how we embrace these principles in our day-to-day work.
You can find further information about corporate responsibility at Munich Re on our website at: www.munichre.com/cr
Organisational structure To ensure that our risk management operates efficiently and effectively, we have established specific risk management functions and committees. Our Integrated Risk Management Division (IRM) supervises risk management Group-wide with the support of decentralised structures in the Group. It is headed by the Chief Risk Officer (CRO), who – like the local CROs at individual companies – is supported by multidisciplinary teams of highly qualified staff. 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, organisation and processes, and this provides the basis for active management of the risks we incur.
Additionally, there is the Group Compliance Committee (GCC), 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. In contrast to the Group Corporate Responsibility Committee (GCRC), which concerns itself with identifying sensitive issues on an abstract level and defining Munich Re’s position on them, the GCC focuses on actual reputational risks that arise from one or more specific cases or are the subject of enquiries from the business units.
— Munich Re’s risk situation in 2013 manageable and under control — Capital position still comfortable — Integrated, Group-wide system for managing operational risks
The Remuneration Committee, in accordance with the German Remuneration Regulation for Insurance Companies (VersVergV), has responsibility for designing, reviewing and enhancing the staff remuneration system, with a particular focus on variable incentive components.
Segment level The Global Underwriting and Risk Committee (GURC), which comprises members of the Reinsurance Committee (a Board committee), was created to function as a special risk committee for reinsurance.
Determining the risk strategy The assumption of risks is an essential part of our business strategy. Our risk strategy defines the extent of the risks we are prepared to incur for our clients and shareholders. The development of our risk strategy is embedded in the annual planning cycle, and hence in our business strategy. It is approved by the Board of Management and discussed regularly with the Supervisory Board. Its objectives are: The risk strategy is determined by a risk appetite defined for a series of risk criteria. The criteria are based on the capital and liquidity available and on our earnings target within specified volatility limits, and provide a frame of reference for the Group’s operating divisions: — Whole portfolio criteria relating to Munich Re’s entire portfolio of risks are designed to protect our capital and limit the likelihood of an economic loss for the year. Of particular note in this respect is the criterion “economic earnings at risk” (EEaR), which we use to manage the Group’s risk profile in such a way that our risk-bearing capacity will not fall below a defined threshold in the event of adverse business experience of the type that occurs statistically around every ten years. As at 31 December 2013, economic earnings at risk stood at €4.3bn.
The risk appetite laid down ensures that an appropriate balance is maintained between business opportunities and risks incurred. Our risk strategy process proved its worth in both the financial crisis and the sovereign debt crisis. Our business model of combining primary insurance and reinsurance under one roof ensures that – even in particularly difficult markets – we are always in a position to be a strong partner for our clients and a stable investment for our shareholders. With our broadly diversified portfolio of investments, we are well equipped for all market scenarios – even extreme ones – that could realistically arise.
Risk identification is performed by means of appropriate systems and indicators (quantitative component) and a number of risk surveys, which are supplemented by expert opinions and assessments by selected, highly experienced managers (qualitative component). Our ad-hoc reporting process provides for staff to report risks to the central risk management function (IRM) at any time.
Our financial strength is an important criterion for the success of our business. As far as our financial strength ratings are concerned, our objective for the present is the second-highest rating from each of the main agencies that rate us. Meeting this objective is a supplementary parameter of our corporate management and is monitored at regular intervals. We currently assume that our financial strength, our good competitive position and our sophisticated risk management will continue to be recognised through correspondingly high ratings.
We compare our internal risk model with the standard formula of Solvency II and take part in the Quantitative Impact Studies and stress tests (e.g. European Insurance Stress Test).
We explain the results produced by our internal risk model on page 118 ff.
Munich Re Group Annual Report 2013 checking and validating the analyses of upstream units, working closely with numerous areas and specialists to this end. This provides us with a quantitative and qualitative assessment that considers possible interactions between risks.
Quantitative risk monitoring based on indicators is carried out both centrally and within units, for example at MEAG for investments and at ERGO IRM, and then collated centrally. We monitor risks that cannot be expressed as an amount either centrally or in our units, depending on their materiality and allocation.
Our internal control system (ICS) is an integrated uniform Group-wide system for managing operational risks that covers all risk dimensions and areas of the Group. It meets Group management requirements, while complying with local regulations.
Controls performed for the ICS at entity level are based on COSO (Committee of Sponsoring Organizations of the Treadway Commission), a recognised internal control standard in the finance industry. IT-level controls are based on COBIT (Control Objectives for Information and Related Technology), an internationally recognised framework for IT governance.
Financial accounting and reporting are subject to carefully defined materiality thresholds to ensure that the cost of the internal controls performed is proportionate to the benefits derived. Significance, risk experience and compliance are taken into account in determining the thresholds. All risks significant for financial reporting from a Group perspective are integrated into the ICS in accordance with uniform criteria. The ICS risk map is checked annually by the risk carriers, and updated and amended as necessary.
Our main operational risks are controlled at a number of levels. We rely primarily on automated, system-based checks of the content of our defined processes.
The aim of our external risk reporting is to provide clients and shareholders with a clear overview of the Group’s risk situation. This includes information on our risk management methods and processes, our risk governance, and the individual risks to which Munich Re is exposed.
Changes in client biometrics or lapse behaviour are risks that have a long-term effect on the value of a portfolio, making it necessary to adjust the actuarial assumptions. In health insurance, morbidity risks are understandably important, whereas in life insurance mortality, longevity and disability risks are the most significant. Limits are laid down for the short-term pandemic scenarios and the longer-term longevity scenarios in conformity with the risk strategy. In German health primary insurance, especially comprehensive health insurance, there are additional uncertainties because policyholders ’ options changed from 2009. These include: — portability of reserves when moving to another insurer (ageing reserves), — obligation on insurer to pay benefits for policyholders who have not paid premiums, with no ability to terminate the contract, and the hardship tariff introduced with effect from 1 August 2013,
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. This includes equity risk, general and specific interest-rate risk, property risk and currency risk. The general interest-rate risk relates to changes in riskfree interest-rate curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, for example on government bonds or credit default swaps (CDSs). We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also our underwriting liabilities, especially in life insurance. Due to the long-term interestrate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities is highly dependent on the capital markets.
Further information on risks in life and health insurance can be found in the notes to the consolidated financial statements on page 252 ff.
We use a cross-balance-sheet counterparty limit system valid throughout the Group to monitor and control our Group-wide credit risks. The limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data, and the risk appetite defined by the Board of Management. The utilisation of limits is calculated on the basis of credit-equivalent exposure (CEE). There are also volume limits for securities lending and repurchase transactions. Investments in asset-backed securities (ABSs) are also controlled through volume limits separate from the counterparty limit system. Groupwide rules for collateral management, for example for OTC derivatives and catastrophe bonds issued, enable the associated credit risk to be reduced. Exposure to issuers of interest-bearing securities and CDSs in the financial sector is additionally limited by a financial sector limit.
In order to take account of country risks other than the credit risk on government bonds, our advisory unit for strategic and economic issues, Group Development, also produces specific country scores in addition to the pure default ratings. These cover the significant political and economic risks and those relating to a country’s internal security, and enable us to comprehensively assess additional country risks of varying importance for different business segments.
Sensitivity analyses of the market risks associated with financial instruments are available on page 265 f.
ICS is the main instrument used for the management of operational risks.
In addition, our Security and Continuity Risk Management (SCRM) Framework 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 and hence explicitly included in our corporate objectives. It incorporates 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.
— known and expected payment obligations through regular, detailed liquidity planning at individual-entity level, and a central cash-flow reporting system; — margin calls and collateral requirements for derivative positions; — unexpectedly high payments resulting, for example, from accumulation losses that far exceed normal loss expectations.
We counter this risk by discussing significant strategic issues and decisions in our Strategy Committee and regularly monitoring their implementation. The Strategy Committee comprises the members of the Group Committee, the Chief Executive Officers (CEOs) of the business segments and the Head of Group Development. IRM is additionally involved in the operational business planning and in the processes for mergers and acquisitions.
We also show the diversification effects we achieve through both our broad spread across the different risk categories (underwriting, market and credit) and our combination of primary insurance and reinsurance business. At the same time, we recognise
The table shows Munich Re’s economic risk capital and risk categories as at 31 December 2013. During last year, the economic risk capital decreased by €3.6bn. The following factors contributed to the reduction: Key figure – economic risk capital 5030 A+BEconomic risk capital (ERC)
Reinsurance Primary insurance Munich Health 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year €bn €bn €bn €bn €bn €bn
— Higher interest rates and the depreciation against the euro of all main currencies, in particular the Canadian dollar and the US dollar, led to a reduction of €1.4bn in the economic risk capital for the life and health risk category. At Munich Health, ERC was reduced primarily by the disposal of Windsor Health Group.
— The small change in economic risk capital for operational risks resulted from the updating of the underlying expert estimates.
Property-casualty The underwriting risk capital for property-casualty is made up as follows: Losses with a potential cost exceeding €10m within a business segment are classified as large losses. Accumulation losses are losses affecting more than one risk (or more than one line of business). We classify all other losses as basic losses. For basic losses, we calculate the risk of subsequent reserving being required for existing risks within a 5035 Economic risk capital (ERC) – Property-casualty
ERC is recalculated quarterly to update the exposure figures, 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.
Cyclone Australia Aggregate VaR (return period: 200 years) €bn (before tax), retained
However, particularly life primary insurance products, and a large part of our health primary insurance business, are long-term in nature, and the results they produce are spread over the entire duration of the policies. Adverse development of risk drivers with a long-term impact, such as changes in the forecast mortality and disablement trends, can cause the value of the insured portfolio to fall (trend risks). The risk modelling then attributes probabilities to each modified assumption and produces a complete profit and loss distribution. We show a valuation of in-force business and value sensitivities for such long-term portfolios in the notes to the consolidated financial statements.
Market risks Market risks are determined using a scenario-based simulation calculation. The scenarios are calibrated on the basis of long historical data series.
More detailed information on the value of in-force business and value sensitivities can be found in the notes to the consolidated financial statements under risks in life and health insurance business on page 252 ff.
Munich Re Group Annual Report 2013 account and 4.5% (3.4%) after derivatives. The rise on the previous year is the reason for the higher risk capital for equities.
The modified duration in primary insurance was 7.4 for fixed-interest investments and 8.1 for liabilities. This leads to exposure to falling interest rates, which arises mainly out of the long-term options and guarantees in life insurance business. These risks are reduced substantially by the extensive interest-rate-risk hedging programme first implemented in 2005. The sensitivity of available financial resources to a parallel increase of one basis point in all interest-rate curves (DV01) amounted to €10.3m.
Hybrid capital 5.8 6.8 –1.0 Available financial resources 38.2 36.5 1.7 1 The value adjustments are mainly due to changes in assumptions in calculating MCEV for life and health primary insurance.
The “additional available economic equity” is also relevant for the calculation of RORAC: it is the difference between the economic equity and the economic risk capital, and amounted to €8.7bn (€2.4bn) as at 31 December 2013.
The effects of the sovereign debt crisis As an insurer and reinsurer, we manage not only our own assets, but above all those of our clients. This applies in particular to insurances of the person. When we invest, in addition to traditional market risks we also have to accept certain credit risks (the risks of deteriorations in creditworthiness and debtors defaulting). This is clearly the case for corporate bonds, but recently risks have also emerged for types of investment that have previously been widely considered to be safe, examples being the “haircut” for private investors in Greek government bonds, or savings being used to cover the costs of the bank bailout in Cyprus.
Munich Re has substantial investments in the eurozone. We attach importance to a correspondingly broad diversification of investments to cover the euro liabilities arising out of our insurance business. We use government bonds to match our underwriting liabilities in terms of currency and duration, especially for life and health primary insur ance. The sovereign debt crisis eased slightly in the eurozone in 2013, but there is also still a great deal of political and economic uncertainty. The spreads on government bonds of peripheral eurozone countries as compared to German Bunds have decreased further, and the eurozone as a whole has moved out of recession. Yet the fundamental state of public finances remains critical in many countries. The need for budget consolidation and expansion of austerity measures despite weak growth and high unemployment present real challenges, especially for politicians at the national level. Currently, the primary default risk in the USA comes from the polarisation of the political standpoints, and particularly from the necessity of agreeing repeated increases to the federal debt ceiling. However, we still regard the default risk in the USA as low, 5055economic solvency ratio components 31.12.2013 Prev. year Change (A) Economic equity €bn 32.4 29.7 2.7 (B) Available financial resources €bn 38.2 36.5 1.7 (C) Available financial resources after dividend and share buy-back €bn 36.2 35.2 1.0 (D) Economic risk capital (ERC) €bn 23.7 27.3 –3.6
(B) minus (D): Economic capital buffer €bn 14.5 9.2 5.3 (C) divided by (D): Economic solvency ratio % 153 129
Munich Re Group Annual Report 2013 as the parties are well aware of the likely serious consequences of default – including for the global financial system – and recently there has been a noticeable increase in willingness to compromise on issues of budgetary policy.
After the federal legislative procedure for the US Fairness in Asbestos Injury Resolution Act foundered in February 2006, several US states adopted legislative initiatives (tort reform), which we believe may have a positive effect on the settling of asbestos claims. Following revelations about often questionable asbestos-related disease diagnoses and the resulting litigation, a number of investigative committees are looking into these issues. Similar questionable practices have come to light in silicosis litigation. These developments indicate that malicious liability claims are being contested in US legal circles with increasing resolve. However, it is too early to say whether and to what extent this will have favourable implications for future loss development in the insurance industry, particularly as plaintiff attorneys are trying hard to repel the tort reform initiatives. We are currently still being affected by late-reported claims – in some cases for large sums– for asbestos-related diseases and similar liability
Following the 2012 Annual General Meeting, three of our shareholders brought legal actions against Munich Reinsurance Company to contest resolutions and to require disclosure. Both complaints were dismissed in December 2012. The dismissal of the disclosure action is not subject to appeal, but an appeal has been submitted in relation to the contesting action. We do not believe that the appeal will be successful. Contesting actions to set aside resolutions of the Annual General Meeting 2013 were also filed, and these were dismissed in December 2013. It is possible that appeals may be lodged.
There is legacy litigation between several former insurance intermediaries and ERGO Lebensversicherung AG, which has now mostly been concluded. In connection with far-reaching claims made by the former intermediaries, serious allegations have been levelled in the media since May 2011, including reports of misconduct on incentive trips and errors in the sale of insurance products at ERGO. There has also been extensive internal auditing at Group level and at ERGO. ERGO has initiated the rectification of errors, and has set aside reserves for any liabilities that may arise. In relation to all these events, additional claims for damages against ERGO and Munich Re have been announced. It is also not possible to completely rule out financial burdens and reputational damage for Group companies in the future as a result of these allegations.
Balance sheet risks Balance sheet risk is the risk of our annual results or our capital being adversely affected by unforeseen reductions in the value of our assets due to provisions or writedowns or increases in our liabilities. It arises primarily out of changes in capital-market parameters or an unforeseen need to adjust assumptions relating to insurance liabilities that could lead to reserves having to be strengthened. In addition, changes in the general macroeconomic environment may affect the cash flows achievable from assets. Assets include goodwill arising on first-time consolidation of subsidiaries, which is subjected to regular impairment tests. Changes in the assumptions on which we have based our calculations could result in decreases in asset values in the future.
The G-20 summit in Pittsburgh in 2009 resolved to make over-the-counter (OTC) derivative trading more transparent and secure. The European Market Infrastructure Regulation (EMIR) – Regulation (EU) No. 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade
Munich Re Group Annual Report 2013 repositories – came into force in August 2012. This introduced a clearing obligation, i.e. standardised OTC derivatives must be cleared by central counterparties (CCPs). Bilateral risk-mitigation techniques – such as the obligation to exchange collateral, or the daily valuation of outstanding contracts – apply to OTC derivatives that are not cleared by a CCP. The Regulation also requires that derivatives should be registered with a trade repository. These obligations will be substantiated in various detailed regulations (technical standards), some of which have yet to be drawn up.
Other legal developments The German Federal Court of Justice (BGH) had referred a question to the European Court of Justice (ECJ) regarding whether the limitation period for policy models within the meaning of Section 5a para. 2 sentence 4 of the Insurance Contract Act (VVG) (old version) complied with the European directives on life insurance. By a ruling dated 19 December 2013, the ECJ decided that the provision violated European law. In its ruling, the Court made no statement as to the effects on the contracts concerned and the German Federal Court of Justice must now rule on this. The ruling affects all life insurance contracts concluded between 1 January 1995 and 1 January 2008 where there was no proper instruction as regards the right to object, or where not all pertinent contractual information was provided at the conclusion of the contract. The ruling cannot be transferred to apply to classes of business other than life insurance.
It is clear, for example, that enhanced business opportunities will result for us if important macroeconomic parameters develop better than expected. A demand surge and an increase in premium income in most classes of insurance would be triggered by a stronger economic recovery in the USA, or quicker success of reform programmes in the eurozone with a more rapid recovery of the economy, accompanied by sustained growth in the emerging countries. Besides this, such a development could further the gradual normalisation of the bond markets and thus contribute to a continuation of the slow rise in yields on US and German government bonds. This would result in burdens on our investment result in the short term, but also bring higher returns in the long run, thus benefiting our long-term insurance business.
— Technical progress, demographic trends and regulatory changes offer profitable growth opportunities
— Development of emerging countries provides opportunities for expanding and further diversifying the portfolio
The rapid development of emerging countries also provides opportunities for profitably expanding and further diversifying our business portfolio. To provide our clients throughout the world with extensive support, Munich Re already operates as one of the leading reinsurers in many Asian and Latin American growth markets and is increasingly also present as a primary insurer.
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 attained some significant milestones in 2013. Business operations in life insurance commenced in China in autumn 2013. In India, we have been working on setting up a joint venture with the Avantha Group, which will provide ERGO with entry to the Indian life insurance market. In addition, we aim to tap some of the attractive markets in southeast Asia.
ERGO stands out positively in the market with its brand proposition “To insure is to understand”
In the industrial countries, the pressure to reform historically evolved health and social security systems is rising. This offers Munich Health opportunities in highly developed markets, despite its withdrawal from US primary insurance business with private clients. For the analysis of health risks, for example, Munich Health provides its reinsurance clients with modern programmes and tools for standardised medical risk assessment. To enhance the efficiency of internal processes, Munich Health offers new automation options and test algorithms, e.g. in the transmission of claims notification and claims processing data.
Our asset manager 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. On the basis of the methods and processes established for the Group companies in terms of portfolio management, reporting and risk management, we 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. Institutional investors include pension funds, municipalities, church institutions, foundations, selected banks, and manufacturing companies.
In 2013, the reinsurance group posted gross premiums of €27.8bn, a figure that was well within the target range of €27–28bn. Gross premiums in life reinsurance totalled €10.8bn, thus coming within the envisaged target corridor of €10–11bn. For propertycasualty reinsurance, the original forecast of around €17bn was right on the mark at €17bn. Both in life reinsurance and in property-casualty business, a negative impact derived from currency translation effects of €0.5bn and €0.7bn respectively.
At €370m, the technical result in life reinsurance was satisfyingly close to the target of around €0.4bn for 2013.
The combined ratio of 92.1% in property-casualty reinsurance was better than the figure of around 94% envisaged.
Our total premium income in primary insurance amounted to €18bn – below our 2013 target of around €18.5bn – mainly on account of the decrease of premium in German life primary insurance. At €16.7bn, gross premiums written remained somewhat below the projected value of slightly over €17bn.
In life primary insurance, total premium income amounted to €6.9bn compared with our original forecast of slightly more than €7bn. Gross premiums written came to €5.5bn versus an envisaged figure of just over €5.5bn. In the health primary insurance segment, gross premiums written totalled €5.7bn; at the beginning of the year, our assumption had been somewhat less than €6bn. In property-casualty primary insurance, gross premiums written reached €5.5bn, compared with a target figure for 2013 of marginally over €5.5bn.
The combined ratio in property-casualty business was 97.2% and thus above the target ratio of around 95%, because the losses actually incurred in Germany owing to heavy rainfall and hailstorms were above our expectations.
At the beginning of the year, we had aimed for a result of €400–500m for primary insurance and €350–450m for the ERGO Group. These target results were achieved, with figures of €433m for primary insurance as a whole and €436m for the ERGO Group.
In the European Union, state supervision for primary insurers and reinsurers is set to undergo profound changes with the Solvency II regulations. After many years of negot iation, the institutions involved in the EU legislation process (European Parl iament, European Commission and Council of the European Union) 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. More or less parallel to this, the Omnibus II Directive, delegated acts and technical implementation standards will need to be adopted in the respective national legal systems. The new supervisory regulations will impose greater requirements on insurance companies in terms of capital, risk management and reporting. For 2014 and 2015, the European insurance supervisor, EIOPA, has introduced a pre-structured preparatory phase during which the national supervisory authorities are required to bring forward the reporting on selected areas. The aim is to ensure that the insurers and authorities make appropriate progress with their prepa rations and that the key elements of the new supervisory scheme are consistently structured within Europe. These elements include the governance rules, the requirements regarding the own risk and solvency assessment (forward-looking assessment of own risks, FLAOR) and the criteria for using internal models. The details regarding selected quantitative data, including economic balance sheet and equity information, have also been defined.
Far-reaching changes are on the horizon in the medium term for accounting, in particular the accounting of insurance contracts and financial instruments. These changes will have a major impact on the insurance and reinsurance markets. In June 2013, the International Accounting Standards Board (IASB) published revised proposals for the future accounting of insurance contracts, which will ensure for the first time that such contracts are accounted for in financial statements in an internationally standardised manner. The new requirements for the accounting and measurement of financial instruments under IFRS 9 are scheduled to be published in a final standard in the first half of 2014.
Although the requirements under the new regulatory frameworks (Solvency II, IFRS 4 and IFRS 9) have not been finalised in detail yet and will only become mandatory in subsequent years, all insurance companies concerned will have to make every effort to ensure that they comply with these requirements and begin to prepare themselves for their impact. Given the profound changes to these frameworks, we are anticipating a substantial impact on the insurance industry’s product landscape and market environment before the official dates of introduction.
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 it 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
Munich Re offers its cedants specialist consulting services and extensive solutions, also for tasks such as balance sheet management, risk modelling and asset-liability manage ment. Reinsurance provides primary insurers with efficient and flexible pro tect ion 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. And we partner our clients in the often challenging task of adjusting to changes in regulatory requirements, which will be altered significantly in many countries in the coming years.
We also 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 shortterm stag nation 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 2014, we expect gross premiums written in life reinsurance to be around €10.5bn, and the technical result to amount to over €400m, assuming that demand for reinsurance is stable in light of the above factors.
As a well-diversified reinsurer with extensive know-how, we – in contrast to most providers – are also able to offer specially tailored solutions. These include multi-year treaties (occasionally incorporating cross-line and cross-regional covers), retroactive re insurance solutions, transactions for capital relief, comprehensive consultation on capital management, and the insurance of complex liability, credit and large industrial risks. Moreover, with our technical expertise and risk knowledge, we are in a position to support rapidly growing industries and to judiciously extend the boundaries of insurability with needs-based covers.
We see good opportunities for primary insurance not only in evolving foreign markets but also in various sectors of the German market.
Munich Re’s consolidated financial statements show the business transacted by ERGO in the three primary insurance segments life, health, and property-casualty.
As last year, total premium income in primary insurance in 2014 should be somewhat over €18bn, with gross premiums written totalling a good €16.5bn.
We are proceeding on the assumption that gross premiums written will amount to just over €5.5bn in 2014. The reduction compared with 2013 stems mainly from the sale of WHG.
The combined ratio is likely to be somewhat above last year’s level, i.e. around 99%.
In the current environment of pronounced political uncertainty and the resultant recurring price volatility in the capital markets, we will continue to attach great importance to a widely diversified investment portfolio. We see the main risks for the current year in the further development of the sovereign debt and banking crisis. A persistently low interest-rate environment in the foreseeable future will have a significant impact on the whole insurance industry and other major investors.
Thanks to our strongly diversified investments, we are well prepared for various 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 2014, 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.
For 2014, we anticipate consistently low interest-rate levels and hence somewhat lower regular income from fixed-interest securities and loans. We also intend not to significant ly increase our relatively low equity-backing ratio of 4.5%, so that write-down risks are low, but so are our chances of realising gains on disposal. Regular income from our investments should total around 3.2%, or 0.2 percentage points lower than last year. Taking into consideration the result from the disposal of investments, write-ups and write-downs, and other income and expenses, we expect the investment result to be marginally lower than last year at almost €7.5bn, equivalent to an annual investment return of around 3.3% or decrease of 0.2 percentage points on last year.
We estimate that the Group’s gross premiums written for 2014 will total around €50bn, roughly €1bn less than in 2013, mainly owing to foreseeable negative currency translation effects and the sale of WHG.
We are adhering to our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets. However, this target will be difficult to achieve given the currently very low level of interest rates on low-risk investments.
Provided that loss experience is average, our assumption for 2014 is that Munich Re will post a technical result of the same level as last year’s €3.7bn.
In the period from mid-November 2013 to the end of February 2014, we bought back shares with a value of around €700m; another €300m are to be repurchased before the Annual General Meeting on 30 April 2014. We are using this measure to return unneeded capital to shareholders. Despite the buy-back, our good capital position will allow us to continue paying attractive dividends and selectively utilising opportunities for profitable growth. Since November 2006, Munich Re has carried out share buy-backs with a total volume of €6.7bn. Subject to approval by the Annual General Meeting, the dividend will rise by 25 cents to €7.25 per share.
List of shareholdings as at 31 December 2013 in accordance with section 313 para. 2 of the german Commercial Code (hgb) 276
B. Investments i. Land and buildings, including buildings on third-party land (3) 3,762 3,831 –69 –1.8 ii. investments in affiliated companies and associates (4) 1,514 1,477 37 2.5 thereof: Associates accounted for using the equity method 1,291 1,267 24 1.9 iV. other securities 1. held to maturity (6) 5 7 –2 –28.6 3. At fair value through profit or loss (9) 2,887 3,015 –128 –4.2
V. Deposits retained on assumed reinsurance (10) 9,636 8,967 669 7.5
C. Investments for the benefit of life insurance policyholders who bear the investment risk 6,699 5,958 741 12.4 D. Ceded share of technical provisions (12) 5,305 5,730 –425 –7.4 E. Receivables i. Current tax receivables 602 572 30 5.2 ii. other receivables (13) 11,357 11,475 –118 –1.0
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (25) 7,043 6,258 785 12.5 E. Other accrued liabilities (26) 4,169 4,318 –149 –3.5 F. Liabilities i. bonds and notes issued (27) 248 259 –11 –4.2 ii. Deposits retained on ceded business (28) 2,762 2,947 –185 –6.3 iii. Current tax liabilities 2,795 4,038 –1,243 –30.8 iV. other liabilities (29) 12,432 13,240 –808 –6.1
G. Deferred tax liabilities (15) 8,188 8,799 –611 –6.9 Total equity and liabilities 254,288 258,416 –4,128 –1.6
Ceded share 326 356 –30 –8.4 6. Investment result (34) investment income 13,196 14,030 –834 –5.9 investment expenses 5,539 5,588 –49 –0.9 thereof: income from associates accounted for using the equity method 7 88 –81 –92.0 9. Deduction of income from technical interest –6,764 –6,918 154 2.2 12. Other non-operating result (36) –673 –830 157 18.9 13. Impairment losses of goodwill (36) 29 140 –111 –79.3 thereof: Attributable to Munich Reinsurance Company equity holders 3,313 3,188 125 3.9 Attributable to non-controlling interests (18) 29 16 13 81.3
Consolidated income statement for the financial year 20131 1 Previous year’s figures adjusted owing to iAs 8; see “Changes in accounting policies and other adjustments”.
Statement of recognised income and expense for the financial year 2013 €m 2013 Prev. year Consolidated result 3,342 3,204 Currency translation
Unrealised gains and losses on investments Gains (losses) recognised in equity –1,572 2,936 Recognised in the consolidated income statement –1,040 –589
Change resulting from valuation at equity Gains (losses) recognised in equity 35 27 Recognised in the consolidated income statement – –
Currency translation – – – – – –69 – – 2 –67 unrealised gains and losses on investments – – – – 2,336 – – – 11 2,347 Change resulting from valuation at equity – – 29 – 7 – –9 – – 27 Change resulting from cash flow hedges – – – – – – 1 – – 1 Remeasurements of defined benefit plans – – –374 – – – – – –8 –382 total recognised income and expense – – –339 – 2,343 –69 –8 3,188 31 5,146 Change in shareholdings in subsidiaries – – –13 – – – – – –33 –46 Change in consolidated group – – – – – – – – – – Dividend – – – – – – – –1,110 –3 –1,113 Purchase/sale of own shares –3 5 26 93 – – – – – 121 Retirement of own shares – – – – – – – – – –
income and expense recognised directly in equity – – 196 – –2,578 –710 7 – –21 –3,106
€m 2013 Prev. year Consolidated result 3,342 3,204 net change in technical provisions 4,049 2,533 Change in deferred acquisition costs –360 152 Change in deposits retained and accounts receivable and payable –856 1,858 Change in other receivables and liabilities –2,325 –646 gains and losses on the disposal of investments –1,058 –651 Change in securities held for trading –839 –584 Change in other balance sheet items 249 391 other income/expenses without impact on cash flow –15 –722 i. Cash flows from operating activities 2,187 5,535 Change from losing control of consolidated subsidiaries –34 35 Change from obtaining control of consolidated subsidiaries –74 –260 Change from the acquisition, sale and maturities of other investments 752 –4,217 Change from the acquisition and sale of investments for unit-linked life insurance –343 –361 other –9 70 ii. Cash flows from investing activities 292 –4,733 inflows from increases in capital and from non-controlling interests 107 121 outflows to ownership interests and non-controlling interests 296 43 Dividend payments 1,258 1,113 Change from other financing activities –1,111 569 iii. Cash flows from financing activities –2,558 –466 Cash flows for the financial year (I + II + III) –79 336 effect of exchange-rate changes on cash 39 34 Cash at the beginning of the financial year 2,860 2,490 Cash at the end of the financial year 2,820 2,860
Additional information income tax paid (net) – included in the cash inflows from operating activities 1,223 265 Dividends received 519 399 interest received 6,496 6,932 interest paid 552 671
» Consolidated cash flow statement for the financial year 2013 (XLs, 45 Kb)
Since 2002, the standards adopted by the International Accounting Standards Board (IASB) have been referred to as International Financial Reporting Standards (IFRSs); the standards from previous years continue to bear the name International Accounting Standards (IASs).
In preparing the consolidated financial statements, we have to use our judgement in applying accounting policies and to make estimates and assumptions that affect the year-end items shown in the consolidated balance sheet, the consolidated income statement and the disclosures on contingent assets and liabilities.
Our presentation currency is the euro (€). Amounts are rounded to million euros, with figures in brackets referring to the previous year.
Changes in accordance with the rules of IAS 8 necessitated the retrospective adjustment of the figures from the consolidated balance sheet and the consolidated income statement for the financial year 2012 and the relevant items of the notes to the consol idated financial statements (see section “Changes in accounting policies and other adjustments”). The other previous-year figures have been calculated on the same basis as the figures for the financial year 2013.
In the financial year 2013, the following new or amended IFRSs had to be applied for the first time: Under the amendment to IAS 1 (rev. 06/2011), Presentation of Financial Statements, Presentation of Items of Other Comprehensive Income, “other comprehensive income” must now be divided into items that will be reclassified to profit or loss at a later date, and items that will not. The purpose of this amendment is to improve the presentation of these items and align the approaches under IFRS and US GAAP. We have made the necessary adjustments in the statement of recognised income and expense.
The amendments to IFRS 7 (rev. 12/2011), Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities, introduced new disclosures for the notes to the financial statements regarding such cases. These additional disclosures comprise gross and net amounts related to offsetting as well as amounts for existing rights to offset that do not satisfy the offsetting criteria. This change currently has no practical significance for Munich Re.
In the financial year, we voluntarily adopted the following IFRSs early: IAS 36 (rev. 05/2013), Recoverable Amount Disclosures for Non-Financial Assets, affects corrections and additions to disclosure requirements if the recoverable amount of an impaired asset is the fair value less costs of disposal. The amendments may result in moderate extended disclosure requirements.
In the fourth quarter, the following modifications were applied retrospectively: b) Interest on income tax assets and liabilities is recognised under the corresponding income tax items. As a consequence of the change, the tax liabilities as at 31 December 2013 have increased by €43m, and the other reserves have been reduced by the same amount. In the income statement, our other operating result for 2013 is €53m higher, with a corresponding increase in the taxes on income.
Munich Re Group Annual Report 2013 c) The calculation of the impairment of the acquired insurance portfolio (present value of future profits, PVFP) did not correctly take deferred taxes into account. The calculation of the impairments and deferred taxes has been modified accordingly.
Unless mentioned separately below, the following standards are mandatory for financial years beginning on or after 1 January 2014. Only the IFRIC Interpretation 21, Levies, has not yet been adopted into European law. The other standards were adopted in March, April, November or December 2013.
IFRS 10 (05/2011), Consolidated Financial Statements, supersedes the provisions of IAS 27 and SIC 12 and creates a uniform definition for control, irrespective of whether this control is based on company law or on contractual or economic circumstances. There are no longer any independent provisions for structured entities (special purpose entities). A situation of control exists when an investor has the ability to direct an investee’s relevant activities and is exposed to the returns from those activities. Further more, IFRS 10 addresses issues that have not been dealt with until now, including the regulation that a situation of control exists even if an investor holds less
Thereof: Income from associates 82 – – 6 88 7. Other operating income 879 –40 – – 839 8. Other operating expenses 923 –50 – – 873 12. Other non-operating result –836 6 – – –830
Munich Re Group Annual Report 2013 than a majority of the voting rights but regularly has a de facto majority of voting rights at the annual general meetings. The changes are unlikely to have any major effects on Munich Re’s consolidated companies.
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 has no effect on 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 is removed for unconsolidated structured entities.
As mandated by the IASB, application of IFRS 10, IFRS 11 and IFRS 12 and the amendments to IAS 27 and IAS 28 , including the Transition Guidance for these standards, would be mandatory for financial years beginning on or after 1 January 2013. When the standards were adopted into European law, the mandatory effective date was deferred by one year, so that the standards concerned have to be applied for the first time by entities domiciled in the European Union for financial years beginning on or after 1 January 2014; voluntary application before that date is permitted. Munich Re has chosen first-time application from 1 January 2014.
The following new or revised standards will not become mandatory until a later date. The relevant information will be disclosed separately. Without exception, the legal changes have not yet been adopted into European law.
IFRS 9 (11/2009 and rev. 10/2010), Financial Instruments, replaces the current requirements of IAS 39 relating to recognition and measurement of financial instruments. Given its complexity, the overall project has been subdivided into three phases. The new rules in IFRS 9 that have thus far been adopted from the first phase of the project mainly concern the classification and measurement of financial instruments. Under these rules, financial assets will in future generally be divided into only two primary measurement categories: amortised cost and fair value through profit or loss. The distinction is to be made on the basis of the reporting entity’s business model and the contractual cash flows of the assets. In addition, for equity instruments there will be the option of measurement at fair value without affecting the income statement, although then it will not be permissible for value changes recognised in other comprehensive income to be subsequently transferred to profit or loss. There also remains the possibility of voluntary measurement at fair value (fair value option). For financial liabilities, there are no changes in the measurement rules except that if the fair value option is applied, value changes attributable to a change in the entity’s credit risk must be recognised without impact on profit or loss in future.
The two other phases of the project are concerned with rules for recognising impairments and for hedge accounting. The discussion regarding hedge accounting has already been concluded and the new rules were integrated into IFRS 9 in November 2013. The IASB published another exposure draft for the rules regarding recognition of impairments in March 2013, and invited comments on the draft to be submitted by July 2013.
Consultation about these two drafts was completed at the beginning of 2014, so that the current IASB planning envisages publication of the final and complete IFRS 9 in the second quarter of 2014.
Originally, IFRS 9 envisaged that the new provisions would be mandatorily effective as from 2013. Since discussions of the still outstanding project phases are taking longer than originally planned, the mandatory effective date of a standard amending IFRS 9 and IFRS 7 (rev. 12/2011) has been deferred to financial years beginning on or after 1 January 2015. Given the ongoing discussions on the project, it was evident that this date was not realistic either. The IASB therefore provisionally decided in February 2014 to schedule the date for the mandatory first-time application of IFRS 9 for financial years beginning on or after 1 January 2018.
In November 2013, the IASB published an amendment to IAS 19 (rev. 11/2013), Employee Benefits, which aims to clarify the allocation of contributions from employees or third parties that are linked to the employee’s service rendered in the same period in which they are payable. This amendment is mandatory for financial years beginning on or after 1 July 2014 and is unlikely to have any material effects on Munich Re.
The IASB also concluded the project “Annual Improvement to IFRSs 2011–2013 Cycle” in December 2013 with the publication of the revised standards. These amendments concern IFRS 1, First-time Adoption of International Financial Reporting Standards; IFRS 3, Business Combinations; IFRS 13, Fair Value Measurement; and IAS 40, Investment Property Measured at Fair Value. Clarifications were also made to these standards concerning individual provisions that have turned out to be unclear in practice; they are unlikely to be relevant for Munich Re. The amendments will be mandatory for financial years beginning on or after 1 July 2014.
In January 2014, the IASB published IFRS 14, Regulatory Deferral Accounts. This interim standard, which is mandatory for financial years beginning on or after 1 January 2016, is only of significance for IFRS first-time users and will therefore have no effect on Munich Re.
Cash flows arising from obtaining control €m 2013 Prev. year Total consideration for obtaining control –95 –274 Non-cash consideration for obtaining control – – Cash consideration for obtaining control –95 –274 Cash over which control was obtained 21 14 Total –74 –260
Other assets 46 41 Technical provisions (net) – – Other liabilities –51 –243
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.
On 10 July 2013, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the wind park company Vingkraft Hakarp AB (VH AB), Hässleholm, Sweden, from Eolus Vind AG, Hässleholm, Sweden. Vingkraft Hakarp AB operates three completed Swedish wind parks (Hakarp, Kaptensberget and Åsen) that are connected to the power grid. Prior to the transaction, the wind parks were transferred as a contribution in kind by Eolus Vind AB to Vingkraft Hakarp AB. Immediately after acquisition, Vingkraft Hakarp AB was renamed Wind Farms Götaland Svealand AG (WFGS). The purchase price of €47.2m (SEK 411.5m) for the wind park company was settled in cash.
The acquisition is part of the RENT programme (Renewable Energy and New Technologies), through which Munich Re invests in renewable energies and new environmental technologies.
The IFRS fair values of the assets and liabilities of the companies at the time of acquisition are as follows: Cash flows arising from losing control €m 2013 Prev. year Total consideration for losing control 98 39 Non-cash consideration for losing control – – Cash consideration for losing control 98 39 Cash over which control was lost –132 –4 Total –34 35
Net assets lost €m 2013 Prev. year Goodwill – – Other intangible assets – 2
Other assets 126 37 Technical provisions (net) –82 –95 Other liabilities –60 –41
On 1 October 2013, via our subsidiary Dallas Acquisition Corporation, Delaware, Munich Re acquired 100% of the voting shares in RenRe Commodity Advisors LLC, Delaware (RCA) for a cash payment. The RCA subsidiary, Renaissance Trading Ltd., Bermuda, assumes and trades with weather risks (derivatives). The business of Renaissance Trading also includes the trading of commodity contracts in oil and natural gas, with the aim of offering one-stop risk solutions. With the acquisition of RCA, we are actively expanding our know-how and product range for weather risks and increasing the diversification of our weather derivatives, as additional regions and classes of business are covered. After the acquisition, RenRe Commodity Advisors was renamed Munich Re Weather & Commodity Risk Holding and its legal form changed to an Inc. Renaissance Trading was renamed Munich Re Trading, its legal form changed to an LLC and its head quarters moved to Delaware.
The annual financial statements of the consolidated subsidiaries and special purpose entities are subject to uniform accounting policies.
IFRS fair values of the assets and liabilities at the acquisition date €m WFGS Purchase price 47
Assets acquired 49 Intangible assets 9 Investments 38 Receivables1 – Cash at bank, cheques and cash in hand – Deferred tax assets 2 Other assets –
Liabilities assumed 2 Other reserves – Liabilities – Deferred tax liabilities 2 Other liabilities2 –
Information on the measurement of investments in associates can be found in the notes under Assets B – Investments.
Goodwill resulting from the first-time consolidation of subsidiaries is tested for impairment at least annually, in accordance with IAS 36. We additionally carry out ad-hoc impairment tests if there are indications of impairment. For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units expected to derive benefit from the synergies of the business combination. To ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cash-generating unit or a group of cash-generating units is compared with that unit’s or group’s recoverable amount. The recoverable amount is the greater of the fair value less costs to sell and the value in use. If this recoverable amount is lower than the carrying amount, a write-down is made on the goodwill. If the amount of the impairment of a cashgenerating unit or group of cash-generating units is greater than the carrying amount of the goodwill allocated, the difference is generally allocated pro rata between the other relevant assets of the unit or group of units on the basis of their carrying amounts. However, the carrying amount may not be reduced below the highest of fair value less costs to sell, the value in use, and zero.
The other intangible assets mainly comprise acquired insurance portfolios, acquired and self-developed software, and acquired brand names, sales networks, client bases and licences.
Munich Re Group Annual Report 2013 weighted useful life for their specific building class. The underlying useful lives mainly range between 40 and 55 years. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount. Impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income.
Investments in associates are valued by the equity method at the Group’s proportionate share of their net assets. The associate’s earnings attributable to the Group are included in the investment result. As a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate are used; in the case of the annual financial statements of significant associates, appropriate adjustments are made to conform them to Munich Re’s accounting policies; exceptional transactions of material importance for a true and fair picture of the associate’s financial position are recognised in the same financial year. Investments in associates that are not material for assessing the Group’s financial position are generally accounted for at fair value. To determine the fair value, we use the share prices at the balance sheet date if the investments are quoted on a stock exchange; for unquoted investments, the fair value is measured using the discounted earnings or net asset value method. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
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 under (4) Hierarchy for the fair value measurement of investments.
Repurchase agreements and securities lending Under repurchase agreements we, as the lender, acquire securities for payment of an amount with the obligation to sell them back to the borrower at a later date. As the risks and rewards from the securities remain with the borrower, the amounts paid are not posted as such in our accounts but are shown as a receivable from the borrower under “other investments, deposits with banks”. Interest income from these transactions is recognised in the investment result.
Assets allocated to Level 2 are valued using models based on observable market data. For this, we use inputs directly or indirectly observable in the market, other than quoted prices. If the financial instrument concerned has a fixed contract period, the inputs used for valuation must be observable for the whole of this period. Moreover, we have allocated to this level investments for which prices are provided by price quoters but for which there is no proof that these were based on actual market transactions. The financial instruments we have allocated to this level mainly comprise bearer bonds and bond funds, borrowers’ note loans, covered bonds, subordinated securities, derivat ives not traded on the stock market, and physical gas.
In the case of loans and investments in associates 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.
Net investment result The net investment result comprises regular income, income from write-ups, gains and losses on the disposal of investments, other income, write-downs of investments, management expenses, interest charges and other expenses. Regular income and expenses from investments not measured at fair value through profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are applied to the acquisition costs, with impact on profit or loss, until maturity.
These are investments for policyholders under unit-linked life insurances. They are measured at fair value. Unrealised gains or losses from changes in fair value are included in the investment result. They are matched by corresponding changes in the technical provisions (see Equity and liabilities D – Technical provisions for life insurance policies where the investment risk is borne by the policyholders), which are included in the technical result. The change in technical provisions also includes changes from addition al premium components. Recognising these investments at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding provisions.
The technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; cf. 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; cf. 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.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. The posting of unearned premiums is restricted to short-term underwriting business, i.e. property-casualty business and parts of accident and health business. In the case of long-term business, a provision for future policy benefits is established.
For all other contracts as per FAS 97, an account is kept to which net level premiums and interest earnings are credited and from which risk premiums and administration expenses are debited, not all credits and debits being contractually fixed at the time the contracts are concluded. The provision for future policy benefits for life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance) is shown separately under Equity and liabilities D – Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders.
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 includes provisions for post-employment benefits and similar obligations. Munich Re companies generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the staff member’s length of service and salary. Under defined contribution plans, the companies pay fixed contributions to an insurer or a pension fund.
The other provisions included in this item are established in the amount of the prob able requirement. Such amounts are not discounted if the interest-rate effect is insignificant.
Direct minority interests in special funds and in partnerships are measured at fair value.
In contrast to this, currency translation differences are largely recognised in profit or loss in our subsidiaries’ individual financial statements. This involves the translation of foreign currency items into the respective functional currency in accordance with IAS 21. An excess of assets over liabilities in a particular foreign currency results on balance in a gain if that currency appreciates, and in a loss if it falls in value. The reverse applies if cover is insufficient.
Munich Re’s primary insurance segments comprise all the activities of the ERGO Insurance Group (ERGO). Certain primary insurers whose business requires special solution-finding competence are coupled to reinsurance as the risk carrier. We therefore transact their business from within reinsurance and consequently allocate them to the reinsurance segment.
C. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholder – – – – 7,042 6,257 – – – – 1 1 – – 7,043 6,258
Reinsurance Primary insurance Munich Health Asset management Total Life Property-casualty Life Health Property-casualty 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. €m 2013 Prev. year 2013 Prev. year 2013 Prev. year 2013 Prev. year 2013 Prev. year 2013 Prev. year 2013 Prev. year 2013 Prev. year
V. Deposits retained on assumed reinsurance 7,847 7,240 1,279 1,181 128 147 1 1 5 4 376 394 – – 9,636 8,967
B. Investments I. Land and buildings, including buildings on third-party land 263 245 1,218 1,224 1,358 1,393 755 777 93 95 10 30 65 67 3,762 3,831 II. Investments in affiliated companies and associates 19 21 818 775 137 132 180 181 212 194 94 93 54 81 1,514 1,477 Thereof: Associates accounted for using the equity method – 1 733 682 92 109 168 168 161 152 93 90 44 65 1,291 1,267
IV. Other securities 1. Held to maturity – – – – 5 7 – – – – – – – – 5 7 3. At fair value through profit or loss 650 605 1,037 1,042 1,039 1,174 127 155 31 22 3 17 – – 2,887 3,015
Thereof: Amortisation and impairment losses of acquired insurance portfolios 3 3 – – 85 55 5 5 1 – – – – – 94 63
Thereof: Interest and similar income 738 728 1,326 1,520 2,696 2,792 1,284 1,277 248 291 80 101 3 5 6,375 6,714 Interest charges and similar expenses 4 3 16 13 1 3 3 2 – 1 – – – – 24 22
Income from associates accounted for using the equity method – – –28 16 8 –5 14 11 22 46 6 14 –15 6 7 88
Thereof: Interest and similar income 74 83 28 22 5 6 1 13 3 2 12 14 1 3 124 143 Write-ups of other operating assets 4 11 21 27 28 33 4 6 3 10 7 9 – – 67 96
Investments in non-current assets per segment €m 31.12.2013 Prev. year Reinsurance life 105 97 Reinsurance property-casualty 377 434 Primary insurance life 405 52 Primary insurance health 5 13 Primary insurance property-casualty 154 161 Munich Health 46 28 Asset management 5 2 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 (RENT).
Reinsurance Primary insurance Munich Health Total €m 2013 Prev. year 2013 Prev. year 2013 Prev. year 2013 Prev. year Europe
Allocation of goodwill to cash-generating units For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units that derive benefit from the synergies of the business combination. At the same time, the unit or group of units to which the goodwill is allocated represents the lowest level at which goodwill is monitored for internal management 8000 A + B Development of goodwill
Reclassifications – – – – Impairment losses – – – 24 Carrying amount at 31 Dec. financial year 1,001 1,046 389 403 Accumulated impairment losses at 31 Dec. financial year – – 51 51 Gross carrying amount at 31 Dec. financial year 1,001 1,046 440 454
Primary insurance Goodwill from the acquisition of ERGO Insurance Group Other €m 2013 Prev. year 2013 Prev. year Gross carrying amount at 31 Dec. previous year 1,754 1,754 554 554 Accumulated impairment losses at 31 Dec. previous year – – 381 381 Carrying amount at 31 Dec. previous year 1,754 1,754 173 173 Currency translation differences – – – – Additions – – 3 – Reclassifications – – – – Impairment losses – – 28 – Carrying amount at 31 Dec. financial year 1,754 1,754 148 173 Accumulated impairment losses at 31 Dec. financial year – – 409 381 Gross carrying amount at 31 Dec. financial year 1,754 1,754 557 554
Munich Health Total Goodwill from the acquisition of Other €m 2013 Prev. year 2013 Prev. year Gross carrying amount at 31 Dec. previous year 156 154 3,964 3,959 Accumulated impairment losses at 31 Dec. previous year 156 40 588 448 Carrying amount at 31 Dec. previous year – 114 3,376 3,511 Currency translation differences – 2 –61 –19
Carrying amount at 31 Dec. financial year – – 3,292 3,376 Accumulated impairment losses at 31 Dec. financial year 156 156 616 588 Gross carrying amount at 31 Dec. financial year 156 156 3,908 3,964
Munich Re Group Annual Report 2013 purposes. In reinsurance, we have allocated the goodwill to divisions or groups of divisions, while in primary insurance it has been allocated to legal entities or groups of legal entities. In the case of Munich Health, goodwill is allocated to the segment bearing that name. Details of our divisions are provided on page 32 f. in the management report.
Our goodwill was fully allocated to the following cash-generating units or groups of cash-generating units: The goodwill from the acquisition of Munich Re America has been allocated to a group of divisions (cash-generating units), which together make up the “reinsurance propertycasualty segment”. Apart from the goodwill from the acquisition of Munich Re America, the carrying amount shown for this includes other goodwill that is impairment-tested on the basis of cash-generating units at the level of divisions or groups of divisions within the segment. This other goodwill is not significant in comparison with the total goodwill and is tested for impairment on the basis of the same key assumptions used for the goodwill from the acquisition of Munich Re America. The goodwill from the acquisition of shares in the ERGO Insurance Group has been allocated to the cash- generating unit ERGO.
Goodwill allocated across other multiple cash-generating units or groups of cash- generating units is not significant in comparison with the total goodwill, either individually or in sum. We regard as “significant” within the meaning of IAS 36.134 and IAS 36.135 amounts of 10% or more of total Group goodwill.
The calculation of these values in use is based on distributable target results derived from the current market environment and the latest corporate planning approved by management. Prepared in an interactive process involving the operational units, the controlling units responsible and the Board of Management, the corporate plans are reviewed and updated at least every quarter. After the detailed planning phase, we estimate the target results achievable long term on the basis of the last adjusted planning year and a growth rate derived taking macroeconomic forecasts into account.
Amount of impairment losses recognised in profit or loss during the period In the financial year 2013, our impairment testing of goodwill identified an impairment. The goodwill from the acquisition of ERGO Previdenza was written down by €28m in the fourth quarter of 2013, mainly owing to a decline in ERGO Previdenza’s business volume. The impairment loss was recognised as impairment losses of goodwill in the life primary insurance segment.
Reinsurance Cash-generating unit or group of property-casualty cash-generating units segment ERGO Basis for calculating the Value in use Value in use recoverable amount Key assumptions regarding In the detailed planning phase (three years), we For the detailed planning (three years), the planning calculation (at the time expect a rise in premium income we expect results to fall initially. of the planning) with a relatively constant combined ratio.
Munich Re Group Annual Report 2013 2 Other intangible assets 8006 A
Acquired insurance portfolios Software Self-developed Other €m 2013 Prev. year 2013 Prev. year 2013 Prev. year Gross carrying amount at 31 Dec. previous year 1,311 1,359 350 342 889 814 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 818 768 220 184 659 605 Carrying amount at 31 Dec. previous year 493 591 130 158 230 209 Currency translation differences –3 –4 – – –4 2 Additions
Acquired Acquired distribution Acquired licences/ brand names networks/client bases patents €m 2013 Prev. year 2013 Prev. year 2013 Prev. year Gross carrying amount at 31 Dec. previous year 283 286 710 744 291 122 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 242 201 367 311 19 12 Carrying amount at 31 Dec. previous year 41 85 343 433 272 110 Currency translation differences –1 – –8 –1 –5 – Additions
Carrying amount at 31 Dec. financial year 31 41 296 343 253 272 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 192 242 317 367 36 19 Gross carrying amount at 31 Dec. financial year 223 283 613 710 289 291 8006 B
Assets pledged as security and other restrictions on title amount to €160m (–). Commit ments to acquire other intangible assets total €7m (3m). Costs of €3m (4m) for research and development incurred in connection with software projects were not capitalised but recognised as expenses.
The impairment losses reversed are distributed between the following different Group segments: in reinsurance, €1m (4m) is apportionable to life and €4m (18m) to propertycasualty; in primary insurance, €13m (9m) is apportionable to life, €2m (1m) to health and – (€1m) to property-casualty.
The impairment losses are distributed between the following segments: in reinsurance, €1m (–) is apportionable to life and €2m (–) to property-casualty; in primary insurance, €11m (36m) is apportionable to life, – (€3m) to health and – (€1m) to property-casualty.
Development of investments in land and buildings, including buildings on third-party land €m 2013 Prev. year Gross carrying amount at 31 Dec. previous year 4,912 4,903 Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year 1,081 1,014 Carrying amount at 31 Dec. previous year 3,831 3,889 Currency translation differences –12 9 Additions
Reclassification –10 21 Carrying amount at 31 Dec. financial year 3,762 3,831 Accumulated depreciation and accumulated impairment losses at 31 Dec. financial year 1,130 1,081 Gross carrying amount at 31 Dec. financial year 4,892 4,912
Property pledged as security and other restrictions on title amount to €838m (724m). Expenditures recognised in the carrying amount for assets in the course of construction total – (€31m) at the balance sheet date. Contractual commitments to acquire other intangible assets amount to €14m (35m).
All investments recognised at fair value are allocated to one of the fair value hierarchy levels of IFRS 13, as are those investments which are not recognised at fair value in the balance sheet but for which a fair value has to be disclosed in the notes. Information on the criteria for allocation to the individual levels of the fair value hierarchy can be found in the notes to Assets B – Investments, Determining fair values. Regularly, at each reporting date, we assess whether the allocation of our investments to the levels of the fair value hierarchy is still appropriate. If changes in the basis of valuation have occurred – for instance, if a market is no longer active or the valuation was performed using inputs requiring another allocation – we make the necessary adjustments.
Derivatives Pricing method Parameters Pricing model Equity and index risks OTC stock options Theoretical price Listing of underlying shares Black-Scholes (European) Effective volatilities Cox, Ross and Rubinstein Money-market interest rate (American) Dividend yield Monte-Carlo simulation Equity forwards Theoretical price Listing of underlying shares Present-value method Money-market interest rate Dividend yield Interest-rate risks Interest-rate swaps Theoretical price Swap curve Present-value method Money-market interest-rate curve Swaptions/interest-rate Theoretical price At-the-money volatility index and Black-76 guarantee skew swap curve Money-market interest-rate curve Interest-rate currency swaps Theoretical price Swap curve Present-value method Money-market interest-rate curve Currency spot rates Inflation swaps Theoretical price Zero-coupon inflation swap rates Present-value method Swap curve Money-market interest-rate curve Currency risks Currency options Theoretical price At-the-money volatility Garman-Kohlhagen Currency spot rates (European) Money-market interest-rate curve Currency forwards Theoretical price Currency spot rates Present-value method Money-market interest-rate curve Other transactions Insurance derivatives Theoretical price Market values of cat bonds Present-value method (excluding variable annuities) Historical event data Interest-rate curve Insurance derivatives Theoretical price Biometric and lapse rates Present-value method (variable annuities) Volatilities Interest-rate curve Currency spot rates Credit default swaps Theoretical price Credit spreads Present-value method Recovery rates ISDA CDS Standard Model Interest-rate curve Total return swaps on Theoretical price Listing of underlying index Index ratio calculation commodities Commodity options Theoretical price Listing of underlying shares Black-Scholes (European) Effective volatilities Cox, Ross and Rubinstein Money-market interest rate (American)
Fund Pricing method Parameters Pricing model Real estate funds – – Net asset value Private equity funds – – Net asset value
At the end of the financial year, we reallocated large portions of our bonds and certain bond funds from Level 1 to Level 2 owing to a modification by the Institute of Public Auditors in Germany (IDW) to the interpretation of the rules of IFRS 13. As a result, we now consistently take account of the fact that in the bond market there is generally no active trading on exchanges, prices being quoted by pricing agencies and brokers. This means that in some cases there is no proof that the Level 1 requirements have actually been fulfilled, so that in accordance with the requirements of the IDW, realloc ation is considered necessary on the basis of a prudent interpretation.
8012 NEU Allocation of investments to levels of the fair value hierarchy €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 38 – 176 214 Investments in associates measured at fair value – – 9 9 Other securities available for sale
Other securities at fair value through profit or loss Held for trading, and hedging derivatives1 754 2,368 33 3,155 Designated as at fair value through profit or loss – 169 – 169
Investments in affiliated companies measured at Investments in associates fair value measured at fair value €m 2013 Prev. year 2013 Prev. year Carrying amount at 31 Dec. previous year 194 214 16 16 Gains and losses –15 30 –7 –
A list of all our shareholdings can be found in the section “List of shareholdings as at 31 December 2013 in accordance with Section 313 para. 2 of the German Commercial Code (HGB)”.
8015 C Other securities at fair value through profit or loss Total
At 31 December 2013, the category “Other securities held to maturity” contains debt securities issued by banks of €5m (7m). The fair value of these debt securities amounts to €5m (8m). This is based on recognised valuation methods in line with the present value principle and taking observable market parameters into account.
Rating of “other loans” according to carrying amounts €m 31.12.2013 Prev. year
Carrying amounts Fair values €m 31.12.2013 Prev. year 31.12.2013 Prev. year Up to one year 5 3 5 3 Over one year and up to two years – 4 – 5
Carrying amounts Unrealised gains/losses Amortised cost €m 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year Fixed-interest securities Government bonds
Non-fixed-interest securities Shares 7,700 6,177 1,683 1,247 6,017 4,930 Investment funds
Disposal proceeds in the financial year €m 2013 Prev. year Fixed-interest securities 43,641 46,079 Non-fixed-interest securities
Realised gains and losses €m 2013 Prev. year Gains on disposal 2,083 1,850
Carrying amounts Amortised cost €m 31.12.2013 Prev. year 31.12.2013 Prev. year Up to one year 8,812 11,526 8,737 12,131 Over one year and up to two years 10,109 8,747 9,862 8,501 Over two years and up to three years 11,224 10,858 10,785 10,259 Over three years and up to four years 10,546 10,599 10,079 9,984 Over four years and up to five years 9,775 10,679 9,278 10,030 Over five years and up to ten years 32,712 34,145 31,154 30,897
Derivative financial instruments are used by Munich Re to manage and hedge against interest-rate, currency, and other market risks. This is done at the Group companies within the framework of individual supervisory regulations and additional internal company directives. The risk of default is practically non-existent in the case of products traded on the stock exchange. Over-the-counter products, on the other hand, harbour a theoretical risk in the amount of the replacement costs. Therefore, Munich Re selects only top-quality counterparties for such transactions.
Open positions 31.12. Periods to maturity in years < 1 1–2 2–3 3–4 4–5 > 5 2013 Prev. year €m Interest-rate risks Traded on the stock exchange
Over-the-counter Fair values 34 23 23 212 –2 746 1,036 1,311
Over-the-counter Fair values –5 – – – – 17 12 –14
Total currency risks Fair values –5 – – – – 17 12 –14
Over-the-counter Fair values –7 15 – – – – 8 17
Over-the-counter Fair values –1 – – – – – –1 6
Fair values 1 – – – – – 1 – Notional amounts 200 – – – – – 200 –
Over-the-counter Fair values 2 – –1 – – – 1 22
Total of all risks Fair values 1 70 66 277 95 804 1,313 1,451
Under the risk type “insurance risks”, we essentially subsume for property-casualty business the derivative portions of natural catastrophe bonds, individually structured insurance-linked derivatives and derivative components separated from their host contract. For life and health business, the risk type “insurance risks” essentially includes the derivative components from securitisations of mortality and morbidity risks and of variable annuities. The securitisation of variable annuities is also accounted for under the risk type “insurance risks”.
Although the derivatives used by Munich Re essentially serve to hedge against risks, only an amount of €219m (296m) meets the requirements of IAS 39 for hedge accounting.
Fair value hedges In the case of fair value hedges, the change in the fair value of the hedging instrument and the change in the fair value of the hedged instrument are generally recognised in profit or loss under the items “investment income” and “investment expenses” in the income statement. With Munich Reinsurance Company’s hedged subordinated bond, this information is shown under net finance costs. Munich Re uses hedging relationships in the form of fair value hedges to selectively and efficiently mitigate interest-rate and other market risks. The main types of transaction employed for hedging are swaps and forwards. The fair value of the derivatives used for this purpose amounted to €184m (249m) at the balance sheet date. In 2013, the following changes in value were recognised in the consolidated income statement: –€65m for the hedging instruments and €65m for the relevant underlyings.
Cash flow hedges play a role in countering fluctuations that may be caused, for example, by variable interest payments. Munich Re uses cash flow hedges chiefly to hedge against interest-rate risks, with interest-rate swaps being the main instruments employed. Changes in the fair value of the hedging instrument are recognised directly in equity for this purpose. Only when the actual cash inflow or outflow takes place, as a result of the hedged circumstance, is the relevant equity item reversed with recognition in profit or loss.
At the balance sheet date, there is an equity item of €3m (–4m) from cash flow hedges. The net fair value of the derivatives falling into this category amounted to €35m (47m) at the balance sheet date.
Munich Re Group Annual Report 2013 10 Deposits retained on assumed reinsurance Deposits retained on assumed reinsurance serve directly as collateral for technical provisions covering business assumed from cedants in reinsurance. They do not trigger any cash flows and may not be used by the cedant independently. The credit risk is therefore limited. The amount of and changes in deposits retained on assumed reinsurance in the financial year generally derive from the values for the changes in the related technical provisions for the reinsured business. Deposits retained on assumed reinsurance business thus do not have a fixed maturity date, their release generally being dependent on the run-off of the corresponding provisions.
Other investments comprise deposits with banks totalling €3,006m (2,461m), tangible assets in renewable energies amounting to €498m (500m), physical gold of €290m (–), physical gas of €21m (–), and forestry investments totalling €10m (3m). Deposits with banks include receivables of €144m (142m) from borrowers under repurchase agreements that have been booked by us as the lender.
In deviation from the purely economic view, the carrying amount of these other investments represents the maximum exposure to credit risk at the balance sheet date, in accordance with IFRS 7.
The tangible assets in renewable energies include items pledged as security and other restrictions on title amounting to €253m (219m).
Provision for future policy benefits 7 7 2,410 2,595 Provision for outstanding claims 90 78 2,616 2,808 Other technical provisions – – 3 23
Provision for future policy benefits 1,667 1,845 – – – –
In deviation from the purely economic view, the carrying amount of the receivables represents the maximum exposure to credit risk at the balance sheet date, in accordance with IFRS 7.
Carrying amounts €m 31.12.2013 Prev. year Up to one year 10,043 10,474 Over one year and up to two years 91 109 Over two years and up to three years 100 272 Over three years and up to four years 386 136 Over four years and up to five years 24 77 Over five years and up to ten years 87 69 Over ten years 626 338 8072Rating of accounts receivable €m 31.12.2013 Prev. year AAA – –
Primary insurance Life Health Property-casualty €m 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 8078 A–C
Reinsurance Life Property-casualty €m 31.12.2013 Prev. year 31.12.2013 Prev. year Status at 31 Dec. previous year 1,984 1,947 1,271 1,431 Currency translation differences –150 14 –59 7 Change in consolidated group/Other – – – –7 New deferred acquisition costs 729 340 1,573 1,982 Changes
Primary insurance Life Health Property-casualty €m 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year Status at 31 Dec. previous year 3,430 3,502 1,721 1,679 748 702 Currency translation differences –2 4 – – –9 21 Change in consolidated group/Other –11 – – – –3 –2
Status at 31 Dec. financial year 3,334 3,430 1,731 1,721 754 748
In the primary insurance segment, assumptions regarding future mortality, lapses and profit participation, and regarding long-term interest-rate levels were adjusted in 2013 on the basis of the long-term regular return on investments. The German Federal Court of Justice’s (BGH) rulings from 2012 on the offsetting of acquisition costs and the amount of surrender values with regard to life insurance were also taken into consideration. Overall, these adjustments led to impairment losses of deferred acquisition costs.
Amortisation –176 –286 –2,702 –3,535 Impairment losses – – –71 –182