Result before amortisation and impairment losses of goodwill 3,429 5,068 5,481 4,150 3,369
Knowledge at work Jörg Schneider and Joachim Oechslin on risk management 22 Cooperation strategy – Pooling competences 26 Growth market health 34 Interview with ERGO CEO Torsten Oletzky 38 Major risks: Safety boots rather than a tie 42
General information 279 Glossary 280 Important addresses 286 Index of key terms 288
Dear Shareholders, 2008 was probably the most turbulent year in Munich Re’s recent history. Unparalleled upheavals on the fi nancial markets and substantial major losses in reinsurance impacted our result.
Against this background, we are presenting fi gures to you which I could not be satisfi ed with under normal circumstances, given that we did not achieve our ambitious targets for 2008. The fact is, though, that our objectives for the past business year were set under conditions that ceased to exist months ago. And I fear it will be some considerable time before we can again take such assumptions as a basis for our planning. Therefore it is only logical, in view of the new reality, to abandon our earnings per share target for the year 2010. But we are adhering to our objective of a 15% return on risk-adjusted capital (RORAC) over the cycle, even though this appears much more ambitious now than it did one or two years ago.
With a profi t of €1.5bn, however, we have no reason at all to be despondent. In the given situation, this profi t for the year is a respectable result, especially in direct comparison with our competitors. In other words, Munich Re has come through the crisis relatively well so far, an achievement refl ected in our share price. We have our strategy to thank for this and the fact that we have “practised what we preach” in our risk management.
And you, ladies and gentlemen, are evidently convinced of this as well. In these diffi cult times, you have remained loyal to us. I thank you sincerely, also on behalf of my colleagues on the Board of Management and all staff in the Group. We are delighted that we will be able to propose an unchanged dividend of €5.50 per share at the Annual General Meeting.
In ERGO’s case, we last year initiated a project for constantly improving its competitiveness. ERGO is remaining true to its strategy of “One entity with strong brands” and is exploiting the economies of scale that result from the combination of business segments and central functions in the ERGO Group. This project will signifi cantly reduce the expense ratio in due course and ensure the necessary high quality of products and client service.
Our maxim of profi tability before growth remains unchanged. I will neither make any concessions in this respect nor tolerate any deviations. Because next year I again want to present a result to you that underlines Munich Re’s leading status in our industry.
Nikolaus von Bomhard Chairman of the Board of Management | Chairman of the Group Committee Group Development | Group Investments | Group Communications | Group Audit | Group Executive Affairs Peter Röder Global Clients and North America Wolfgang Strassl Board member responsible for personnel and welfare matters, within the meaning of Section 33 of the German Co-Determination Act Life (until 31 December 2008) | HealthCare | Human Resources Georg Daschner Europe and Latin America
Changes on Munich Re’s Board of Management In November 2008, the Supervisory Board appoints Joachim Wenning, formerly CEO of New Re in Geneva, to the Munich Re Board of Management, where he assumes responsibility for the Life Division on 1 January 2009. Wolfgang Strassl – whose responsibilities thus far included life reinsurance – focuses his full attention on the Human Resources Division, his broadened responsibilities as Board member in charge of personnel and welfare matters, and the expansion of the rapidly growing International Health fi eld of business.
New head of IR in Munich Christian Becker-Hussong succeeds Sascha Bibert as head of Investor and Rating Agency Relations in November 2008. He has many years of experience in capital market communications, having headed IR at Postbank and HVB.
US strategy consistently implemented At the end of December 2008, Munich Re announces that it will acquire a 100% stake in the Hartford Steam Boiler Group from US insurer AIG. The purchase price of US$ 742m (€531m) will be fully fi nanced from Munich Re’s own resources. The transaction is expected to be completed at the end of the fi rst quarter of 2009.
Another acquisition successfully concluded in April for a price of US$ 52.5m (around €33.7m) is Roanoke Companies Inc., the holding company of Roanoke Trade Services Inc., which is a major underwriting agency and broker for marine in surance in the USA. This expands Munich Re’s managing agency business and improves its position in special segments of marine insurance.
Securitisation optimises portfolio Munich Re is increasingly offering capital-market solutions to supplement traditional reinsurance. In February 2008, it securitises pandemic risks for the fi rst time. The bond programme provides cover against losses following severe pandemics or similar events in the USA, Canada, England, Wales and Germany. Windstorm risks in Europe are placed on the capital markets under the “Queen Street” programme. It is the fi rst time frequency risks have been securitised as well as peak risks. Furthermore, Munich Re also transfers earthquake risks to the capital markets for its Japanese client Zenkyoren.
Natural catastrophe fi gures for 2008 A large number of tropical cyclones and the earthquake in Sichuan make 2008 one of the most devastating years on record. Six tropical cyclones hit the US coast in close succession, the severest being Ike. Throughout the world, more than 220,000 people die as a result of natural catastrophes in 2008. Overall losses come to around US$ 200bn and insured losses rise to US$ 45bn, exceeding the previous year’s fi gure by 50%.
Munich Re active in important climate initiatives Munich Re is one of the fi rst companies to sign the Climate Principles, the initiative called into being by the Climate Group. The aim of the initiative is to emphasise the important role that fi nancial service providers play in the transition to a low-carbon energy industry. The signatories declare that they will gear their management, business strategy, products and consulting services more strongly to the demands of climate change.
In the 2008 financial year, the Supervisory Board at all times fulfilled the tasks and duties incumbent upon it under the law, the Articles of Association and the rules of procedure. We advised the Board of Management in its running of the Group and constantly monitored and supervised its activities.
As Chairman of the Supervisory Board, I regularly discussed with the Chairman of the Board of Management questions of strategy, planning, the Company ’s current business performance and risk management, and events of particular significance in the Group. Dr. Albrecht Schmidt, as Chairman of the Audit Committee, also remained in close contact with Dr. Jörg Schneider between meetings. The shareholder representatives and employee representa tives had the opportunity prior to the Supervisory Board meetings to discuss important topics separately with the Chairman of the Board of Management.
Focal points at the meetings of the full Supervisory Board were the quarterly financial statements and the annual result for 2008. We naturally also discussed the Company financial statements and the Group financial statements for the previous financial year and prepared the motions for resolution by the 2008 Annual General Meeting. At each meeting, we obtained detailed reports on the Munich Re Group’s performance, also compared with its competitors. We received regular overviews of the performance of the Group’s investments. At our request, the Board of Management involved us to a greater extent in its deliberations on the strategic alignment and development of the Group. We discussed the Group planning for 2009 and 2010 in autumn 2008. The Board of Management also kept us abreast of the growth initiatives developed as a result of the Changing Gear programme. Furthermore, at our meetings, the Board of Management informed us about current topics such as the assessment of pandemic risk and developments in US workers’ compensation reinsurance at Munich Re America (MRAm). A particular focus of our interest was the integration of MRAm’s latest acquisitions. Besides this, we concerned ourselves with the development and expansion of the business segment International Health. In the context of the Board of Management’s regular reports on the Group’s risk situation and profitability, we devoted our attention on numerous occasions to the effects of the financial market crisis on Munich Re’s business development. The Group Chief Risk Officer gave us an overview of the work and objectives of integrated risk management and of the current status of the European Commission’s Solvency II initiative. Shareprice performance, dividend policy and the share buy-back programme also featured on the agenda, as did compliance and anti-fraud management, which have been subject to great public scrutiny of late. Finally, we also dealt in detail with the Board of Management’s remuneration system, along with key elements of relevant contracts, as these were to be decided on by the full Supervisory Board for the first time in accordance with the amended German Corporate Governance Code.
The Personnel Committee met six times. In addition to succession planning for the Board of Management, the Committee also considered the appointment and contracts of Board members. It discussed the remuneration system for the Board of Management and the restructuring of individual remuneration components, and prepared the corresponding resolution for submission to the full Supervisory Board. Furthermore, the Personnel Committee reviewed the remuneration of the Board of Management and adjusted it individually. Besides this, the Personnel Committee determined the details of the reorganised retirement plans for the Board of Management and took decisions on the individual pension agreements. It decided on the extent to which the Board of Management achieved its objectives with regard to the 2007 annual bonus, on the individual Board members’ objectives for the 2009 annual bonus and the three-year medium-term incentive plan starting in 2009. The Committee also approved the acceptance of seats on supervisory, advisory and similar boards by members of the Board of Management. In addition, the Personnel Committee prepared information for the full Super visory Board on the adjustment of the Board of Management’s distribution of responsibilities.
The Audit Committee held five meetings in the period under consideration. At two meetings with the external auditor, it discussed in detail the Company financial statements and Group financial statements, the Company management report 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 2007 financial year. The Head of Group Audit submitted his annual report for 2007 and the audit planning for 2008 to the Audit Committee for discussion. The topic of compliance was a routine item on the agenda for every meeting. Additionally, the Compliance Officer reported on the organisation, tasks and responsibilities of his department as well as on individual compliance incidents and enquiries from BaFin. Moreover, the Committee reviewed and monitored the auditor’s independence and commissioned the audit for the 2008 financial year, deciding on its focal points and the auditor’s fees, simultaneously commissioning the auditor with the review of the 2008 half-year report. The Audit Committee also took delivery of reports from the auditor on its auditing and non-audit-related services. Equally, the Audit Committee closely considered the 2008 quarterly reports and the 2008 half-year financial report, which it discussed at length in the presence of the auditor. The Committee determined the focal points of the audits for the 2009 financial year and considered inviting tenders for the audit mandate. Furthermore, it continually monitored the Company’s risk situation, satisfying itself that the experiences of the bear market in 2002/2003 had been successfully implemented in Munich Re’s risk management. The meetings also focused on questions relating to the effects of the financial crisis on Munich Re, with the management of investments also being monitored carefully. The Audit Committee received separate reports on the development of pension provisions and of embedded values in life reinsurance business and in life and health primary insurance business. At the suggestion of the Chairman of the Audit Committee, the Committee conducted a self-evaluation of its work, in which it set out the Audit Committee’s approach to its tasks and procedures in a memorandum of information and drew up an annual topic catalogue.
The Nomination Committee formed in late 2007 took up its duties in 2008 and worked intensively in its first three meetings on preparing the election of shareholders’ representatives by the 2009 Annual General Meeting. This process included drawing up and adopting a set of criteria on the basis of which the Committee subsequently selected eligible candidates, whom it then proposed to the full Supervisory Board.
Corporate governance and Good corporate governance is of particular concern to us. We thus welcome declaration of conformity the fact that the Board of Management has further clarified the Munich Re
Code of Conduct and thereby clearly documented the conduct expected of all staff. The new version of the German Corporate Governance Code has necessitated the amendment of the Supervisory Board’s rules of procedure with regard to responsibility for the system governing the Board of Management’s remuneration. In keeping with the normal schedule, the Standing Committee monitored the efficiency of our Supervisory Board activities and presented the results to the full Supervisory Board for discussion. Further information on these topics and on corporate governance in general is available in the joint report of the Board of Management and Supervisory Board on page 130.
Changes on the On 10 November 2008, the Supervisory Board appointed Dr. Joachim Wenning Board of Management to the Board of Management with effect from 1 January 2009. He has been with the Munich Re Group since 1991, latterly as the Chief Executive Officer of New Re in Geneva. Dr. Wenning is responsible for the Life Division, and succeeds Dr. Wolfgang Strassl, who will now be able to devote himself fully to his responsibilities for Human Resources and the rapidly growing International Health business segment. We have adjusted the distribution of responsibilities on the Board of Management accordingly.
Company and Group KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungs - financial statements gesellschaft audited the following documents and gave them an unqualified auditor’s opinion: Munich Reinsurance Company’s financial statements and Group financial statements as at 31 December 2008, and the management reports for the Company and the Group. All members of the Supervisory Board received the auditor’s reports promptly. At its meeting on 2 March 2009, the Audit Committee conferred in detail about the preliminary year-end figures as at 31 December 2008 and, on 12 March 2009, prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. In this context, it examined in advance the Company financial statements and Group financial statements, the management reports and the Board of Management’s proposal for appropriation of the net retained profits. It discussed them closely with the auditor, who was present at the meeting, and also gave detailed consideration to the auditor’s reports. The Chairman of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting on 13 March 2009.
The stock market year 2008 got off to a disappointing start. Concerns about a major cooling of the US economy and increasing burdens from the subprime crisis made themselves felt on the stock exchanges in the first few weeks of January. The decisive measures of the US Federal Reserve, which lowered interest rates twice in succession, were initially able to halt the downturn. After JP Morgan had taken over the ailing investment bank Bear Stearns in midMarch, there were brief hopes of a rapid end to the crisis, and for a time prices even showed marked gains. But the recovery was only short-lived, and the continuing high volatility on the capital markets was adversely reflected in companies’ balance sheets.
Initially, Munich Re shares were not able to escape the downward trend. Starting at a price of €132.76, they fell below €110 at times up to the end of January, but were able to largely make up for the losses by the beginning of April. In the further course of the year, however, the stock market turmoil took its toll. Our investment result declined appreciably, so that at the end of July we had to revise our original profit guidance for 2008. The market upheavals following the Lehman Brothers insolvency pushed our share price down to €76.17 by the end of October.
These share price gains were backed by a confident outlook for 2009. Prospects for the reinsurance industry improved, with a likely upward trend in prices for cover, which well-capitalised quality providers like Munich Re should benefit from in particular.
Last year, the global stock markets suffered massive setbacks, with fi nancial stocks among the greatest losers. In this diffi cult environment,
With a dividend yield of approximately 5.0% (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 that features the 15 DAX companies with the highest dividend yields.
Share buy-backs continued We are essentially still committed to our share buy-back programme but, as hitherto, will carefully review the advantages and disadvantages before implementing it further.
In the course of the 2008/2009 share buy-back programme, 8.4 million shares with a value of €942m had been repurchased by the end of December 2008. Of this total, 1.3 million shares or €149m were attributable to the put options sold in February 2008 and expiring in October 2008. By the Annual General Meeting on 22 April 2009, we intend to increase the volume as announced to €1bn.
In the year under review, the average daily turnover of Munich Re shares amounted to €252m, putting us in twelfth place among the DAX stocks at yearend 2008. In terms of market capitalisation, we ranked 11th, with nearly €23bn.
Free float still at 100% In December 2008, around 109,000 shareholders were entered in our share register. Our free float, which is significant for the weighting in key share price indices, remains at 100%. The vast majority of shares are held by institutional investors such as banks, insurers or investment companies; 7.2% are in the hands of private investors.
Bloomberg MUV2 WKN 843 002 1 Including minority interests. 2 Adjusted pursuant to IAS 8.
Strong weighting in many indices Given their importance, Munich Re shares are represented in major national and international share price indices like the DAX and the EURO STOXX 50. In the sector indices for insurance companies, our shares have traditionally had a high weighting. In the EURO STOXX Insurance, it stood at 15.4% at the end of the year.
As in 2007, our investor relations work again received recognition from external experts last year. Based on a survey of buy-side analysts, Munich Re received the award for “Most Improved Investor Relations” in the European insurance sector from the Institutional Investor Research Group.
But our activities are not only geared to institutional investors: private investors can contact Munich Re directly at any time as well. All the presentations we use in our meetings with investors are published concurrently on the internet, and we are glad to send these to interested shareholders on request. Many of our events are transmitted live via webstreaming. Enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team.
We publish all important information on Munich Re shares on our website under Investor Relations. In 2008, we also expanded the service we provide on our bonds issues and now offer daily updated price charts. The service pages of our shareholder portal (www.munichre.com/register) offer shareholders various facilities, such as registering to receive documents for the Annual General Meeting by e-mail or updating their registered shareholder data online.
At 45.1%, the proportion of the share capital represented in the votes reached nearly the same level as last year (45.2%). We see this renewed high figure as the fruit of our efforts to actively inform our investors and to encourage them to exercise their voting rights at the Annual General Meeting.
Other capital market instruments To improve its capital structure, Munich Re has issued several subordinated of the Munich Re Group bonds in recent years. With the upheavals on the credit markets, the prices of these securities – like those of comparable bonds issued by other financial institutions – came under pressure in 2008.
The high degree of confidence in our Group’s financial strength is reflected in trading with credit default swaps (CDSs). These tools enable investors 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.
3 First callable on 21 June 2018. 4 First callable in April/May 2009 5 Registered bonds, not listed on the stock exchange. 6 In August 2008, the issuer bought back notes with an aggregate principal amount of US$ 79m.
Munich Reinsurance Company €1.5bn 5.767% until 2017, thereafter fl oating 2007 Undated1 WKN: A0N4EX ISIN: XS0304987042 Reuters: DE030498704 = Bloomberg: MUNRE
– to be the most profitable of the top five globally operating reinsurers, – to expand profitably in growth markets and segments in primary insurance, – to take major steps towards market leadership in the international health market, thereby turning risk into value and enhancing Munich Re’s corporate value on a sustained basis.
Every initiative in the context of Changing Gear is embedded in our integrated risk management, from accepting individual insurance risks to managing whole portfolios or our investments, not to mention mergers and acquisitions. Identifying and evaluating risks holistically – a process that we have substantially developed, continually refined and, above all, practised in recent years – clearly proved its worth in 2008.
The most severe capital market crisis since the Second World War has hit many heavyweights in the financial sector hard, in some cases causing their corporate values to fall significantly. Although Munich Re’s shares also fell in value in the course of last year, they were considered a “safe haven” on the stock markets.
We continue to have sufficient risk capital for risk-carrying. Despite several acquisitions, financed from our own resources, we have been able to carry on with the share buy-back programme launched in 2007 with the aim of returning over €5bn to our shareholders by the close of the financial year 2010. We essentially wish to adhere to this target, but plan to wait a little before further implementation. We will carefully weigh up the benefit of the buy-backs against the advantages of comfortable capitalisation, also with a view to growth opportunities.
Bringing together what Our integrated business model of primary insurance and reinsurance, with belongs together its synergy effects and diversification benefits, has proved its effectiveness.
We are therefore continuing to expand it consistently – on both a large and a small scale.
The financial market crisis also presents us with opportunities. Our acquisition of the Hartford Steam Boiler Group (HSB), agreed on in 2008, is just one ex ample. HSB is a leading insurance and inspection company for engineering risks and previously belonged to the AIG Group. It enhances Munich Re’s already significant position in the field of engineering insurance. Munich Re America will manage both HSB and Midland, as this will enable us to achieve the greatest synergies.
These acquisitions, like others before them, give us greater access to profitable niche segments that we cannot reach through “traditional” reinsurance. They also make us more independent of market cycles in reinsurance and enhance our diversification.
In other words, we are pooling a wide range of services and insurance companies which we can combined and deploy flexibly, depending on market circumstances and specific requirements. This means that in each case we can operate in those parts of the value chain where we can create the greatest added value and grow profitably.
Following our acquisition of Sterling Life Insurance Company in 2007, a specialist health insurer in the USA, the expansion of our international health business is being supported by further initiatives, including the formation of DKV Salute in Italy and the building of a new hospital and provision of healthcare by DKV Seguros in the Spanish municipality of Denia.
“We need more realism and common sense”, says CFO Jörg Schneider, summing up the lessons to be learnt from the fi nancial crisis. In the following interview, Munich Re CRO Joachim Oechslin and Jörg Schneider discuss why insurers in particular cannot rely just on statistical models.
Why has Munich Re come through the turbulence better than other competitors? Oechslin: We were well capitalised prior to the crisis – overcapitalised, some players even thought. Today, we are in a solid position and, above all, have kept our options open. We were also more prudent in our investments than some competitors. Without doubt, this was partly due to the fact that the last crisis back in 2002/ 2003 hit Munich Re harder than others. As a result of that experience, we constantly improved our risk management, with consistent implementation of asset-liability management – the matching of investments with the structure of our liabilities.
In the opinion of the Financial Stability Forum, an international body comprising representatives of central banks and supervisory authorities, the risk management of the fi nancial sector as a whole failed. What went wrong? Oechslin: There is no question that risk management failed in signifi cant areas. In particular, many players extrapolated the relatively low-risk period of recent years more or less unhesitatingly into the future. And the supervisory authorities checked risk models mainly for correct calibration on the basis of historical fl uctuations.
We need more of this common sense again. If a new business idea is submitted to us and we do not understand at least its fundamental elements, we seek clarity by talking to experts. If we are not convinced that the risks are controllable, we drop the idea, even if it means forgoing enticing earnings. So intuition does play a part in the end. Oechslin: For insurers it is absolutely essential not to rely entirely on statistical models but to challenge them, because we know that such tools have their limits. That is why we conduct what we call probable maximum loss scenarios, for instance. In other
“We were well capitalised prior to the crisis – overcapitalised, some players even thought.” Joachim Oechslin
Let us take so-called emerging risks. These are risks arising from new processes of information technology, genetic engineering or nanotechnology, or from changes in the legal system – class actions are a case in point. We need to identify and limit emerging risks as early as pos sible, although we cannot completely avoid them, nor do we want to. Oechslin: The best example of an emerging risk is still asbestos. If the risks of this material had been considered at an early stage, major damage might have been prevented. Today, we concern ourselves much more systematically with emerging risks and attempt to target potential loss scenarios early on. Nevertheless, you cannot be certain that you have correctly identifi ed the danger that lurks around the next corner. Schneider: This is why reinsurers charge margins for the unknown in their prices, for something we cannot measure. After all, this risk is also present and exposes our capital.
Munich Re is to focus even more on risk-based performance indicators in future. What progress has there been here? Schneider: We attach great importance to this and have already made substantial progress. A few years ago, we began publishing our risk capital as the most important indicator, broken down according to the main risk classes. In addition, we communicate the risk-adjusted return on this capital and measure our business performance on the basis of that fi gure. At fi rst, we met with little understanding, because many investors were still focused on absolute profi ts for the year and return on equity, indicators which do not refl ect risk. Oechslin: In the past, we published and explained details of our risk capital mainly in events and presentations for investors. Now we have included this information in our annual report for the fi rst time, enriched with additional analyses and supplementary risk information. This step has been made possible by the increasing stability of our risk models, meaning that we already meet future requirements of Solvency II with regard to transparency.
What lessons should we draw from the fi nancial crisis? Schneider: Let me repeat: Enterprise means seeking opportunities and taking risks, but only those risks whose basic structures you understand. This requires great care but also entrepreneurial fl air. In addition, the industry has to face the fact that permanent returns of 20% or more are no longer possible in competitive markets. Only this realism will restore the urgently needed sense of proportion, which has partially been lost.
CRO Assembly 2008: Risk management as a business enabler More than 80 risk experts from over 20 countries took part last November in the CRO Assembly, an annual event at which chief risk offi cers (CROs) from the insurance industry meet to discuss current trends in risk management.
Munich Re hosted the conference, which is organised by the Geneva Association with Munich Re and Swiss Re alternately. The central topics were the fi nancial crisis, the development of supervisory regulations, and risk management as a business enabler. Although the fi nancial crisis has also cast its shadow over the insurance sector, the industry is signifi cantly more resilient because fi nancing through policyholders’ premiums makes its liquidity situation more stable than that of other fi nancial service providers. Holistic risk management has been crucial in helping the industry weather the storm. Not only is it based on statistical models but it also includes the limitation of concentration risks, probable maximum loss limits and stress tests. The conference participants were in agreement that the role of risk management will continue to develop – away from pure control towards the function of a business enabler. Risk management will become an integral part of the development process for insurance products, leading to an expanded role in product design. There was also consensus among the participants, who featured representatives from the insurance industry, fi nancial supervisory authorities and rating agencies, that only internationally harmonised supervision can meet the challenges of the future.
Conference participants in the passageway designed by US light artist Keith Sonnier for Munich Re.
A further hallmark of excellence – Excellent cooperation partners 35_Magazinteil_e 27 13.03.2009 13:09:20 Uhr
Besides substantial capacity and excellent fi nancial strength, we offer our clients additional support in their value creation, namely in those very areas where they require the expertise of a leading reinsurer. This strategy also pays off for our shareholders, for at the end of the day the cooperations help us to develop profitable new growth fi elds for ourselves and to optimise our risk management.
The think tank as an ivory tower – that was yesterday. Today, the “pro duction” of new risk solutions is like every other process: integrated into a close-knit network. Internal and external knowledge provides the raw material which our specialists “refi ne” to devise new products. To make sure we have the whole picture, with all the facts, we cooperate with renowned partners that are leading institutions in their fi eld.
Risk Management Solutions – Risk research drives modelling development Risk Management Solutions (RMS), founded in 1988, is one of the world’s leading providers of models and tools for the quantifi cation and management of accumulation risks, ranging from natural disasters to man-made catastrophes such as acts of terrorism. The increasing complexity of risks poses a permanent challenge for both a professional model provider and a leading risk carrier – this is exactly the starting point for our long-term, non-exclusive collaboration with RMS. Together we research new and emerging sources of risk for which adequate models have yet to be developed, such as global terrorism, liability, and disease pandemics. We also analyse areas of risk that continue to present challenges in modelling and its applications, including the key drivers of uncertainty and sensitivity to data quality. As a consequence, we add new insights to our knowledge of risks, methods and modelling, optimise our risk management, and promote innovation on the boundaries of insurability – to the benefi t of our clients. Hemant Shah, President and CEO of RMS on his expectations of the cooperation: “Munich Re is already an industry leader in its utilisation of models to make effective business decisions. Looking forward, both RMS and Munich Re see signifi cant opportunities for catastrophe and other classes of risk models to catalyse an even greater degree of innovation and effi ciency in risk management practices. We look forward to exploring the frontiers together, and to this exciting collaboration.”
What all natural hazards have in common is their highly destructive force and their capacity to affect large areas and cause huge fi nancial losses. As reinsurers often have to carry the lion’s share of such losses, it is vitally important for us to master the complex risk of climate change and its implications. Only if we understand the resultant risks and opportunities in detail and respond at an early stage to changes in risk evaluation, modelling and product development, can we carry such risks and secure our commercial success. With this in mind, we supplement our internal knowledge with excellent external know-how. A prime example is the work of our geoscientists.
Offshore wind turbine: The efficient use of renewable energy can help curb climate change. But wind farms are prone to losses, so appropriate in surance solutions are in demand.
To keep our internal expertise up to date, to meaningfully supplement it and to make available our many years of experience to others, our experts from the Corporate Climate Centre play an active role in a global network of scientists, associations and organisations and are involved in numerous research and development projects. They thus provide good examples of external networking.
An excellent example of the wealth of knowledge we have developed is the Globe of Natural Hazards, which combines the geoscientifi c data and fi ndings we have accumulated over a period of almost 35 years. First devised as a wall map in 1978, the product has established itself as a standard work for the identifi cation, exposure assessment and risk management of natural hazards.
DAMAN demonstrates on a small scale the factors that will drive the global health market in the coming years. The traditional model of pure risk assumption by primary insurers and reinsurers does not go far enough, and the provision of services and management is rapidly gaining in importance. Hence the key to success lies in an integrated approach. Munich Re has created the necessary structures for this: in future, it will conduct all health business except German health primary insurance as a separate Group business segment – International Health – underlining the signifi cance of the healthcare market for the Munich Re Group.
Expats with an income of above €900 can also take out comprehensive health insurance, whose cover includes care in private clinics and some treatment abroad. Here Munich Re has not only taken on the health care management but also functions as the primary insurer and reinsurer. Altogether, more than 1.1 million for eign employees benefi t from DAMAN’s products and services. Its insureds also include another half a million local citizens from the United Arab Emirates. “No one credited us with getting so many clients in such a short time”, says Bitzer, refl ecting on the scepticism he encountered at the start. The present number of insureds is twice as high as originally planned; premiums are actually three times higher.
There are several reasons for this success. Munich Re’s pioneering role in building up insurance in the Gulf Region proved a valuable advantage in negotiations with the government of Abu Dhabi. Even though the market has developed dynamically in the meantime – around two dozen competitors are now active there – we aim to extend our leading position. The chances of doing so are good: after all, Munich Re has gathered a fund of experience in the region and the right expertise for optimally designing and introducing health insurance schemes.
Public property to be returned to the local government after 15 years
Denia, a municipality in the Province of Alicante, and its integrated healthcare concept.
Mr. Oletzky, you took up your position as Chairman of the Board of Management in January 2008 and have launched an ambitious programme with your objectives for 2012. What kilometre mark has the marathon runner Oletzky now reached with ERGO? Torsten Oletzky: A marathon is 42 kilometres – a long distance, but with regular training and good form on the day, I can run it in just under four hours. Our action programme ERGO 2012 extends over a period of fi ve years: you need more stamina for that. We have got off to a reasonable start and are well underway. We are tackling our ambitious objectives step by step, but we have only completed the fi rst stage of the course so far.
What are your main work priorities? Oletzky: We aim to grow further in Germany and internationally, and at the same time to become better and more effi cient. We need both these factors – growth and quality – to achieve sustained success. As I see it, my main task is to maintain the right balance between these goals and advance them both strategically and operatively.
What distinguishes ERGO from other primary insurers? Oletzky: Particularly in Germany, we combine several brands under one roof whose individual strengths we can fully exploit in marketing. We offer our products via the full range of distribution channels and have competent and qualifi ed agents who can advise clients appropriately according to their specifi c needs. After all, clients want to be convinced of a product’s value. Our broad set-up is also an advantage. Especially in the current situation, it is an enormous plus. From life, health and propertycasualty insurance to legal expenses and travel insurance – ERGO can provide private, commercial and industrial clients with all the products that the German market can offer. This makes it easier for us to cope with diffi cult business environments as well.
“As a result of the fi nancial crisis, traditional life insurance will regain importance as an instrument of old-age provision.”
All in all, we have high expectations of the Indian market, especially if the limit for participations in joint-venture companies is raised from the present 26% to 49%, as planned by the government. In Southeast Asia, we are currently looking at further business opportunities. Besides this, we are keeping a very close eye on the Chinese market and have already had talks with potential business partners. But more important to me than quick success is fi nding a partner that is a good fi t for us in the long term.
can operate on a different scale in this sector, which opens up additional opportunities for us. Beyond this, there are close ties between our managements. Our Board member for Finances, Investments and Life Insurance came from Munich Re, and conversely a former ERGO manager is today responsible for the reinsurer’s investments. And there are numerous other examples at company levels below this. I would welcome it if even more colleagues from the operative area moved between business fi elds. Such a change in perspective helps all sides. I am sure that our operations will be even more closely inter meshed in fi ve years.
If you venture a look ahead, where will ERGO be in a few years? Oletzky: In fi ve years, I see ERGO as an international insurer that is at the very top in terms of profi tability and client satisfaction. We aim to establish ERGO as a hallmark of quality and operative excellence. At the same time, we will carry on growing and consistently seek out attractive business opportunities, especially internationally. Our integration experience will be of great help to us in this. From the formation of ERGO in Germany and a large number of international acquisitions, we know how to successfully incorporate new units. In short, we want to make the joint undertaking ERGO even better. And we are making good progress in this direction.
Where do you benefi t from one another? Oletzky: The Group’s know-how, especially for overarching topics like risk management and control systems, provides extraordinary added value for ERGO, which we have profited from enormously in past years. We learn from experience gained in reinsurance business and simultaneously contribute our primary insurance perspective. By combining the Group’s investments and assigning the asset management to MEAG, we
When heirs quarrel, it is not only common sense that is often lacking but also liquidity – this is all the more true, the bigger the estate. To determine what each person is entitled to, there is mostly little alternative but to go to court, and that involves great expense where a large sums are involved. For such cases, D. A. S. Litigation Financing offers an attractive concept. Above a value in dispute of €50,000, it assumes all litigation expenses and lawyers’ fees for potentially successful lawsuits. If the claimant wins, he has to pay a percentage share of the proceeds as a consideration. If the suit is lost, the fi nancer carries all the costs. Lawyers also benefi t from the many years of litigation experience in specialist areas. Thus the business model embraces not only inheritance and insolvency but also law relating to medical malpractice and architects’ fees.
Europe is growing together – but getting a claim settled after a car accident abroad still costs time and nerves. For example: A German driver is involved in an accident with an Italian driver in Austria – he is then confronted with different country -specifi c claims settlement rules, as well as language barriers. Although the European Union brought about improvements for accident victims with the green card scheme and the fourth motor directive, settling claims can often take a very long time, given the coordination required across borders between different insurers. With TPL-Car-Net, the ERGO Group has created a settlement network to ensure that such claims are dealt with swiftly. The local ERGO companies, other insurers and claims adjustment offi ces support each other with swift communication and a uniform claims handling process. Lengthy correspondence with foreign contacts and expensive claims adjustment offi ces are thus a thing of the past.
Many can’t wait for it, but for more and more people retirement is becoming an increasingly distant prospect – in Germany, the retirement age will gradually rise between 2012 and 2029 until it reaches 67. “Working-time accounts” are a way of enabling workers to retire earlier. Employees can pay any overtime, remaining leave or special leave, as well as any compensation components, into a long-term working-time account. With the accumulated credit, employees can reduce the period they have to work until retirement without sacrifi cing earnings. German legislation has recognised the increasing importance of this HR policy tool and therefore, as from 2009, provides additional rules for working-time accounts which should further increase their prevalence. The ERGO life insurers Hamburg-Mannheimer and Victoria are among the top providers of arrangements for long-term working-time accounts and offer two basic variations: employees’ contributions to their accounts are paid either into an insurance with a guaranteed interest rate or into a special fund model. Competent advice and well-conceived, full-service solutions: this is what makes the ERGO companies stand out from the crowd.
Managing such gigantic projects is an enormous challenge. Immense values are concentrated in an extremely small space, often involving the use of novel technologies. Munich Re is a much-sought-after partner especially in such cases, offering not only its fi nancial strength but much more besides: its engineers’ know-how and practical experience, structured risk analyses, and customised coverage concepts.
Abu Dhabi, December 2007: Our civil engineer arrives on the site to meet with the local insurer’s representative and the project manager. Apart from a great deal of sand, there is little to see at the moment, but in seven years’ time this will be the site of a new city. The following fi ve hours of intensive discussions confi rm again what our engineering underwriters call a “secret of success”. “The in surance of such huge projects is a people business; you have to speak the same language. Professional competence is a fundamental requirement for the principal to gain trust and recognise that the project is in good hands. “The important thing is to ask the right questions at the right time and to offer solutions”, says Bendel, who had previously spent ten years in project management at an international construction company. “And whether you are taken seriously by the other side starts with whether you wear safety boots on the building site or a tie.”
Munich, January/February 2008: By this time, the head offi ce wheels are turning at top speed. The underwriter responsible for this project is in permanent contact with everyone involved in the production of the quotation and the contract: client managers, colleagues in Integrated Risk Management, the legal department, and the Board of Management. This is because, for a project of this size, the quotation requires top-level approval.
Munich, March 2008: After three months of intense negotiations, the contract is fi nally in place, with Munich Re acting as leading reinsurer. The principals were won over by our risk expertise and our detailed quotation. “The in-depth talks and the site inspection enabled us to show exactly where the risks were and how we would deal with them. At the same time, they helped us make our quotation technically transparent, ” Bendel explained. “Our business partners were convinced that they could profi t from the experience Munich Re had gained with other major projects like Burj Dubai, Dubai Mall, which is currently the world’s largest shopping centre, and Dubai International Financial Center.”
Yas Island will be fi nished in 2014. We will keep a constant watch on the progress of construction work until then. Munich Re provides cover for about 800 projects around the globe, each with a volume of more than a million euros.
Other success factors 122 Clients and client relationships 122 Research and development 124 Staff 125 Corporate responsibility 127 Security and availability 129
Prospects 144 Overview 144 Economic parameters 146 Development of the Munich Re Group 148
Reinsurance group Of the gross premiums totalling €21.8bn written in 2008, around 67% came from property-casualty and 33% from life and health business.
The reinsurance group is active in nearly all branches of life, health and property -casualty business, the latter being subdivided into the liability, personal accident, motor, marine, aviation, space, fire, engineering, credit and bonding and other classes of business. Under the last heading, we subsume the remaining classes of property business, i.e. burg lary, glass, hail (including agricultural reinsurance), water damage, contingency, windstorm, livestock, householders’ and homeowners’ comprehensive reinsurance as well as fidelity guarantee reinsurance. In the two reinsurance segments, we also book our various specialised primary insurance activities that are managed by the re insurance organisation.
The divisions Life and HealthCare underwrite our international life and health reinsurance business, and their structures reflect those of many of our clients, which conduct these two classes of business separately from property-casualty insurance, often through independent entities. The HealthCare division also manages Sterling Life Insurance Company (Sterling), which we acquired in 2008. Through close organisational cooperation and by establishing the International Health Board as the superordinated management body, we have brought together our HealthCare Division and foreign health primary insurers to form the new International Health segment. The aim is to turn this business field into a more independent organisational unit of Munich Reinsurance Company with effect from the second quarter of 2009.
Since 1 January 2008, Global Clients and the former North America Division, which was responsible for our subsidiary Munich Re America, for Munich Reinsurance Company of Canada and for Temple Insurance Company, have been combined in the new Global Clients and North America Division. It handles our accounts with major international insurance groups (hence “Global Clients”) and globally operating Lloyd’s syndicates, pools our know-how in the North American market, and writes business worldwide in special classes such as workers’ compensation and marine. Global Clients and North America is additionally responsible for the management of The Midland Company (Midland), which we acquired in 2008.
The Corporate Underwriting Division is an independent entity without responsibility for operative business. It performs an important function for the reinsurance group in the property-casualty segment: its staff clarify fundamental issues of underwriting policy, oversee quality assurance, integrate math e matical methods into our business processes, and set standards for claims management.
Europe and Latin America Bell & Clements (London) Ltd., London Bell & Clements (USA) Inc, Reston, Virginia B&C International Insurance, Hamilton, Bermuda Munich Ré France Branch, Paris Munich Reinsurance Company UK General Branch, London Münchener Rückversicherungs-Gesellschaft A. G. Sucursal España y Portugal, Madrid Münchener Rück do Brasil Reseguradora S. A., São Paulo Münchener de Argentina Servicios Técnicos S. R. L., Buenos Aires Münchener de Colombia S. A. Corredores de Reaseguros, Santafé de Bogotá D. C. Münchener de México S. A., Mexico City Münchener de Venezuela C. A. Intermediaria de Reaseguros, Caracas Muenchener Hellas Reinsurance Services S. A., Athens Münchener Rück Italia S. p. A., Milan
Global Clients and North America MSP Underwriting Ltd., London Munich Re Underwriting Limited, London The Roanoke Companies Inc., Schaumburg, Illinois Northern Marine Underwriters Limited, Leeds Watkins Marine Services Limited, London Watkins Syndicate Hong Kong Limited, Hong Kong Watkins Syndicate Middle East Limited, Dubai Watkins Syndicate Singapore Pte. Limited, Singapore Munich Reinsurance Company of Canada, Toronto Munich Reinsurance America, Inc., Princeton, New Jersey Temple Insurance Company, Toronto The Midland Company, Cincinnati, Ohio The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware The American Alternative Insurance Corporation, Wilmington, Delaware
¹ A complete list of shareholdings can be found on our website at www.munichre.com.
Management report Munich Re Group 95% of our premium income derives from the ERGO Insurance Group, which is made up of the long-established German brands Victoria, Hamburg- Mannheimer, DKV and D. A. S., and also KarstadtQuelle Versicherungen. Europäische Reiseversicherung, which thus far had been owned directly by Munich Reinsurance Company, was integrated into ERGO together with Mercur Assistance with effect from 1 January 2009. The segments (life, health and property-casualty business in Germany, foreign business as a whole) are managed centrally by ERGO. The individual brands provide significant franchise strength and enjoy a high profile among clients. A combination of sales channels is used for marketing the brands: apart from their own strong sales organisations, their wide variety of broker relationships and extensive banking cooperation with the UniCredit Group are important.
In addition to our core activities in Germany and the European markets with predominantly strong growth, we are also present in South Korea and India. Beyond this, we are seeking to tap further selected primary insurance markets in Asia. ERGO’s main companies outside Germany are the ERGO Italia Group, the health insurer DKV Seguros in Spain, the Polish property-casualty insurer ERGO Hestia, and the Turkish ERGOISVIÇRE Group.
Mercur Assistance offers 24-hour assistance services worldwide in the fields of medicine and mobility.
In 2008, our primary insurance segment also included the Watkins Syndicate. It operates within Lloyd’s of London and has been part of the Munich Re Group since 1997, specialising in marine insurance business. Watkins has taken advantage of the favourable conditions over the last few years to significantly strengthen its market position. Today it is the largest marine insurance syndicate at Lloyd’s and is represented in the UK, Hong Kong, Singapore and Dubai. From the 2009 financial year, we will report the business of the syndicate in reinsurance, since Watkins has been incorporated into the reinsurance group.
MEAG is internationally oriented, with offices in New York and Hong Kong. Since July 2006, it has held a 19% stake in PICC Asset Management Company Ltd. (PAMC), Shanghai, the asset management subsidiary of the People’s Insurance Company of China (PICC).
Our value-based management is characterised by the following aspects: – We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed, which is material in measuring added value as well. As the heavy losses investors sustained in 2008 demonstrated all too clearly, the risk-return relationship reveals how beneficial an activity is from the shareholder’s point of view.
The embedded value relates to the portfolio existing at the valuation date. 100% of our life reinsurance business and more than 90% of our life primary insurance and long-term health primary insurance business is reflected in the embedded value. The latter does not include the value of future new business. However, the valuation is made under the assumption of continued operations, i.e. taking into account the related costs in particular. Options and guarantees – especially for the policyholders – are explicitly valued using stochastic simulations. All cash flows are valued on the basis of the “swap rates” of the respective currency regions at the valuation date of 31 December 2008. Assets that are traded on the capital markets are valued on the basis of the market values observed at the valuation date.
The change in embedded value within one year, adjusted for effects of exchange rate fluctuations, acquisition or sale of companies, dividends and capital injections, is shown by us as the total embedded value earnings. Adjustments to eliminate the influences of changes in fiscal and capital- market parameters give the operating embedded value earnings, which are a measure of the operative business performance for one year.
Our steering of the Munich Re Group’s investments is strongly geared to the structure of the liabilities on our balance sheet. With the help of asset-liability management, we determine the “economic neutral position”. This involves a synthetic investment portfolio which – taking into consideration significant additional parameters in the investment of capital – best reflects the characteristics of our liabilities towards clients.
As part of an optimisation process, a benchmark portfolio is developed that takes account of our own risk-bearing capacity and other investor preferences on the basis of long-term expectations of capital market yields. Our asset manager MEAG is responsible for implementing this strategic benchmark portfolio using concrete investments, from which it deviates only within a carefully defined framework and taking into account its own market view for the respective financial year. The target return, i.e. the expected income from the benchmark portfolio, is compared with the return from the actual port folio. MEAG’s performance is measured in terms of the excess return it achieves, taking into consideration the risks entered into.
The combined ratio, which is calculated as the percentage ratio of the sum of net expenses for claims and benefits plus net operating expenses to net earned premiums, corresponds to the sum of the loss ratio and the expense ratio. Put simply, a combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Net expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses. The portion of other underwriting expenses not considered includes, for example, German fire brigade tax. Net operating expenses chiefly comprise the costs arising in the acquisition of new business (e.g. commission) and for the ongoing administration of insurance contracts.
In the property-casualty reinsurance segment, there were net expenses for claims and benefits of €9,362m (9,172m) and net operating expenses of €4,019m (3,853m) in 2008, compared with net earned premiums of €13,448m (13,507m). The combined ratio thus amounts to 99.5% (96.4%), a satisfactory figure considering that the impact of major losses from natural catastrophes was €832m or 6.2% of net earned premiums in 2008, and hence greater than in the previous year. Our cycle management and underwriting discipline continue to form the basis of this success.
In 2008, paid claims and the change in claims provisions in the property-casualty primary insurance segment (including legal expenses insurance) totalled €2,818m (2,569m) and net operating expenses €1,597m (1,520m), compared with net earned premiums of €4,841m (4,380m). Our combined ratio in primary insurance thus amounts to 91.2% (93.4%) – an excellent figure both in absolute terms and in comparison with competitors.
Rather, the key factor we consider is economic value added, which cannot be properly reflected by the combined ratio. We pursue this target internally through the performance indicator of value added, which measures value creation not only on the basis of current and forecast profits but also taking into account the size of the risks assumed. Thus, when considering Group performance, we gear targets (by way of a common, linking element) to a riskadjusted return. Although this is not a direct performance measure, it is a strong indication of the Group’s value creation.
At what level should the Our RORAC target is a sustained return on risk-adjusted capital after tax of RORAC target be set? 15% over the whole market cycle. This target underlines our fundamental commitment to a long-term increase in our corporate value.
The life and health primary insurance business, managed and measured on an embedded-value basis, will contribute to the IFRS consolidated profit and thus to reaching the RORAC target, even though IFRS consolidated results are based on the individual financial-year perspective.
Our targets – In selecting suitable targets, contrasting aspects have to be considered and Ambitious but attainable weighed up. On the one hand, undue complexity should be avoided in order to ensure transparency for investors, staff and the public. On the other hand, the challenge lies in reflecting economic realities as closely as possible, avoiding oversimplification, and enshrining added value as the Group’s overriding guiding principle. As the above description shows, the background is multifaceted, especially as the parallel use of different performance indicators is unavoidable.
We are convinced that we are on the right track with RORAC as our primary key performance target. Whether and to what extent our targets are attainable depends in equal measure on the way in which the economic parameters develop and on the random occurrence of major losses. Despite the particular uncertainties of the environment, we will do our utmost to continue successfully steering our Group through the economic crisis.
RORAC = net income – interest rate x (1 – tax rate) x additional available economic equity risk-based capital 40_Lagebericht_e 5940_Lagebericht_e 59 10.03.2009 11:29:05 Uhr10.03.2009 11:29:05 Uhr
In reinsurance, the Corporate Underwriting Division develops guidelines and best-practice principles for the handling of our reinsurance business. Corpor ate Underwriting thus defines standards for the underwriting, pricing and claims management of our non-life business. Besides this, regular reviews are conducted to make sure that these standards are complied with. In this way, we ensure that the quality of our reinsurance business is consistently high and that we respond swiftly to changes and new developments. Since Cor por ate Underwriting is closely linked to our operative business, it can generate needs-oriented products and services for our clients as well. For the life and health segments, this task is assumed by specialists in the Life and HealthCare Divisions who, with the help of underwriting guidelines and reviews, also see to it that the business written always meets our high standards.
Dr. rer. pol. Thomas Blunck Special and Financial Risks Reinsurance Investments Central Procurement
Dr. jur. Jörg Schneider Group Reporting Group Controlling Corporate Finance M&A Integrated Risk Management Group Legal, Compliance Group Taxation Investor and Rating Agency Relations
Dr. oec. publ. Wolfgang Strassl (Board member responsible for personnel and welfare matters, within the meaning of Section 33 of the German Co-Determination Act) Life (until 31 December 2008) HealthCare Human Resources
Dr. oec. publ. Joachim Wenning (from 1 January 2009) Life (from 1 January 2009)
Prof. Dr. rer. nat. Dr.-Ing. E. h. Henning Kagermann Chairman of the Executive Board and Chief Executive Officer of SAP AG
Prof. Dr. rer. nat. Drs. h. c. mult. Hubert Markl Former President of the Max Planck Society
Judy Võ Employee of Munich Reinsurance Company 40_Lagebericht_e 6240_Lagebericht_e 62 10.03.2009 11:29:05 Uhr10.03.2009 11:29:05 Uhr
Dr. oec. publ. Wolfgang Strassl DKV Deutsche Krankenversicherung AG2 – Mecklenburgische Lebensversicherungs-AG
Prof. Dr. rer. nat. Dr.-Ing. E. h. Deutsche Bank AG Nokia Corporation, Finland
Wolfgang Mayrhuber Bayerische Motoren- Werke AG Heico Corporation, Miami Eurowings Luftverkehrs AG Swiss International Air Lines AG, Basel Fraport AG Lufthansa- Technik AG4
Prof. Dr. jur. Dr.-Ing. E. h. Hochtief AG KOC Holding A.S., Istanbul Heinrich v. Pierer
Dr. jur. Dr. h. c. Albrecht Schmidt – Thyssen’sche Handelsgesellschaft m. b. H.
In addition, the insurance industry’s regulatory environment is being affected by profound changes. The introduction of new rules for state supervision in Europe (Solvency II) and new accounting standards have implications for insurers’ capital requirements and income statements. Besides this, the current crisis on the international financial markets is producing great uncertainty, also with regard to state intervention. In this context, both the demand for insurance cover and its supply will change. A group like Munich Re, among the leaders in integrated risk management, can take advantage of the chan ging industry dynamics and exploit the business opportunities they present in reinsurance and primary insurance.
The international financial crisis and the macroeconomic parameters had a major effect on the insurance industry, especially in the second half of 2008. Growth in the global economy slowed significantly in the third and fourth quarters. After reaching record levels in the first six months, the oil price declined noticeably in the further course of the year. The international financial markets were disrupted significantly, with stock markets in Europe, the USA and Asia suffering some massive price setbacks. By the end of the year, they had recorded substantial losses.
Growth was subdued in the majority of the emerging economies in Asia, Eastern Europe and Latin America, and export-oriented sectors in particular felt the effects of the economic stagnation in the industrialised countries. The Chinese economy remained very strong despite the slowdown, with real growth totalling 9.0%. In India, too, the expansion rate remained high despite a minor slowing in momentum. Russia experienced a distinct slackening of growth owing to declining exports of raw materials, although these still remained at a high level. Thanks to strong domestic demand, the slowdown in Brazil’s growth dynamic was comparatively slight.
Insurance industry Writing business at risk-adequate prices was once more the central issue on the insurance markets in 2008. In the reinsurance renewals at the beginning of the year and at 1 April and 1 July, it was again apparent that most market players were giving priority to selective and profit-oriented underwriting. Nevertheless, reinsurance prices initially showed a downward trend.
Following the international financial crisis and high losses from natural catastrophes, the reinsurance industry’s capital base deteriorated for the first time in years. A simultaneous decline in the capitalisation of many primary insurers led to an increase in demand for reinsurance at the end of the year. In the renewals at 1 January 2009, market terms and conditions in most regions and lines of business hardened, even improving markedly in some cases.
In general, development of the insurance markets was supported by the still robust economy up to mid-2008. This applied especially to markets in emerging economies. In China and India, for example, the figures up to and including
The insurance industry in Germany grew slightly by 1.5% compared with the previous year, the growth rate being curbed by continued strong competition and the economic uncertainty felt by many citizens.
In Europe, the majority of insurance companies have withstood the crisis comparatively well. This could be partly attributable to the advance effect of the European Commission’s Solvency II project, which has been the subject of intense discussion since 2005 and represents a complete overhaul of insurance supervision law in Europe. The new legislation is due to come into force in around 2012, but many insurance companies, including Munich Re, have been working for some time on preparing for the future supervisory regulations.
The new regulations specify explicitly that a company’s management is responsible for establishing proper business organisation and for instituting adequate risk management. Essentially, it must be ensured that risks specific to the company are dealt with effectively. To achieve this, all the significant risks to which an insurance company is or could be exposed need to be identified and dealt with appropriately. This means setting up processes in the company with which risks can be identified, analysed, evaluated, managed and monitored.
– Consolidated result of €1.5bn despite global financial crisis – Return on risk-adjusted capital (RORAC) of 6.9% after tax – Dividend of €5.50 per share planned
The financial year 2008 proved difficult owing to the global financial crisis. A large number of financial services providers had to revise their profit guidance.
Considering the turmoil on the financial markets, our investment result was respectable thanks to our balanced investment policy and the use of equity hedging instruments. The investment result of primary insurance and reinsurance contributed €5.8bn (9.3bn) to the Group result before participation of policyholders and tax. Compared with the excellent previous year’s figure, this is equivalent to a decrease of 36.8%. At 3.4%, the return on investment (based on the average investment portfolio at market values) was distinctly below our long-term target of 4.5%. Key factors were lower capital gains than in the previous year and high write-downs we had to make in our equities portfolio because of the financial crisis.
At €1,373m, tax expenses were higher than in the previous year (801m), representing 47.3% (17.0%) of the pre-tax profit. The main reason for this in crease was that – unlike in the previous year, which was favourably influenced by the German business tax reform 2008 – tax expenses did not benefit from any positive special effects in the year under review. In addition, the Group effective tax rate was raised by the negative developments in the cap ital markets, since impairments and losses on equities are not deductible under German tax law.
Premium Approximately 54% of our Group premium income was earned from reinsurance and 46% from primary insurance. Whereas in reinsurance we operate on a global basis, in primary insurance 75% of our premium comes from the German market. In both fields of business, the share of premium from outside Germany climbed appreciably, a trend due not only to organic growth but also to selected acquisitions in growth markets.
Premium in property-casualty reinsurance rose slightly to €14.7bn (14.2bn) but showed an increase of 9.3% after adjustment for currency translation effects. Cycle management, underwriting discipline, client focus and leading expertise continue to provide the foundations for our good results. Rates in the 2008 renewals fell marginally as a result of increasing competitive pressure, but we continue to apply risk-adequate prices, terms and conditions. We will consistently refrain from participating in business that does not meet our stringent profitability requirements and aim to expand specialty segments with strong margins.
In primary insurance, gross premium volume rose by 1.5% to €18.5bn compared with the previous year (€18.3bn). Growth was especially apparent in international business, above all in property-casualty and health insurance. With around 90% of our premium income in primary insurance stemming from the eurozone, changes in exchange rates had practically no impact.
Currency influences The consolidated financial statements are affected by changes in exchange rates. The translation of our independent foreign subsidiaries’ financial statements into the Group presentation currency – the euro – is reflected in our reserve for currency translation adjustments, thus influencing the amount of Group equity. Translation of our foreign subsidiaries’ financial statements has no impact on profit or loss. Generally speaking, rising exchange rates for foreign currencies increase Group equity, whilst falling exchange rates reduce it.
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, i.e. the currency in which the individual financial statement is prepared. Our subsidiaries recognise such currency translation differences in their income statements. Overcoverage1 in a particular foreign currency leads on balance to a positive result contribution if exchange rates for that currency rise, and in a negative result contribution if they fall. With undercoverage, the effects are the opposite. In preparing the consolidated financial statements, we recognise these items under “other income” and “other expenses”.
Beyond this, the impact of changes in exchange rates is reflected in period-toperiod comparisons of all items in the income statement. Thus, for example, gross premiums translated into euros for the consolidated financial statements show a rise if their original currency has appreciated against the euro compared with the prior period. Falling exchange rates have a converse effect.
Events after the balance sheet date Under the share buy-back programme decided on by the Munich Re Board of Management in the second quarter of 2008, we repurchased a further 450,000 Munich Re shares with a volume of €46.3m after the balance sheet date up to 2 March 2009.
1 Overcoverage exists if more assets than liabilities are held in a particular foreign currency.
Consolidation –1.4 –1.5 –1.5 –1.7 –1.8 42_Lagebericht_e 7442_Lagebericht_e 74 10.03.2009 11:28:43 Uhr10.03.2009 11:28:43 Uhr
– Satisfactory result despite substantial losses in property-casualty – Positive business development and solid result in life and health – Significant decline in investment result owing to financial crisis
In the second half of 2008, the risk-carrying capacity of a large number of our clients and competitors in reinsurance was significantly restricted and their need for security heightened due to the dramatic declines in share prices on the stock exchanges. Our risk assessment expertise and, most importantly, our financial strength therefore proved to be other key success factors.
Gross premiums written: Thereof natural catastrophes2 Percentage points 6.2 4.7 1.0 19.2 5.0
Consolidated result life and health €m 573 714 561 977 432 43_Lagebericht_e 7543_Lagebericht_e 75 10.03.2009 11:28:33 Uhr10.03.2009 11:28:33 Uhr
Premium income At €21.8bn (21.5bn), our premium volume in the financial year increased only marginally by 1.2%, mainly because of negative currency translation effects. If exchange rates had remained unchanged, our premium income would have risen by 7.3%. Approximately €16.4bn or 75% of premium was written in foreign currency, of which 50% was in US dollars and 14% in pounds sterling, compared with 25% of our premium volume in euros.
– Life: Solid result despite decline in premium – Health: Premium growth of 38%
The operating result of €934m (1,075m) and the consolidated result of €573m (714m) were both lower than in the previous year, reflecting the impact of the financial crisis on the investment result. The market-consistent European Embedded Value of total life reinsurance business dropped to €6,116m (6,662m), predominantly owing to currency translation effects. The impact of the financial crisis resulted only in a moderate decrease in overall earnings to €498m (859m). By contrast, value added by new business rose markedly to €356m (277m).
With a gross premium volume of €0.9bn (1.0bn), our branch in the United Kingdom kept its premium income stable compared with the previous year whilst increasing its market share in its chosen market segments. Downward pressure on the prices of pure mortality covers continued, but we succeeded in writing increased business volumes as against the previous year and in exceeding profitability targets. In 2008, we continued our focus on client ser vice and on further developing our areas of core expertise, namely risk selection and pricing. We expect another good result in 2009, irrespective of the performance of the UK economy.
Our long-term positive attitude to Asia remains unchanged, but the effects of the global financial crisis on our clients and thus on our business are difficult to assess.
Health The global healthcare market with its segments “financial protection”, “health services” and “provision of care” offers more growth opportunities than virtually any other sector. Our core business, financial protection, offers the prospect of especially promising growth. Two factors in particular are con ducive to demand: healthcare is gaining in significance, and healthcare systems worldwide are undergoing further liberalisation and privatisation. As a leading provider whose product portfolio of primary insurance, reinsurance and services has been combined in the International Health segment since October 2005, Munich Re is well-positioned for this market.
With the acquisition of Sterling, we have strengthened our International Health segment and competitive position in the American market. Premium income since the first-time consolidation of Sterling as at 1 April totalled €538m in 2008. Sterling holds a good position in the growing market for Medicare Advantage plans, which comprise health insurance solutions under the state Medicare programme that are offered and managed by private insurers. The market parameters for products geared to seniors are defined at political level. In 2008, changes occurred that have confronted Sterling with new challenges. Notwithstanding the political risks involved, this market is 43_Lagebericht_e 7943_Lagebericht_e 79 10.03.2009 11:28:33 Uhr10.03.2009 11:28:33 Uhr
In the Gulf states, our business model combining reinsurance and risk management through our managed-care service organisation MedNet continued to show robust growth. Similarly, our partnership with DAMAN Health Insurance (DAMAN), Abu Dhabi, the first specialised health insurer in the United Arab Emirates, is working extremely well. In April 2008, DAMAN already reported over a million (800,000) members. DAMAN also assumed responsibility for managing the health insurance of Abu Dhabi’s approximately 450,000 nationals, which is provided free of charge by the government. The company’s premium income rose to €75m (64m). In addition to reinsurance, we also supply DAMAN with comprehensive services under a management agreement. In order to further strengthen our cooperation with the government of Abu Dhabi, Munich Re acquired a 20% stake in DAMAN in 2008.
There are privatisation trends in other Gulf states, promising further high growth in the medium to long term. In 2008, our premium volume in the Gulf states rose to €143m (120m), accounting for 8% (9%) of premium in health business.
Since 2007, the Munich Re Group has been running Apollo DKV Insurance Company Limited (Apollo DKV), one of India’s first health insurers, in a joint venture with Apollo Hospitals Group (Asia’s largest chain of hospitals). The aim is to offer people in India better access to healthcare and to give the country’s health insurance sector new stimulus.
Other markets, in particular the United Kingdom, the Netherlands, and Italy, plus China and other Asian countries, form part of our overall health portfolio. This broad regional spread enables us to limit the political and economic risks of our business.
– Solid result of €1,755m considering the financial market turmoil – Respectable combined ratio of 99.5%
Result Based on our satisfactory technical result and – in the light of the global financial crisis – notable investment result, we achieved an operating result of €2,822m (3,063m) and a consolidated result of €1,755m (2,586m). Having benefited in the previous year from positive special factors due to the German business tax reform, the expenditure for taxes on income levelled out at €845m (285m) in the year under review. The substantial increase in major loss expenditure and the erosion of prices for our basic business caused the combined ratio to climb to 99.5% (96.4%), which is still quite respectable given the overall situation. Total losses from natural catastrophes came to €832m (634m)1, represent ing 6.2 (4.7)1 percentage points of the combined ratio.
At €677m (469m)1, man-made major losses in 2008 were within the long-term average. The biggest single loss was an explosion at a sugar refinery in the USA, costing us €68m.
1 Change in methodology: Previous year’s figure adjusted owing to a change in the threshold for major losses.
In the Europe and Latin America Division, the combined ratio for 2008 fell to a gratifying 91.7% compared with 95.0% in 2007, when claims experience had already been good.
In the Global Clients and North America Division, we registered an increase in the combined ratio of 6.0 percentage points to 101.8%. Natural catastrophes (hurricanes and tornadoes in North America and Winter Storm Emma in Europe) had a stronger impact on the result than in the previous year.
Premium The 2008 renewals were satisfying overall, even though competitive pressure in the international reinsurance markets continued to rise until around midyear. The positive aspect for us is that – unlike in the past – the market cycles are very different, depending on the region and class of business involved. A global reinsurer with a widely diversified risk portfolio such as Munich Re can relocate capacity to profitable segments and regions to optimise its book of business. As in the past, we systematically refrained from writing business that did not meet our requirements for risk-adequate prices and conditions. An integral part of this cycle management is, among other things, the agreement of differential terms, i.e. terms that are better than those obtained by other reinsurers. Our financial security and acknowledged risk expertise are being more and more frequently rewarded with better prices than those achieved by our competitors. In some cases, we even conclude exclusive agreements, or “private placements”, where we are the sole reinsurer of our clients. These measures enabled us to limit price erosion across our full book of treaty business to 2.8%. Thanks to our consistent cycle management and despite a substantial impact from exchange rates, gross premiums written rose to €14.7bn (14.2bn), bolstered by growth through acquisitions and new business. The structure of the portfolio experienced a further shift towards non-proportional reinsurance.
North America Division in 2008, was down due to a reduction in a quota share treaty with a volume in the three-digit million euro range. By contrast, we were able to take advantage of attractive growth opportunities with selected products and existing client relationships. Our majority shareholding in the Lloyd’s syndicate MSP also allowed us to expand our Lloyd’s business in the property classes. The pressure on reinsurance rates prompted us to systematically withdraw from non-profitable business. Overall, our premium volume totalled €5,022m (5,751m).
We maintained our leading market position in Spain. The result was favour able, which we see as confirmation of our successful, profit-oriented underwriting policy. Premium income reduced to €446m (472m) owing to our withdrawal from two major proportional treaties.
Our major-loss expenditure in 2008 was significantly lower than in the previous year. The key factor here was that winter storms were fortunately not as severe as Kyrill in 2007, which gave rise to claims costs of some €150m in Germany alone. The pressure on rates in motor reinsurance, the class of business with the largest premium volume, persisted on a broad front. Re insurance premium volume declined market-wide with lower margins, prompting us to further reduce our book of motor business in 2008.
In Japan and Korea, our premium volume of €555m remained at virtually the same level as in the previous year (565m). 2008 was again a year with few typhoons, and even earthquake activity in Japan was low. Japanese fire business and the engineering lines continued to deteriorate. In our view, measures on the primary insurance side are not yet adequate. We therefore made substantial changes to the composition of our portfolio, for instance by increasing the number of treaties written at terms and conditions that differ significantly from those of other providers. In addition, we placed another catastrophe bond for clients in 2008. Climate change is also a subject of critical importance in Japan. By staging a major exhibition on this subject in Tokyo, we underscored Munich Re’s expertise in this area. Supply and demand for accumulation covers for Japan (earthquake/typhoon) initially remained largely stable, but demand expressed in euros and US dollars experienced a robust increase towards the end of the year thanks to the marked appreciation of the yen. In addition, we supported Japanese insurers in expanding abroad through international reinsurance programmes.
The result for the year was burdened above all by Hurricane Ike in the USA but the combined ratio of 102.0% (85.8%) was still very satisfactory. The financial crisis left New Re largely unaffected, since the company mainly holds low-risk, fixed-interest securities in its investment portfolio.
In the past year, we redefined our US business strategy and assigned responsibility for it to a single Board member. Since then, we have been actively and successfully implementing this strategy. Its focus is on a client-centric approach and the development of even closer partnerships with leading broker firms. In view of the soft market phase that characterised the US market until mid2008, we tapped only selected new business segments in reinsurance and withdrew from unprofitable ones. Munich Re America remains committed to its consistently profit-oriented pricing and underwriting discipline. The combined ratio deteriorated to 135.7% (116.2%) owing to the burdens from hurricane losses and selective reserve strengthening. The successful conclusion of our Midland acquisition gave us access to specialised primary insurance in niche segments of the US market. Moreover, we concentrated on the expansion of property business in this segment and consistently implemented the strategy decided on for Munich Re America’s realignment.
In agricultural reinsurance, we extended our leading position further. The business we wrote mainly comprised state-supported crop insurance programmes, with a large portion stemming from the USA. In close consultation with selected cedants, we apply our vast experience and expertise in this business to other regions with a high potential for profitable growth. As in previous years, the result in agricultural insurance in 2008 was again satisfying.
In aviation and space business, which is characteristically volatile, the picture in 2008 was varied. The price erosion of prior years persisted in aviation, where it spread to covers for light aircraft. As a consequence, we continued to withdraw from underpriced business. Since the non-proportional reinsurance of aviation risks remains very profitable, however, we expanded our business in this area as planned. The aviation insurance market started to harden in the fourth quarter. Having reduced our market share in previous years as a result of stringent cycle management, we expect to see opportun ities for growing aviation business profitably in 2009. Space business, by contrast, developed very favourably in 2008. Although the major-loss burden in the previous year did not result in a reduction in overcapacity, it did give rise to appreciable price increases. These parameters consolidated our position as market leader, improved the quality of premiums and led to increased shares in selected risks. Premium volume in aviation and space business correspondingly grew to €530m (489m). The excellent technical result of €43m (–7m) also reflects below-average claims experience. The combined ratio totalled 89.6% (100.4%).
Our medium- to long-term assessment of the aviation market remains positive. We therefore increased our share in the Global Aerospace Pool to 37.46% (27.25%) in underwriting year 2008 and will raise it to 44.96% from underwriting year 2009 onwards. This pool is managed by GAUM Ltd., the world’s leading underwriting agency for aviation and space business, in which we have a stake of 40%.
The current political and regulatory developments in India give cause for hope that the market will be opened to international reinsurers in the near future. Munich Re remains committed to the strategy of setting up a life and non-life reinsurance branch in India, and is in a close dialogue with the political institutions in this connection. Our strategy is endorsed by the fact that, two years after deregulation, a stabilisation of the market is gradually becoming evident. The emerging improvement is reflected in rising prices on the one hand and the growing number of reinsurance treaties that could be concluded at individual prices, terms and conditions on the other. We are underlining our strategy geared to sustained profitability and aimed at a further expansion of our position in the Indian market by engaging in numerous supporting activities such as market events on topics of particular relevance for India, e.g. natural catastrophes or accumulation control.
The Group’s primary insurers essentially comprise the ERGO Insurance Group and the Watkins Syndicate. From the 2009 financial year, the business of the Watkins Syndicate will be reported in reinsurance, reflecting the fact that Watkins has been incorporated into the reinsurance group. (Specialist insurers in niche segments, whose business requires special expertise, are in some cases coupled to reinsurance as the risk carrier. We therefore transact this business from within reinsurance and book it there accordingly.) Europäische Reiseversicherung, which thus far had been owned directly by Munich Reinsurance Company, was integrated into ERGO together with Mercur Assistance with effect from 1 January 2009. Particular attention is being given to the partners of Europäische and Mercur from other insurance groups, who will continue to be served with the complete spectrum of products. Our primary insurers are active in nearly all branches of life, health and property-casualty insurance. Approximately 75% of their gross written premium income derives from Germany, the remaining 25% stemming from international business, in particular from Europe. The bulk of their business is therefore transacted in euros.
Marketing In primary insurance, we use multiple sales channels. ERGO has more than 21,000 full-time self-employed insurance agents representing its brand insurers and additionally works with brokers and strong cooperation partners. The Group is stepping up its activities in international business under the ERGO brand name. In Germany, by contrast, the brands D.A.S., DKV Deutsche Krankenversicherung, Hamburg-Mannheimer and Victoria are of key importance for ERGO’s tied agents, who generate 55% of sales. KarstadtQuelle Versicherungen, also a member of the ERGO Group, is Germany’s most popular direct insurer. At the end of 2008, ERGO agreed to acquire the remaining shares in KarstadtQuelle Versicherungen from Arcandor AG. ERGO cooperates with the subsidiaries of the Italian UniCredit bank in Germany and several countries in central and eastern Europe.
Combined ratio legal expenses insurance % 93.9 94.5 95.3 99.8 98.9
Result Our primary insurers performed satisfactorily in the past financial year, despite the significant impact of the financial crisis on the investment and subgroup results. Whilst the technical result was at a very good level, the operating result declined appreciably, totalling €477m for the period January to December 2008. Compared with the excellent previous year’s figure of €1,253m, this represents a decrease of 61.9%, for which the investment result was chiefly responsible. The previous year had been favourably influenced by gains on the disposal of real estate and shares. Furthermore, as major invest ors, we too were affected by the exceptional capital-market turbulences and had to make significant write-downs in 2008. Nevertheless, the consistent risk reduction policy we have pursued in recent years is now paying off – otherwise the negative effects of the financial crisis would have been much greater. There was also a high write-down of goodwill for our stake in the Austrian company BACAV acquired in the first half of 2008. The consolidated result in the past financial year amounted to €163m (984m), the difference to the previous year reflecting not only the effects described but also the one-off tax income of €120m in 2007 from the German Business Tax Reform Act 2008. In addition, to optimise its capital structure, ERGO paid out a dividend of around €1bn in the second quarter of 2008 and refinanced this through strategic debt, which was the main reason for a rise in its finance costs of €42m compared with the previous year.
Life and health The consolidated result in life and health primary insurance for the past financial year amounted to €7m (358m).
In line with option price theory, embedded value can be divided into two components, namely intrinsic value and time value. Especially in life primary insurance, there are substantial guarantees and options for the client resulting from terms of their policies as well as statutory and supervisory regulations. The time value of these options and guarantees is determined explicitly using 1,000 stochastic scenarios representing the investments’ volatilities at the balance sheet date. This is necessary because companies can actively influence the time value of these options and guarantees, especially through discretionary scope with regard to profit sharing and through their long-term investment strategy.
In 2008, our life insurers’ overall premium income fell by 1.8% to €7.2bn (7.3bn), with international business increasing by a robust 10.0% and German business dropping by 4.4%. In this context, special mention must be made of the first-time consolidation of BACAV with effect from the fourth quarter of 2008, which contributed 8.8 percentage points to growth. Our activities in Belgium also developed well, whereas German single-premium business, especially via the bancassurance channel, suffered from the financial crisis. Overall, gross premiums written were down 4.5% to €6.0bn (6.3bn). This figure does not include the savings premiums from unit-linked life insurance and capitalisation products such as German “Riester” pensions – business that is playing an ever more important role for us.
Premium income in health business rose by 2.5% to €5.4bn (5.3bn) in the past financial year. In international business, the increase was even stronger at 7.4%, with sales in Spain and Belgium particularly good. Domestic growth was a gratifying 1.6%. In supplementary health business, premium volume was up by 4.3% and in comprehensive health cover by a slightly less pronounced 1.2%. The German health reform had a distinctly adverse impact on new comprehensive insurance business, which showed a year-on-year reduction of 14.8%. This development has to be seen in light of the fact that new business at the beginning of 2007 had been brisk, as clients took advantage of the last opportunity to switch to private health insurance without having to satisfy the waiting period requirement. The three-year waiting period is likely to continue to be an adverse factor throughout the entire transition phase up to January 2010.
Property-casualty In property-casualty insurance, we posted a consolidated result of €156m (626m).
Premium income in the past financial year rose by 4.9% to €5.9bn (5.6bn), with international business continuing to show particularly strong growth of 10.1% to €2.4bn (2.2bn). This development was mainly attributable to the Polish market and to the consolidation of the South Korean direct insurer ERGO Daum Direct from the second quarter of 2008 onwards. Adjusted to eliminate the effect of changes in the consolidated group, gross premium volume still increased by 5.2%. At €2.7bn (2.6bn), ERGO’s German business slightly exceeded the previous year’s level. Premium volume in German motor insurance decreased by 1.1%, since despite sustained price competition, we continue to adhere to our disciplined underwriting policy. Moreover, the positive loss trend of recent years meant that an increasing number of policyholders were reassigned to higher no-claims bonus classes. By contrast, we achieved growth in our target lines of commercial property and liability business where, whilst maintaining our profit-oriented underwriting policy, we posted year-onyear increases of 9.0% and 3.5% respectively, along with small growth of 0.3% in personal accident insurance.
At 58.2% (58.6%), the loss ratio was down somewhat on the previous year’s level. 2007 had been burdened by Winter Storm Kyrill, but 2008 was also affected by numerous local natural events, e.g. Winter Storm Emma and Windstorm Hilal. Costs developed favourably as well, although we still need to make further improvements to enhance our competitive strength. In absolute figures, administration and operating expenses were lower than in 2007, and a look at the expense ratio confirms this pleasing picture: since our premium income rose significantly and operating expenses for own account decreased, we were able to reduce the expense ratio to 33.0% (34.8%). The combined ratio for property casualty business including legal expenses insurance improved by an appreciable 2.2 percentage points to 91.2% (93.4%).
Further expansion of A key part of our strategy is to advance international activities in primary international activities insurance and to increase the share of business written outside Germany. This approach brought us success in the past year, as did the good market knowledge we have gained as a Group from our presence over the years in many of the world’s markets, which has been ideally combined with the primary insurance know-how of the ERGO Insurance Group.
On 17 November 2008, ERGO became the sole shareholder in the Turkish ERGO company ERGOISVIÇRE, acquiring the remaining 25% of shares from the private founders. Since ERGO’s initial acquisition of a stake in the company in 2006, ERGOISVIÇRE has become the fourth-largest insurer in the Turkish property- casualty market. ERGO will continue to expand its successful business in the dynamic growth market of Turkey.
– World’s largest financial crisis for decades brings sharp falls on almost all investment markets
– Equity exposure reduced significantly over the course of the year – Further strengthening of portfolio of fixed-interest securities and loans – Investment result of €5.8bn down significantly on previous year
In the following, we report on the performance of our Group’s own investments, which derive almost entirely from our core business fields of reinsurance and primary insurance. In addition, we provide information on third-party business, where we manage the assets of non-Group institutional investors and private investors.
Liquidity The Munich Re Group’s liquidity is ensured at all times by means of detailed, Group-wide liquidity planning. As a rule, the Munich Re Group generates significant liquidity from its premium income, from regular investment income and from investments that mature. We also attach great importance to the credit rating and fungibility of our investments. Given the maturity structure of the outstanding bonds and the credit facilities employed (which are, in any case, relatively insignificant in scope), the Munich Re Group has no re financing requirements.
Significant developments in Considering the capital market upheavals, we achieved a respectable investthe 2008 financial year ment result of €5.8bn (9.3bn), although this represented a significant decrease of 36.8% on the previous year. The heavy falls on stock markets worldwide on account of the financial crisis have played a crucial part in this deterioration in the result. Owing to our strict application of the impairment rules, the capital market developments led to high write-downs of €4.9bn on our equity portfolios. Thanks to our active portfolio management, this was partially compensated for by the net balance of €2.8bn from write-ups and write-downs de riving from our hedging transactions. Furthermore, our result from disposals was lower than in the previous year, which had benefited significantly from the sale of a German real-estate package and large sections of our equity port folios.
Despite the considerable turmoil on the capital markets, we recorded only a slight reduction of €1.2bn or 0.7% to €175.0bn in Group investments. Above all, our equity portfolio shrank noticeably as a consequence of disposals and falling market values. By contrast, the value of our fixed-interest securities improved over the course of the year, partly due to new investments and partly to interest-rate trends. Especially in primary insurance, we classify longterm fixed-interest securities which are not traded on an active market as loans at the time of acquisition, recognising these at amortised cost. At carrying amounts, our investments in loans thus increased appreciably by €4.9bn or 13.9%. For the additional investment in loans, we used cash flows from in surance business as well as liquid funds from disposals. These reallocations led to shifts in our investment mix.
On 13 October 2008, the IASB (International Accounting Standards Board) fast-tracked an amendment of IAS 39 Financial Instruments relating to the reclassification of financial instruments. In the light of the financial crisis, the changes made are intended to eliminate the potential competitive advantages of US banks by aligning IFRS with US GAAP and to provide balance-sheet relief in the financial sector.
Thanks to our well-balanced investment policy and our already somewhat conservative accounting methods, we do not need to reclassify financial in struments in order to take advantage of these relaxations in requirements. We attach importance to continuity in our accounting practices as well as to the transparency of our assets and results.
The marked year-on-year decrease in the investment result is attributable largely to lower capital gains and the high write-downs we had to make in our equities portfolio because of the financial crisis. The extraordinary result from equities and derivatives with non-fixed-interest underlyings of –€0.2bn represents a decline of approximately €2.3bn against the same period last year. In conjunction with the change in net gains on real-estate sales of around –€0.6bn, this explains the bulk of the overall reduction in the investment result. With a 3.4% return on investment in 2008, we have thus fallen well short of our target of again achieving an RoI of 4.5% (based on the average investment portfolio at market values).
Extraordinary result from equities and derivatives with non-fixed-interest underlying transactions €bn 2008 Change vs. previous year
Investment result by type of investment 2008 Previous year Change €m €m¹ %
Deposits retained on assumed reinsurance and other investments 205 456 –55.0
The modest decline in regular investment income mainly reflects decreasing interest income from the reduced volume of deposits retained on assumed reinsurance. Regular income from loans improved owing chiefly to greater investments in such products, whilst earnings fell on our fixed-interest secur ities available for sale.
We posted net realised gains on disposal of €2,145m (2,803m) in the period under review, €1,004m of this in the fourth quarter alone. In 2007, the sale of a real-estate package comprising residential and commercial properties in Germany had already led to gains on disposal of around €630m. The aforementioned decrease in our result from the disposal of equities compared with 2007 is mainly due to the favourable stock market performance in the first half of 2007, which we had exploited by realising considerable gains on disposals. By contrast, 2008 saw an improvement in our result from expired and closedderivative financial instruments which we had purchased to hedge our equity port folio and whose performance had benefited from the bear market. In the fourth quarter alone, we thus realised net gains of €1,223m from forward sales on shares we had in some cases arranged before the start of the financial year at much higher price levels. However, this was partly offset in the fourth quarter by a result of –€474m (474m) from the sale of non-fixed-interest securities categorised as “available for sale”, almost exclusively involving our equity port folios.
The capital market crisis also led to a major decline in the net balance of writeups and write-downs, due particularly to the heavy share-price losses, for which the derivative financial instruments could not compensate entirely. The following special features of IFRS accounting regulations determine that these effects be recognised in the income statement: Changes in the value of share portfolios categorised as “available for sale” are always recognised in equity with no effect on profit or loss. Only when they are sold are the amounts of such holdings recorded in the income statement. An exception to this rule exists in the event of a sustained impairment. We consider such an impairment to be “sustained” if the stock market price of an equity investment falls below the average historical acquisition cost either for a sustained period, i.e. at least six months, or significantly, i.e. by at least 20%. If an impairment occurs, the accumulated loss previously recognised in equity is eliminated and recognised in the income statement as an expense. Further declines in the prices of equities that have already been written down once are recognised immediately in the income statement (this is referred to as “once impaired, always impaired”). The facts described were relevant for approximately two-thirds of the impairments booked.
Another special feature applies to changes in the fair value of individual equity portfolios for which hedge accounting using derivatives is employed. Where this is the case, any change in value must be recognised immediately in the income statement, i.e. with write-downs for share-price losses and write-ups for price gains. These effects are counterbalanced by the opposite development of the derivative financial instruments.
Between January and December 2008, we had to make total write-downs of €7,191m (2,263m), of which €4,935m (603m) was on our non-fixed-interest securities categorised as “available for sale”, virtually all involving our equity portfolios. Approximately one-third of these write-downs affected equity portfolios for which the losses in value were almost offset by price gains on hedg ing derivatives. Some of the other impairments in our equity portfolio were compensated for by earnings from the performance of economic hedging transactions (without a hedging relationship in the balance sheet). In the course of the year, there were significant increases in the value of derivative hedging instruments, allowing us to achieve a net balance of €2,840m (–533m) from write-ups and write-downs of our derivative financial instruments, €2,831m (–476m) of which was apportionable to derivatives with non-fixed-interest underlying transactions.
Overall, the revaluation of the Munich Re Group’s total portfolio of fixedinterest securities categorised as “available for sale” in the period under review resulted in write-downs totalling €478m, of which €60m is apportionable to fixed-interest securities issued by Lehman Brothers. Our business relations with Lehman Brothers, which involve various capital market transactions, have led to write-downs totalling around €115m net following the company’s application for creditor protection. Beyond this, we made writedowns in the mid double-digit million range on participation certificates, dormant holdings and similar equity instruments. Our 2008 consolidated financial statements also contain write-downs of around €280m on various portions of our US portfolios, commercial mortgage-backed securities, Alt-A and subprime home equity loans because, given the economic prospects, we do not expect them to recover in value.
The majority of our investments are in the European area (95% in primary in surance and 55% in reinsurance). By way of currency matching, we base investments on the currency structure of our underwriting liabilities. The focus of ERGO’s business, and thus also of the technical provisions requiring investment coverage, is on Germany and other European countries. In re in surance, investments and technical provisions have a more international spread; our commitment in the US reinsurance market is reflected by the fact that North America has a 39% share of regional investment allocation.
Real estate Our investments in real estate are geared to generating an appropriate yield from regular income and growth in value, which requires continually monitoring existing properties and property funds with regard to their long-term profitability, and their location- and property-specific risks. Following the sale of the German real-estate package comprising residential and commercial properties that we concluded in 2007, we did not expand our portfolio in the 2008 financial year.
In the current financial year, our investments in loans grew markedly by €4.9bn or 13.9% to €40.4bn (35.5bn). Most of these were in pfandbriefs, government bonds and variable rate notes. The latter participate in rising long-term interest rates, but guarantee a minimum return if interest rates fall, thus helping secure contractually agreed interest-rate guarantees under life in surance policies. A large proportion of these investments were consequently made by our life and health insurance companies. At the same time, the share of investments in fixed-interest securities available for sale in our total investment portfolio moved up by €13.3bn to €107.9bn (94.6bn).
Portfolio of equities and long-term equity investments at market values, hedge quota and (economic) equity-backing ratio
1 Presentation based on economic view and not fully comparable with IFRS figures. The economic view includes cash positions.
As at the balance sheet date, our bank exposure was around 11% of our portfolio of fixed-interest securities and loans, which includes short-term items at market value. Approximately 3% of this portfolio is composed of dormant hold ings, participation certificates and similar equity instruments. In addition, we hold around 9% of our bank exposure primarily in subordinated bonds with limited maturities.
Non-agency other (not subprime) 162 3 2 – – – 167 46_Lagebericht_e 10646_Lagebericht_e 106 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
Market value development of key Capital market developments have a direct effect on our unrealised gains and types of investment, their unrealised losses and on our off-balance-sheet valuation reserves. gains and losses and off-balancesheet valuation reserves The downward trend on the stock exchanges prevalent since the start of 2008 continued apace, especially at the start of the fourth quarter. Prices in the most important in dices have been plummeting globally since January. The EURO STOXX 50 alone lost 1,952 points or 44.4% in the past financial year, 590 points or 19.4% in the fourth quarter. As a result of these developments and our disposals, the market value of our equity portfolios fell from €22.9bn at the start of the year to €5.0bn at the reporting date, equivalent to a decline of 78.4% and involving a €9.5bn decrease in the fourth quarter.
Overall, our off-balance-sheet valuation reserves rose by €1.7bn, meaning that as at the reporting date, valuation reserves on our investments (excluding owner-occupied property) were positive on balance, totalling €2.0bn.
If policyholders’ bonuses, deferred taxes and minority interests are subtracted from our total off-balance-sheet valuation reserves of €2.3bn, 37% of the total hidden reserves are allocable to shareholders.
Valuation Fair value Carrying Valuation Fair value Carrying reserves amount reserves amount €m 31.12.2008 31.12.2008 31.12.2008 Prev. year Prev. year Prev. year 46_Lagebericht_e 10846_Lagebericht_e 108 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
Group asset management result €bn 36 60 46_Lagebericht_e 10946_Lagebericht_e 109 10.03.2009 11:26:26 Uhr10.03.2009 11:26:26 Uhr
The capital structure of the Munich Re Group is essentially governed by its activity as an insurer and reinsurer. Investments on the assets side of the balance sheet serve mainly to cover technical provisions (75.4% of the balance sheet total). Equity (9.9% of the balance sheet total) and bonds classified as strategic debt (2.5%) are the most important sources of funds.
Reinsurance business accounts for approximately 32% of technical provi sions, and primary insurance business for about 68%. 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. Whilst in property insurance a major portion of the provisions is generally paid out after one year, in life insurance or liabil ity insurance substantial amounts are still due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar and pound sterling. We ensure that our business is sufficiently capitalised at all times by monitoring the situation continuously and taking suitable measures, which are dealt with in the section on capital management.
Strategic debt has not changed significantly compared with the previous year. A detailed analysis of the structuring of this type of funding is provided in the section on strategic debt on page 116 f.
The structure of our technical provisions and other liabilities is the basis for the Munich Re Group’s investment strategy, the main focus of which is assetliability management: the aim is to ensure that economic factors influence the value of our investments and that of our technical provisions and liabilities in the same way, thus cushioning the effect of capital market fluctuations. 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 if possible. If, for instance, there is a strong rise in inflation, our nominal outflows as a result of claims payments increase significantly. This applies in particular to lines of business with long payout patterns, e.g. liability, as inflation accumulates over a number of periods. To an increasing extent we are endeavouring in our asset-liability management to structure our investment portfolio in such a way that inflows from investments increase in line with rising inflation rates.
Through active capital management, we ensure that the capital of the Munich Re Group is maintained at an appropriate level. The Group’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 measured oppor tunities 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 exceed that required for our operations. Such a needs-based, risk- commensurate capital level makes a decisive contribution to financial dis cipline in all our business processes.
We derive our economic equity from IFRS equity by means of various adjustments. These are described in the section on available financial resources on page 167 f. of the risk report.
– Within the framework of the share buy-back programmes announced in May 2007 and May 2008, we bought back shares to the value of approximately €1.4bn in 2008, which we offset against retained earnings.
Issued capital and capital reserve Consolidated result attributable to Munich Re equity holders
Composition of the issued capital As at 31 December 2008, Munich Reinsurance Company’s share capital of €587.7m was divided into 206,403,804 registered, no-par-value, fully paid shares. The shares are endowed with full voting and dividend rights, with the exception of the 10,748,453 shares held by the Munich Re Group itself at 31 December 2008 (Section 71b of the German Stock Companies Act). Each voting share carries one vote at the Annual General Meeting. Article 5 para. 1 of the Articles of Association excludes the right of shareholders to have share certificates issued for their shares. Shareholders’ participation in the Company’s profit is based on the proportion of the share capital they hold (Section 60 of the German Stock Companies Act).
The listed registered shares are subject to transfer restrictions. The issuing of restrictedly transferable registered shares by Munich Re dates back to the Company’s foundation in 1880 and is a very common phenomenon in the insurance industry. Restricted transferability means that these shares may be transferred to another holder only with Munich Re’s consent, which, according to Article 3 para. 2 of Munich Re’s Articles of Association, is granted at the Company’s discretion. Since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. In recent decades, it has been granted without exception.
Shareholdings exceeding Under the German Securities Trading Act, any investor whose shareholding – 10% of the voting rights through acquisition, disposal or other means – attains, exceeds or falls below specified percentages of the voting rights in our Company must notify us and the German Federal Financial Supervisory Authority. The lowest threshold for this notification requirement is 3% of the voting rights. We have neither been notified nor do we know of any direct or indirect shareholdings in our Company equal to or exceeding 10%.
by the employees 47_Lagebericht_e 11447_Lagebericht_e 114 10.03.2009 11:53:35 Uhr10.03.2009 11:53:35 Uhr
Powers of the Board of The powers of the members of the Board of Management are defined in Management to issue or Sections 71 and 76 to 94 of the German Stock Companies Act. The Board of buy back shares Management has the following powers to issue and buy back shares (the complete wordings of the relevant resolutions and provisions in the Articles of Association can be viewed under the heading “Investor Relations” on our website at www.munichre.com): – The Annual General Meeting of 17 April 2008 authorised the Company, pursuant to Section 71 para. 1 item 8 of the German Stock Companies Act, to buy back shares until 16 October 2009 up to a total amount of 10% of the share capital at the time of the Annual General Meeting resolution (€587,725,396.48). The shares acquired plus other own shares in the pos session of the Company or attributable to the Company in accordance with Section 71a ff. of the German Stock Companies Act may at no time amount to more than 10% of the share capital. The shares may, in accordance with the provisions of the authorisation, be acquired in various ways: via the stock exchange, via a public purchase offer to all shareholders, via a solicitation to all shareholders to submit offers (request to sell) or via a public offer to all shareholders of the Company to exchange Munich Re shares for shares in another listed company as defined in Section 3 para. 2 of the German Stock Companies Act. In so doing, it may buy back shares amounting to a max imum of 5% of the share capital using derivatives in the form of put options, call options or a combination of the two. The Board of Management is au thorised to use shares thus acquired for all legally admissible purposes, in particular those specified in the authorisation, whilst excluding subscrip tion rights; among other things, the Board of Management is empowered under Section 71 para. 1 item 8 sentence 6 of the German Stock Companies Act to retire the shares without requiring further approval from the Annual General Meeting.
– The Annual General Meeting of 11 June 2003 also empowered the Board of Management in the event of a capital increase at any time up to 11 June 2008 from the capital authorised for this purpose, with the consent of the Supervisory Board, to attach one bearer warrant to each of the new shares to which the shareholders have a subscription right when the capital author ised for this purpose is issued. No use was made of this authorisation up to the end of its term.
– Under Article 4 para. 1 of the Articles of Association, the Board of Management is authorised, with the consent of the Supervisory Board, to increase the Company’s share capital at any time up to 25 May 2009 by an amount of up to €280m by issuing new shares against cash or non-cash contribution (Authorised Capital Increase 2004). In accordance with the above-mentioned provisions of the Articles of Association, it may exclude subscription rights.
– 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 18 April 2011 by an amount of up to €5m by issuing new shares against cash contribution (Authorised Capital In crease 2006). The subscription right of shareholders is excluded insofar as this is necessary to allow the shares to be issued to employees of the Munich Reinsurance Company and its affiliated companies.
1 In August 2008, the issuer bought back notes with a principal amount of US$ 79m.
Subordinated liabilities of Bank Austria Creditanstalt Versicherung AG, Vienna 60 –
The 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 €2,026m and the debt leverage amounts to only 7.6%.
The Munich Re Group is subject not only to the supervisory requirements ap plying to individual insurance companies but also to supervision at Group level. Munich Reinsurance Company as the parent has introduced suitable control methods and, when reporting to the German Federal Financial Supervisory Authority (BaFin), which is also responsible for the Munich Re 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 re quirements. The aim of the “adjusted solvency” rules is to prevent the multiple use of equity to cover risks from underwriting business at different levels of the Group hierarchy. To calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the IFRS consolidated financial statements. To determine the eligible capital elements, the IFRS equity is adjusted; in particular, it is increased by portions of the subordinated liabilities and reduced by intangible assets. The Munich Re Group’s eligible capital is more than two-and-a-half times higher than the legal requirement.
The change in the adjusted solvency ratio from 342.2% in the previous year to 263.9% in 2008 is mainly due to the reduction in Group eligible capital, the chief causes of which were the decrease in IFRS equity and the increase in intangible assets.
Despite the financial crisis, Munich Re’s financial strength continues to be assigned the second-highest rating category by each of the leading rating agencies. Standard & Poor’s, for example, explicitly refers to Munich Re’s continued strong capitalisation.
The ratings for our subsidiaries on 2 March 2009 at a glance: Financial strength ratings for the Munich Re Group
Temple Insurance Company A+ 1 Rating as at 31 December 2008. Company merged into Munich Reinsurance Company in January 2009.
Munich Reinsurance Company 7.625% until 2018, thereafter floating, £300m Subordinated bonds 2003/2028 a+ A+ A2 A–
The Midland Company LIBOR +350 BP, US$ 24m Subordinated bonds 2004/2034 Not rated
2 In August 2008, the issuer bought back notes with an aggregate principal amount of US$ 79m. 3 ERGO AG has bonds with a nominal value of €3m in its portfolio; the volume outstanding has been reduced accordingly. 4 ERGO International AG has bonds with a nominal value of €3m in its portfolio; the volume outstanding has been reduced accordingly.
Cash flows for the financial year –141 362 47_Lagebericht_e 12047_Lagebericht_e 120 10.03.2009 11:53:35 Uhr10.03.2009 11:53:35 Uhr
Management report Financial position investments and €72m in gross technical provisions. We also acquired 65% of the share capital of ERGO Daum Direct Auto Insurance Co. The purchase price of €37m has been reduced by the cash of €0.2m held. As a consequence of the purchase, investments of €112m and technical provisions of €121m were transferred to the Munich Re Group. Lastly, we purchased 100% of the shares in the holding company The Roanoke Companies for €34m, less the cash of €9m held. In this connection, the Munich Re Group assumed intangible assets of €43m and liabilities of €12m.
The cash outflows for financing activities stem mainly from the share buybacks of €1,498m and the dividend payment of €1,181m for 2008.
In addition to our ongoing profit-focused business operations, we aim to secure the long-term economic success of the Munich Re Group with factors that cannot be measured by financial performance indicators. These include: – Open dialogue with our clients – A firm commitment to new, needs-oriented products and solutions – Corporate responsibility towards employees, society and the environment – Efficient business processes for managing our Group and identifying or avoiding risks
The Munich Re Group has different client bases in reinsurance and primary insurance. The reinsurance group works together with over 4,000 corporate clients – traditional insurers and captives – from more than 160 countries. By contrast, our primary insurers service some 34 million policyholders – mostly private clients – in around 30 countries in Europe and Asia. The products and services we offer therefore differ accordingly.
In Munich and at our many offices and subsidiaries, we staged more than 100 seminars and workshops for our clients on topics related to insurance and reinsurance in 2008. Through ongoing dialogue, we remain in close contact with our clients and support them in all aspects of their business.
Our two scholarship programmes, the “Alois Alzheimer Scholarship – High potential development programme” and the “Horst K. Jannott Scholarship – Management programme for future executives”, have for many years also created close ties with our cedants. More than 450 former scholarship holders from all over the world are registered in the Munich Re Alumni Network, established at the end of 2007.
Munich Re Group Annual Report 2008 clock. In this way, connect.munichre both supports primary insurers in their daily business and presents a direct and secure interface to Munich Re. With its interactive features, it supplements our services and rounds off personal client relationships. We are currently refining our client platform to gear its contents even more closely to the target group.
Besides this, we pass on our knowledge to our business partners in printed form: in 2008, we again brought out around 50 technical publications in various languages. How much our clients appreciate this service is indicated by the nearly one million downloads last year from our publication portal at www.munichre.com.
ERGO addresses clients via the full spectrum of distribution channels: through agents and brokers, direct selling or cooperation partners. We aim to further improve our competitiveness through stronger sales support. In Germany, a multi-line IT distribution platform is being set up step by step. It is designed to support sales and administration processes and accelerate the launching of new products. A unified broker sales force will be selling products of different brands from one source as from 2009.
Trends and markets change rapidly. In order to respond appropriately to this shifting environment, we need to concern ourselves with the relevant factors at an early stage. Only then can we adjust our products and services to the new circumstances, devise innovative solutions, develop special segment strategies or introduce new distribution approaches.
Reinsurance In our divisional units, we have six innovation teams in place. These are interdisciplinary groups made up of highly qualified experts who work together with specialists from the underwriting units to develop new business opportunities. They also collaborate closely with the client managers at home and abroad, whose direct contact with the cedants gives them the best insight into needs and market requirements. They therefore provide valuable input for new business ideas. Our clients benefit in different ways from the solutions we come up with, often in joint projects with them: risk management analyses and support, optimised individual policy design, and new risk transfer solutions for risks on the boundary of insurability.
A key role for product development is also played by our more than 20 centres of competence with their wide range of specialist areas – from biosicences to D&O, Solvency II and environmental liability risks. They analyse the param eters and investigate their implications for the insurance industry. The focus is always on tapping new business potentials.
In addition, we are increasingly supplementing our internal expertise with the specialist knowledge of external partners by entering into cooperations with well-known institutions (cf. page 27 ff.).
ERGO’s life insurers also use their own mortality tables in order to have customised data available for their specifically structured portfolios. The health insurers make use of the German Association of Private Health Insurers’ mortality tables. Our actuaries work closely with the German Association of Actuaries to extend and update their knowledge about client life expectancy.
Highly qualified and motivated staff are key to the success of our business. And given the global nature of Munich Re’s operations, an internationally oriented approach to human resources management is essential. Last year, we restructured our HR activities, placing even more emphasis on a business- and performance-related corporate and leadership culture. This supports the process of cultural change within the Group, in which change itself, achievement and learning are self-evident concepts.
Facts and figures On 31 December 2008, 44,209 (38,634) staff were employed with the Munich Re Group worldwide, 10,534 (7,372) in the reinsurance group, 32,867 (30,460) in the primary insurance group and 808 (802) in asset management. In reinsurance and asset management, staff numbers increased by 3,162 and 6 respectively. The 42.9% rise in reinsurance is attributable to international acquisitions.
Attracting, winning and keeping the best talents worldwide and filling key positions with the best possible candidates is of major significance for us. That is why we created the Employer Branding initiative, which is intended to improve Munich Re’s systematic positioning in the international labour market. We also aim to step up our recruitment of university graduates nationally and internationally and to promote our image as an attractive employer beyond the confines of the insurance industry. Beyond this, we have enhanced our manpower planning qualitatively and quantitatively, and have networked our succession planning for key positions. To take account of the changing para meters of the internal and external employment market, we adjust our staff succession planning on an ongoing basis.
Overall turnover at the main Group companies in Germany 48_Lagebericht_e 12648_Lagebericht_e 126 10.03.2009 11:26:00 Uhr10.03.2009 11:26:00 Uhr
Another field of activity involved preparing the integration of Europäische and Mercur into the ERGO Insurance Group. Subject to negotiation with the codetermination bodies, this is scheduled to be concluded by the end of March 2009.
A further significant topic, last year and this, is the “ERGO – one entity” initiative. Its objective is to reflect in terms of labour law the cross-market, functionoriented organisation and process structure we have established for ERGO in Germany over the last few years. As from the end of 2009, insurance oper ations staff are to have employment contracts solely with ERGO Versiche rungsgruppe AG, rather than with the individual brand companies. Field staff and staff working in the sales offices of the brand companies are to remain em ployees of those companies.
Corporate responsibility is an integral part of the Munich Re Group’s strategy. For us, it primarily covers four main topics: – Economic excellence – Good corporate governance – Corporate environmental responsibility – Corporate social responsibility 48_Lagebericht_e 12748_Lagebericht_e 127 10.03.2009 11:26:00 Uhr10.03.2009 11:26:00 Uhr
The Munich Re Group aims to create long-term corporate value. One of the guiding principles of our corporate responsibility is to identify the business opportunities inherent in central global challenges and to realise these profitably. Thus, for example, we have devised a range of different insurance solutions for climate protection and adaptation.
As an international group, Munich Re manages substantial assets. Security, liquidity and diversification are the main principles of our investment strategy. In 2002, we determined that our investments in shares and corporate bonds must meet sustainability requirements. We aim to invest at least 80% of the market value of our investments in assets that are included in a sustainability index or satisfy generally recognised sustainability criteria. We have already surpassed this target and are convinced that taking account of sustainability criteria in our investments will have a favourable effect on risk and return in the long term.
Corporate governance is of central importance to us. We meet all the recommendations of the German Corporate Governance Code and, as an international group, comply with the corporate governance rules of the various legal systems under which we operate. In our Code of Conduct, we specify our rules for correct and responsible behaviour, i.e. conduct which is legally impeccable and based on ethical principles. We have also made a firm commitment to the highest ethical standards at international level: in August 2007, the Munich Re Group signed up to the UN Global Compact Initiative, whose ten principles set international standards for companies and organisations in the fields of human rights, labour rights, environmental protection, and anticorruption.
Reinsurance Even if we, as a service provider, place comparatively little burden on the environment, we take our ecological responsibility seriously. We are working constantly on reducing our consumption of resources. In 2009, we will make the business activities at our Munich location carbon-neutral. The entire reinsurance group, currently numbering more than 50 locations worldwide, will follow suit by 2012. To this end, we are pursuing a threefold strategy: increasing the energy efficiency of our office buildings, using electricity from renewable energy sources, and compensating for unavoidable emissions through the purchase and retirement of emission credits. Nevertheless, our overall objective is to achieve carbon neutrality as far as possible with our own projects and internal measures.
Munich Re Foundation Under the motto “From Knowledge to Action”, the Munich Re Foundation has set itself the aim of helping people in risk situations and improving their lot, especially in developing countries. The foundation not only provides direct support but also devotes itself to promoting knowledge, heightening awareness and networking, which facilitates self-help. In its work, it can build on the highly developed risk knowledge of its benefactor.
The Schinzler Foundation The Schinzler Foundation is our platform for corporate volunteering. The aim of the foundation is to support staff worldwide in their voluntary work in various areas of society. As a result, numerous projects in Germany, Latin America, Africa and Asia benefit.
How we view corporate governance Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. Of particular importance to us in this context are the promotion of shareholders’ interests, efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies and the companies’ staff, and open and transparent corporate communications.
Continually improving our good corporate governance is an important prin ciple underlying our business activities.
Statutory regulations and The German Stock Companies Act contains general provisions governing provisions in the Articles of amendments to the Articles of Association (Sections 124 para. 2 sentence 2, Association concerning and 179–181 of the Act). These state that only the Annual General Meeting can amendments to the Articles make resolutions on changes to the Articles of Association. In order to be carried, a resolution must receive at least three-quarters of the votes cast by the share capital represented in the vote. The Articles of Association may stipulate a different capital majority (higher or lower) or other requirements, but Munich Re’s Articles of Association do not provide for any such special features.
The German Stock Companies Act contains special regulations on amendments to the Articles of Association where increases and reductions in share capital are concerned (Sections 182–240 of the Act). Under these regulations, all 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 (cap ital) measures (see page 115 f. for the authorisations relating to Munich Re). 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 49_Lagebericht_e 13049_Lagebericht_e 130 10.03.2009 11:25:33 Uhr10.03.2009 11:25:33 Uhr
Management report Corporate governance report the vote. Where these resolutions are concerned, Munich Re’s Art icles of Association again do not provide for other (i.e. higher) majorities or further requirements.
The Annual General Meeting is entitled to transfer to the Supervisory Board the authority to make amendments to the Articles of Association that affect only the wording (Section 179 para. 1 sentence 2 of the German Stock Com panies Act). This is the case with Munich Re and has been regulated in Section 14 of the Articles of Association.
Munich Re’s Supervisory Board has set up five committees: the Standing Committee, the Personnel Committee, the Audit Committee, the Conference Committee, and the Nomination Committee.
Significant agreements which Based on our underwriting guidelines, our reinsurance agreements generally take effect, alter or terminate include a clause that grants both parties to the agreement a right of extra upon a change of control ordinary cancellation in the event that “the other party merges with another following a takeover bid company or its ownership and control undergoes a material change”. Such or similar clauses are typical of the industry. Munich Re’s long-term incentive plans provide for special exercise conditions in the event of a change of control.
In the past year, the Supervisory Board again performed an efficiency audit. The main focus was on the content and scope of reports from the Board of Management to the Supervisory Board and the work of the Supervisory Board and its committees. Despite a number of suggestions for improvement, both areas were assessed as consistently positive and efficient.
Until now, the structure and system governing the Board of Management’s remuneration has been determined by the Supervisory Board’s Personnel Committee, whose three members comprise the Chairman of the Supervisory Board, another of the shareholder representatives and one of the employee representatives. Regular reviews of the remuneration structure have been conducted by the full Supervisory Board.
Structure and system of the Board of Management’s remuneration in 2008
Annual bonus 35% Consolidated result Company result Divisional result Individual objectives 0 –150% (fully achieved = 100%)
Achievement of objectives at least 50% on average over three years
Fixed – Retirement – Insured event – Premature termination or non-extension of employment contract under certain circumstances
Remuneration in kind and fringe benefits are granted according to function, and are commensurate with market conditions (DAX 30 companies). Income tax on the benefits in question is paid individually for each member of the Board of Management, with the Company bearing the amount due.
In accordance with the recommendations of the German Corporate Governance Code, the monetary remuneration of the Board members thus comprises fixed and variable components.
Continued payment of remuneration In the case of temporary incapacity to work due to illness or for other cause in the case of incapacity to work beyond the Board member’s control, the remuneration will be paid until the end of the contract of employment. The Company may terminate the contract prematurely if the Board member is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him (permanent incapacity to work). In this event, the Board member will receive a disability pension.
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 compensation computation. Excepted from this is remuneration for memberships explicitly recognised by the Company as personal. No such memberships exist at present. In the event of a change of control, the members of the Board of Management have no contractual entitlement to payments. As far as the share-price-based remuneration is concerned, the con ditions merely provide for special exercise options in the event of a change of control. Details of this are provided in the notes to the consolidated financial statements on page 270.
Contract ends owing to non-extension or revocation of Board member’s appointment due to permanent incapacity to work
Entitlement to vested benefi ts – Leaving the Board before reaching the age of 60 – At least ten years’ service with the Company
– For six months, previous monthly basic remuneration (only for Board members appointed prior to 2006)
– The vested benefi ts are a proportion of the occupational pension, based on the ratio of actual service with the Company to the period the Board member would have worked for the Company altogether until 65th birthday
– Reduced by 2% for each year or part thereof short of 65th birthday 49_Lagebericht_e 13749_Lagebericht_e 137 10.03.2009 11:25:33 Uhr10.03.2009 11:25:33 Uhr
Occupational pensions and pensions for surviving dependants are reviewed for adjustment if salaries payable under pay-scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay-scale categories) since the pensions were last fixed or more than three years have passed since that date. The adjustment made will at least be in line with the increase in the cost of living in the meantime according to the consumer price index for Germany. Vested benefits are not adjusted.
Beginning in 2009, pension plans for Board members have been changed to a defined contribution system. It should be stressed that the main aim of this change is the fullest possible outsourcing of all pension-specific risks from the Company’s balance sheet. This major risk transfer will be achieved by financing future increases in entitlements exclusively by paying premiums into insurance policies concluded to cover these benefit obligations.
A defined contribution approach is thus being taken for the Board members as of 2009. This means the Company is no longer liable for the pension benefits, as these are covered by the aforementioned insurance policies. The longevity risk, the biometric risks of premature occurrence of a pensionable event (e.g. disability or death of a member of the Board during active service), and the capital market risk are transferred to the insurer and the individual Board members.
– For six months, previous monthly basic remuneration (only in the case of Board members appointed prior to 2006)
– Offsettable against widow(er)’s pension · Income up to a maximum of 50%, insofar as such income exceeds 50% of widow(er)’s pension
– Widow(er)’s and orphan’s pensions together may not exceed the occupational pension 49_Lagebericht_e 13849_Lagebericht_e 138 10.03.2009 11:25:33 Uhr10.03.2009 11:25:33 Uhr
Total remuneration of the The basis for reporting the remuneration of Board members is German Board of Management Accounting Standard No. 17 (DRS 17), according to which the amounts shown for the annual bonus and the medium-term bonus are the provisions established for those bonuses, since the performance on which the bonuses are based has been completed by the balance sheet date of the financial year and the requisite Board resolution is already foreseeable. The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €18.5m (12.8m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. This amount includes the provisions of €7.9m for the medium-term bonus 2006–2008 disclosed in the annual reports for 2006 and 2007, which explains the notional increase in total remuneration.
The share-priced-based compensation component is accounted for at fair value at the granting date. Details of the fair value are provided in the notes to the consolidated financial statements on page 267 f. Whether the variable components will actually be paid out to the Board members and, if so, how high the sums will be, is not yet certain and will depend on the degree to which individual objectives are achieved, and on the exercise conditions of the longterm incentive plans. Munich Re shares have been acquired to cover future obligations arising from the long-term incentive plans as from 2003, so that the expenses resulting from a growth in value of the stock appreciation rights are neutralised by an increase in the value of the share portfolio.
Dr. Hasford, who retired on 28 February 2007, received the following amounts in 2008 for 2007: remuneration in kind and fringe benefits totalling €164.99, as well as a pro-rata payment of €164,267.00 from the 2007 annual bonus.
1 At the balance sheet date, no Board resolution had yet been passed on the amounts to be paid for 2008. The amount shown for the annual bonus is based on estimates and the corresponding provisions posted. For the 2007 annual bonus, a total of €79,905 less was paid out than had been reserved. The provisions for the 2008 annual bonus have been reduced by this amount.
2 At the balance sheet date, no Board resolution had yet been passed on the amounts to be paid. The amount shown for the 2006–2008 medium-term bonus is based on estimates and the corresponding provisions posted. The amount shown for 2008 embraces the financial years 2006–2008. The bonus is to be paid in the financial year 2009.
3 Member of the Board of Management since 1 October 2007. 4 The total expenditure recognised in the period under review for the share-price-based remuneration component – long-term incentive plan – breaks down as follows: von Bomhard €835,586.90, Arnoldussen €457,445.69, Blunck €500,705.05, Daschner €458,953.75, Jeworrek €641,480.47, Röder €353,867.83, Schneider €474,197.91, Strassl €455,176.31.
Name Financial Basic Remuner- Annual Medium- Value of stock Total Number year remuner- ation in kind bonus1 term bonus appreciation of stock ation and fringe 2006–20082 rights appreciation benefits granted4 rights 49_Lagebericht_e 14049_Lagebericht_e 140 10.03.2009 11:25:33 Uhr10.03.2009 11:25:33 Uhr
Name Financial Basic Remuner- Annual Medium- Value of stock Total Number year remuner- ation in kind bonus1 term bonus appreciation of stock ation and fringe 2006–20082 rights appreciation benefits granted rights 49_Lagebericht_e 141 13.03.2009 13:22:20 Uhr
The result-related annual remuneration is based on the undiluted earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs): each Supervisory Board member receives €4,500 for each full euro by which earnings per share exceed €4, but a maximum of €36,000. As of the 2009 financial year, each Supervisory Board member will receive €4,000 for each full euro by which earnings per share exceed €12, but a maximum of €40,000. Furthermore, in accordance with the German Corporate Governance Code, a long-term compensation component of €10,000 has been introduced as of the 2009 financial year. This will be paid out if earnings per share in the remuneration year exceed earnings per share in the third financial year preceding the remuneration year by at least 30%.
The additional remuneration for work on committees – which is based on the fixed remuneration only – takes into account the recommendations of the German Corporate Governance Code.
Share trading and shares held by The Company has to be notified promptly of the acquisition or sale of Company members of the Board of Management shares or financial instruments based on these by members of its Board of and the Supervisory Board Management and Supervisory Board and by certain persons closely related to or connected with them. This notification must take place for acquisition and sales transactions equal to or exceeding €5,000 in a single calendar year. Under Section 10 para. 1 of the German Securities Prospectus Act, Munich Re is obliged to publish information of this kind on its website without delay as well as in an annual document.
Management report Corporate governance report 1 Plus turnover tax in each case, in accordance with Article 15 para. 6 of the Articles of Association. 2 In the case of members of the Audit Committee and/or Nomination Committee, the amount includes attendance fees in accordance with Article 15 para. 4 of the Articles of Association.
3 After capping in accordance with Article 15 para. 5 of the Articles of Association.
Remuneration of Supervisory Board members in the financial year 2008 in accordance with Article 15 of the Articles of Assiciation1
(RORAC) over the full cycle – Result forecast for 2009 not possible; achievement of previous target of €18 earnings per share for 2010 no longer realistic at present – Proposed dividend of €5.50 per share for 2008 – Fundamental adherence to share buy-back programme, but further realisation only after careful review
Predictions about the forthcoming development of our Group are based primarily on planning figures, forecasts and expectations. Consequently, the following assessment of the Munich Re Group’s development merely reflects our assumptions and views. It follows that we cannot accept any responsibility or liability in the event that they are not realised in part or in full.
In reinsurance, we anticipate a flight to quality in the wake of the financial crisis. The market should harden in the current year, opening up good opportunities for profitable business. We are well-positioned for this environment, owing to our consistent cycle management and solid capitalisation. We will provide our clients with high indemnity limits at risk-adequate prices, and we expect our financial strength to be rewarded with a growing amount of business at prices that differ from those of our competitors. These developments should enable us to at least partly offset the as yet unquantifiable recessionrelated losses in premium and to operate profitably.
All the following prognoses are subject to considerable uncertainty, and reliable profit estimates for 2009 and 2010 are impossible under the present circumstances. With risk-free interest rates low and our equity exposure considerably reduced, we must expect a significantly lower investment result than previously envisaged. On the whole, however, we remain confident and are adhering to our long-term objective of achieving an attractive 15% return on risk-adjusted capital after tax for the coming years (a definition of RORAC is provided on page 59).
With a profit for the year of over €1.5bn (3.9bn) and a post-tax RORAC of 6.9% (20.2%), we fell short of our target for 2008. Although our basic business performed satisfactorily, our investment result dropped appreciably, impacted in particular by the massive declines in share prices on the stock markets and by the defaults and credit-rating problems among counterparties. In addition, our investment result in the previous year had profited from exceptionally high gains on disposals and we had benefited from an extraordinary tax effect of €0.4bn. In 2008, the crisis certainly did not leave us unscathed. However, thanks to our long-standing adherence to a strictly risk-conscious corporate strategy, it has not put us on the defensive like many other financial service providers but is offering us opportunities to extend our market position.
Now we are benefiting from the raft of initiatives launched in the past two years and in some cases already concluded. These initiatives were geared above all to improving our competitive position and to optimising our capital management. They have enabled the Munich Re Group to further sharpen its business profile and become an even more attractive partner for its clients. For our shareholders, Munich Re shares have proved a relatively good investment that has delivered a stable performance in the capital market crisis. We are financially and strategically well-positioned and able to effectively exploit our competitive strength to systematically tap opportunities without having to run unreasonable risks.
Macroeconomic parameters have deteriorated even further in 2009, which has implications for insurance demand and for expected returns on investments.
Economy There has been a dramatic slackening in economic growth worldwide. All industrial nations have entered into a recession whose overall magnitude and duration are not yet foreseeable. Consumer demand will be adversely impacted by rising unemployment, high levels of private debt in some countries and negligible real increases in wages. Owing to its dependency on exports, Germany is being hit by a collapse in demand from abroad, and the USA and UK are suffering because of their strong focus on the financial sector. The implications of state intervention and soaring national debt are still open, and emerging countries will show noticeably reduced growth at best. No recovery is in sight before the end of 2009. Since global demand is dropping, inflation in 2009 (subject to the inflationary impact of state intervention) is likely to be moderate, and oil prices should rise only slightly, if at all.
Capital markets In view of the gloomy prospects for the economy, the environment for higherrisk investments in 2009 will continue to be difficult. The bonds of countries considered particularly solid are in demand because of their safe-haven characteristics, but do not really offer attractive investment opportunities, given their very low interest rates. Investors whose risk appetite is moderate therefore cannot expect to obtain high returns.
Insurance industry The above situation also applies to the insurance industry. Though less hard hit than other industries in its core business, it will nevertheless be substantially affected by the economic downturn. In 2009, growth in the global insurance industry, if any, will be achieved in the emerging countries and then at a clearly reduced pace. Only in the medium to long term is the superior concept of private provision likely to lead to appreciably increased demand again. But the recession seems set to cause the international insurance industry’s growth rates to suffer at first. In an economic crisis, D&O, professional indemnity, and credit and bonding business are the lines of property-casualty reinsurance most likely to be affected by rising claims burdens due especially to the increasing number of insolvencies. Premium volume is expected to be lower in many other non-life insurance classes, but at the same time claims expenditure is also likely to decline. Similarly, new business in life insurance suffers from a prolonged recession because the funds available for old-age provision drop. If interest rates remain low, it will also become increasingly difficult for life insurers to pay the returns they have promised to their clients without taking a cut in profit.
Risks The risks have recently risen considerably. The economic prospects are subject to the imponderables described. Especially the liquidity and confidence crisis in the international financial markets could have further, as yet unforeseeable implications. The recession could spiral into a deflation and longterm depression. Other risks include geopolitical threats, especially in the Near and Middle East, the risk of major new terrorist attacks and protectionist trade policies.
Economic recovery should be accompanied in the medium to long term by increased demand in all classes of business. We predict that the highest percentage growth rates will come from the emerging markets of Asia and Latin America. Given their higher starting level, however, Europe and North America should record significantly greater absolute growth. With our worldwide presence, we will be able to tap the potential in all regions of the world and fields of business assuming we emerge stronger than our competitors from the economic crisis.
Especially life reinsurance will offer good growth opportunities in the medium to long term. It is frequently used by our clients in particular as a capital substitute. Further impulses for new business are also expected to derive from the restructuring of European supervisory rules (Solvency II), the continuing privatisation trend in old-age and disability provision in the developed markets, the growing need for asset protection, and the dynamic expansion of the Asian and eastern European life insurance markets. As an important component of our diversification and due to its relatively low volatility, life reinsurance is being strengthened as a core element of our strategy. Munich Re is renowned for its in-depth risk and market expertise, good client relations, and financial strength. It is not possible at present to provide a reliable forecast of how the result will develop in 2009. A severe recession may negatively impact disability and suicide rates. Also, short-term premium development may come under pressure owing to declines in the business production of our primary insurance clients. Nevertheless, we remain committed to our very ambitious aim of doubling the value added by new business in the period 2006 to 2011 based on embedded value calculations.
In property-casualty reinsurance, which is naturally cycle-dependent, Munich Re will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions. During the renewals at 1 January 2009, market terms and conditions in most regions hardened and prices in some segments improved markedly. In a difficult environment, our financial solidity, acknowledged risk expertise, service and client-centric focus 50_Lagebericht_e 14850_Lagebericht_e 148 10.03.2009 11:25:19 Uhr10.03.2009 11:25:19 Uhr
At 1 January 2009, about two-thirds of our property-casualty reinsurance portfolio was up for renewal, which corresponds to a premium volume of around €8.3bn. The situation of the economy as a whole, with its effects on the insurance industry’s capitalisation and results, has not yet led to a situation in all markets where the players recognise the need for pricing that is consistently risk-adequate. The development of prices, terms and conditions varied greatly between classes of business and regions but generally followed a positive trend. Overall, we succeeded in halting the erosion of reinsurance prices that has taken place over the last few years and in improving our portfolio, partly through price increases for existing business and partly through attractive new business, but also by terminating business where prices were no longer sufficient.
Although not all of our expectations were fulfilled, we are nevertheless satisfied with the improved portfolio quality we have achieved. The share of casualty business fell by around four percentage points, whilst the share of other lines – mainly shorter-tail business – rose. In particular, owing to inadequate original rates, we scaled back proportional business in China, motor business in Germany, and workers’ compensation business in the USA. On the other hand, we grew our business in other lines. An example is offshore energy business, where the price level improved markedly, rising in some cases by over 100% following last year’s hurricane losses. Other treaties with US hurricane exposure now also have a much improved rate level. Agricultural business, which has produced profitable results for many years, was expanded.
If exchange rates remain stable and the cyclical losses in premium income for primary insurers remain within reasonable bounds, gross premiums in reinsurance should range between €21bn and €22bn in 2009. Owing to the anti cipated increase in demand for reinsurance as a substitute for equity and the shortages in capacity on the supply side, terms of trade should improve in 2009 – despite the weakened overall economy. In addition, we project that the growth markets will continue to develop favourably, albeit at a temporarily reduced rate. For property-casualty reinsurance, we anticipate a combined ratio of around 97% for 2009 of our net premiums earned, in line with our target for the market cycle as a whole. This estimate is based on an average major-loss burden of 6.5% from natural catastrophes, which takes account of shifts in the portfolio. The uncertainties involved in the estimate derive not only from the random incidence of major individual losses: a strong rise in losses due to the recession cannot be completely ruled out, particularly in the highly exposed classes previously mentioned. Conversely, if market conditions continue to harden, experience is likely to be far more favourable.
Primary insurance Despite substantial uncertainty regarding the effects of the bleak macroeconomic environment, we expect that we will be able to post higher premium income across all segments in the current financial year. Of great significance in this regard is the long-term nature of our client relationships, in particular in life, health and personal accident insurance.
In life insurance, we anticipate that our overall premium income will grow, owing to international business. This increase will result mainly from the firsttime consolidation of BACAV, whose premium income we have recognised in our consolidated figures since the fourth quarter of 2008. We expect premium volume in Germany to reduce marginally, in line with general market developments. As far as new business is concerned, we are reckoning with major challenges in view of the economic environment, even if clients tend towards more secure forms of investment and provision as a result of the financial crisis. We project that regular-premium private-provision products will develop more favourably than single-premium business.
Total premium income in primary insurance should range between €18.5bn and €19.5bn in 2009, with gross premiums written reaching €17.5–18.5bn. Unlike in 2008, the premiums written by Lloyd’s Watkins Syndicate will no longer be included in the primary insurance segment (€418m in 2008).
Investments The year 2008 was overshadowed by the financial crisis. Uncertainty regarding the amount and extent of the losses sustained by banks and other financial institutions caused confidence in the markets to evaporate over the course of the year. Whilst the capital markets initially stabilised at a lower level following the rescue of investment bank Bear Stearns in the spring of 2008, the difficulties encountered by the USA’s main mortgage lenders and, above all, the collapse of Lehman Brothers investment bank caused the prices of all riskcarrying assets – from corporate loans, asset-backed securities, and inflationindexed bonds to equities – to nosedive.
In 2009, the dollar should benefit from the fact that the volume and breadth of impulses from US monetary and fiscal policy have the potential to stabilise the confidence of international investors.
We also intend to maintain a conservative approach in managing interest-rate risks in 2009 and to largely gear the periods to maturity in our bond portfolios to match the periods of our liabilities. For our life insurers, moreover, the hedging programme we adopted against falling interest rates will be further adjusted and refined in the current year.
Up to now, we have not invested heavily in hedge funds or private equity. We do not plan to significantly increase these investments in the current financial year.
Owing to the high write-downs we made in our equity portfolios in 2008, our return on investment of 3.4% fell far short of our target of 4.5%. For the current financial year, our planning calculation is based on the assumption that, given the very low risk-free market interest rate, the return will not be significantly higher than in 2008. According to rough estimates for 2009, regular income, which in 2008 generated a return of 4.6% on the market values of our investments, will be significantly lower at a little over 4%. This is partly because reinvestment returns have reached a very low level but also because the dividends paid on our already much smaller equity portfolio have tended to be much reduced. Despite the selective and prudent expansion of our credit risk exposure, we do not intend to even remotely compensate for the losses in interest income from risk-free interest carriers by assuming higher investment risks. Depending on the further development of the financial markets, we cannot fully rule out the need for additional write-downs of equities and fixedinterest products with their corresponding implications for the result. Given 50_Lagebericht_e 15250_Lagebericht_e 152 10.03.2009 11:25:19 Uhr10.03.2009 11:25:19 Uhr
Management report Prospects the extensive measures in the 2008 financial year and based on our broadly diversified investment portfolio, however, we do not see any immediate, significant threat. Taking into account all gains and losses on disposals, write-ups and write-downs and expenses for the management of investments, however, we project that our return on investment will be distinctly below our long-term target of 4.5%.
MEAG will pursue its successful business strategy for institutional investors outside the Munich Re Group. It will continue to focus on assuming the asset management of institutions which, like us, are subject to the German Insurance Control Act or to comparable restrictions in other sectors and states. This ranges from the pure management of their portfolios to the complete outsourcing of the whole investment value chain, including back office and risk controlling. In the next few years, German insurance companies will come under increasing pressure to consolidate in view of ever stricter supervisory regulations in connection with risk management and Solvency II. MEAG is able to offer its special competence in the management of capital market risks under special mandates and sees the ongoing financial crisis as an opportunity to expand sustainable business relations with institutional investors.
Premium of the Munich Re Group If exchange rates remain stable compared with those at the end of 2008, we expect gross premiums written in reinsurance and primary insurance in 2009 to be in the range of €37.5–39.5bn (total consolidated premium). In view of the continued upheaval in the financial markets and the severe global recession, this prognosis is subject to considerable uncertainty.
To provide for efficient risk management, Munich Re has established specific risk management functions and bodies. The Integrated Risk Management (IRM) Division supervises risk management Group-wide, building on the decentralised risk management structures in all units of the Group. It is headed by the Group Chief Risk Officer (Group CRO), to whom the decentralised risk officers report. He is supported – as are the decentralised CROs of individual units – by interdisciplinary teams of highly qualified staff and by state-of-the-art systems. Our stringent risk governance ensures that staff of the risk management organisation and the whole Group are sufficiently informed about our business and risk strategy, organisation and the relevant roles and responsibilities.
As a result, our risk management covers all units and the Group’s total expos ure both geographically and in terms of the units’ many different business activities. This creates transparency and enables us to actively manage the risks taken.
The Chief Risk Officer is a permanent member of the Group Committee of the Board of Management, the body responsible for decisions in matters concerning the whole Group. Risk topics are routinely dealt with at this level by the Group Risk Committee, whose members comprise the Group Committee plus other specialists from insurance and reinsurance. We take a similar approach at business-field level. For reinsurance, a dedicated risk committee – the Global Underwriting and Risk Committee (GURC) – has been formed from within the ranks of the Reinsurance Committee. In our primary insurance business, ERGO IRM supervises risk management and is supported in its function by decentralised risk management structures in all ERGO units. The ERGO Board of Management has established the ERGO Risk Committee as a decisionmaking body.
Our practical implementation of risk management embraces the identification, measurement, analysis and evaluation of risks, and the resultant risk reporting, limitation (reduction to a deliberately chosen measure) and monitoring. In these processes, we endeavour to consider all risks.
Risk measurement: We are constantly refining the tools with which we measure risks. Our suite of tools is tailored to the business or operational segment we are monitoring. In each case, the lead risk measure is an economic risk measure designed to best reflect the risk in our portfolio. We regularly compare the results of our risk model with both regulatory and rating-agency measures. These comparisons are made at many levels, including Group, segment, legal entity, risk type, geographical and line of business. We also regularly perform outside-in benchmarking of our capital-model results and par ticipate in industry surveys to constantly challenge and continuously refine our risk measurement tools. Thus we recently undertook a comparison with the results of the Quantitative Impact Study 4 (QIS4) carried out as part of the work to create a new, harmonised regulatory regime in the European Union (Solvency II). We explain the results of our internal risk model on page 162 ff.
Risk analysis and evaluation are carried out at the top-most level in IRM, in the form of a consolidated Group view, taking into account restrictions of capital fungibility. They are based on the analyses prepared in the central risk management units of the Munich Re reinsurance group, ERGO, and MEAG. Besides this, IRM is responsible for checking and validating the analyses of downstream parties. To this end, IRM collaborates closely with many units and experts within the Group and in some cases with outside parties. This provides us with a quantitative and qualitative assessment that considers possible interdependencies between risks.
Risk limitation is integrated into the Strategic Risk Management Framework. Based on the defined risk appetite, risk-reducing measures are decided on and implemented. Various units in the Group work hand in hand to comply with the specified risk criteria, whilst simultaneously taking account of business interests. If a business unit identifies attractive business that exceeds its individual risk criteria, Corporate Underwriting and IRM analyse the potential impact of the business on the Group portfolio and the risk tolerance of the whole Group. Taking these results and the expected earnings from the business into consideration, the Risk Trading Unit and IRM draw up a risk limitation concept with which the business can be accepted in our books if appropriate.
Our investments are constantly monitored on the basis of various key risk and earnings figures as part of a Group-wide early-warning system. This process is designed to ensure that we do not take any inappropriate risks and that we fulfil equity capital requirements at individual company as well as at Group level.
For underwriting risks, we have set ourselves limits and rules, compliance with which is supervised by the respective hierarchy levels (underwriters, senior underwriters, heads of department, heads of division, Board members ). These underwriting guidelines are drawn up by Corporate Underwriting, which regularly controls their implementation by means of reviews. Exceptions have to be approved in advance by the competent committees, e.g. the Global Underwriting and Risk Committee, on which IRM is represented.
Risk reporting Internal risk reporting provides management with regular information on the risk situation, both as regards the individual risk categories (ongoing) and the whole Group (quarterly). This ensures that faint signals and negative trends are identified in sufficient time for countermeasures to be taken. IRM is respon sible for the risk reporting, whilst Group Reporting attends to related annual-report requirements deriving from the accounting rules applied.
We not only meet current legal requirements with our risk reporting, but also create transparency for management, our clients and our shareholders.
Specifically, we distinguish between the following categories from which significant risks can arise.
This is defined as the risk that insured losses in property-casualty business (insurance and reinsurance) may be higher than our expectations.
Binding underwriting guidelines and limits and clear underwriting authorities regulate who is authorised and accountable for concluding insurance and reinsurance contracts in the Munich Re Group.
The underwriting risk in this case is defined as the risk that insured benefits payable in life or health business (insurance and reinsurance) may be higher than expected.
Further risk-relevant information on our underwriting as a whole can be found under (36) Risks from insurance contracts in the life and health segment and (37) Risks from insurance contracts in the property-casualty segment, in the notes to the consolidated financial statements.
Munich Re defines market risk as the risk of economic losses resulting from changes on the capital markets. Relevant here are, inter alia, the equity risk, the interest-rate risk, the property risk and the currency risk. Market price fluctuations affect investments and liabilities.
Munich Re defines operational risks as potential losses resulting from inadequate processes, technical failure, human error or external events. These include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations or disagreements with business partners.
We minimise such risks through systematic application of specific risk management measures. It is our declared corporate aim, which we consistently pursue, to sensitise employees to possible risks and to establish an appropriate risk culture. This encompasses the willingness to learn from mistakes and to recognise and grasp these as opportunities for improvement.
In our management of operational risks, we also focus on the following topics: Risks in information technology These risks are identified and limited by IRM’s security and emergency planning team, which is supported by decentralised security organisations.
Risks involving human resources Targeted personnel marketing measures, staff potential assessment and development schemes, and systematic succession planning are designed to reduce the risk of shortages in qualified staff. Modern management tools and adequate monetary and non-monetary incentives ensure a high level of mo tivation.
Munich Re defines liquidity risk as the risk of not being in a position to meet our financial obligations when they are due.
The reputational risk is the risk of a loss resulting from damage to the Group’s public image or its reputation among clients, shareholders or other parties such as the supervisory authorities.
We monitor the reputational risk through the identification processes we have established in various internal units (e.g. Group Communications). As soon as such a risk is identified, further procedure is decided on by a Reputational Risk Committee set up specifically for this purpose. This prevents risks from arising out of business transacted. The Committee is made up of experts from various units and is headed by the Compliance Officer. Our Code of Conduct formulates the main rules and principles for legally correct and responsible behaviour by employees. How Munich Re is perceived in public depends essentially on each and every member of staff. By stipulating high ethical and legal standards, we protect the reputation of the Company and the Group.
Overview of the risk situation We assess our risk situation on the basis of qualitative and quantitative factors. This assessment is carried out by central risk management. Throughout the entire period under review, the Munich Re Group’s risk situation was manageable and under control. Our carefully implemented, modern risk management processes combined with our solid capitalisation ensured the solvency and viability of the Group at all times. In addition to the underwriting and cap ital market risks inherent in our business model, which we can assess well and therefore consciously take (see below), there are a large number of other risks to which Munich Re – like every other company – is exposed. The incidence of these risks is not planned and their occurrence probability and impact are mostly difficult to estimate. We therefore attach great importance to closely monitoring our environment and our own Group to identify such risks in good time and to take suitable measures to avert loss or damage.
Internal risk model Munich Re steers its business on the basis of a consolidated Group view, using its own integrated risk model to determine the capital needed to ensure the Group’s ability to pay even after extreme loss events.
The Munich Re Group’s risk model specifies the distribution of the economic equity over a one-year time horizon. It is based on separately modelled distributions for the segments property-casualty, life and health, market, credit, and operational risks. Every risk segment embraces all the risks that the Group runs within the area concerned, both in the reinsurance and the primary insurance segments. We also consider (tail) dependencies between the segments.
To determine the economic risk capital (ERC) of the Munich Re Group, we use the economic profit-loss distribution across all risk segments. The economic risk capital corresponds to 1.75 times the value at risk of this distribution over a one-year time horizon with a confidence level of 99.5%. The value at risk with a confidence level of 99.5% gives the economic loss of the Munich Re Group which, given unchanged exposures, will be statistically exceeded once every two hundred years at most. It represents the probable risk tolerance under Solvency II. By calculating 1.75 times the capital requirement in respect of this risk tolerance, our Group follows a conservative approach, aimed at offering our clients a high level of security.
– The rise of approximately €0.7bn in risk capital for life and health business is mainly due to the lower interest-rate level in the USA and Canada. In other words, it derives primarily from the increase in the present value of possible future losses, rather than from a higher nominal assessment of the risk.
– The economic risk capital for credit risks rose by around €1.2bn, essentially as a consequence of the major increase in spreads on the capital markets. A growth in the volume invested in fixed-interest securities and loans also had the effect of increasing the economic risk capital.
The table also makes clear the diversification effects we achieve through our broad spread across the different risk categories (underwriting, market, credit) and through our combination of primary insurance and reinsurance business. The diversification effect between the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risks” grew by around €0.6bn owing to a certain levelling of the risk exposures between risk categories. The diversification effect between the primary insurance and reinsurance segments has fallen slightly, although the risk exposures have levelled in this case as well. This results from a higher discount for restrictions in capital fungibility due to the lower avail able financial resources.
As described, Munich Re actively controls its risk exposure. This includes restricting our exposure through limits and budgets for natural catastrophe risks, where our experts consider scenarios for possible natural events, the scientific factors, occurrence probabilities and potential loss amounts. Significant losses from claims burdens can nevertheless not be ruled out.
The following diagram shows how we estimate our exposure to the two peak scenarios for a return period of 200 years.
Refined scenario (integration of various existing US hurricane scenarios), consideration of multiple landfalls
Details of the sensitivities of the value of business in force and new business in our life reinsurance and life and health primary insurance business may be obtained from the notes to the consolidated financial statements under (36) Risks from insurance contracts in the life and health segment.
31.12.2008 Segment Prev. year Segment Change Group Re- Primary diversi- Group Re- Primary diversi- Group €bn insurance insurance fication insurance insurance fication
Diversification effect –4.4 –3.4 –1.6 – –2.6 –2.6 –1.7 – –1.8 55_Lagebericht_e 16555_Lagebericht_e 165 10.03.2009 11:59:05 Uhr10.03.2009 11:59:05 Uhr
Equity risks The market value of our equity investments, including participating interests, amounted to €6.3bn on 31 December 2008. At this date, on a market-value basis and without taking hedging transactions into account, the ratio of equities to total investments amounted to approximately 3.6% (13.8%).
The fall in the equity risk is mainly due to the reduction of 10.8% in the equitybacking ratio (after hedging) to 1.7%.
Interest-rate risks We reinvested the liquid funds from reducing the proportion of investments in equities mainly in fixed-interest securities, which is reflected in a rise in the interest-rate risk in the reinsurance segment. Besides this, owing to the lower interest-rate level, the duration of our commitments (convexity) in the primary insurance segment has increased, which has also contributed to the rise in interest-rate risks. Overall, the interest-rate risk grew by around €1.9bn.
In reinsurance, the interest-rate risk on investments in units of modified duration (interest-rate sensitivity) is around 4.7, whereas the modified duration of liabilities is approximately 5.1. Owing to the larger portfolio of fixed-interest securities and loans compared with the liabilities, the reinsurance segment is nevertheless exposed to rising interest rates. The sensitivity of the available financial resources (see following section) to a parallel increase in all interestrate curves by one basis point (DV01) amounts to approximately –€7.1m. This means a change in the available financial resources, given the parallel shift in the interest-rate curve, by the given amount.
In primary insurance, the modified duration is 5.9 for investments and 6.7 for liabilities. This exposure to falling interest rates derives mainly from the longterm options and guarantees embedded in life insurance business. The extensive hedging programme which we implemented for the first time in 2005 has contributed significantly to reducing these interest-rate risks. The sensitivity of the available financial resources (see following section) to a parallel increase in all interest-rate curves by one basis point (DV01) amounts to approximately –€11.9m. The different expos ure in reinsurance and primary insurance thus has a reducing effect on our interest-rate risk at Group level.
Property risks The market value of our real estate, including buildings on land owned by third parties, amounted to €7.6bn at 31 December 2008. In the year under review, we made write-downs of €248m on our real estate, €131m of which was for depreciation.
Credit risks are determined using a portfolio model, taking into account changes in value owing to rating migrations and defaults of the Munich Re Group’s creditors.
The market value of our fixed-interest securities and loans as at 31 December 2008 totalled €150.4bn, representing 85% of the market value of the Munich Re Group’s overall investments. These securities thus made up the bulk of the portfolio. A detailed presentation of our fixed-interest securities and loans on a market value basis, including short-term items, can be found in the section on investment performance on page 105. Ratings for these investments are provided in the notes to the consolidatd financial statements under (5) Loans, (6) Other securities held to maturity, (7) Other securities available for sale, and (8) Other securities held for trading.
Our provisions ceded to reinsurers and retrocessionaires were assignable to the following rating categories at 31 December 2008: Available financial resources
Available financial resources The economic risk capital – the Munich Re Group’s capital requirement – differs from the actually available financial resources, with which higher-than- expected loss event can be covered. These resources are calculated as the sum of the economic equity and the available hybrid capital. The economic equity is based mainly on the Munich Re Group’s IFRS equity, supplemented by various economically appropriate adjustments. Thus, for example, in life insurance market-consistent embedded value is regarded as capital available to cushion risks. This is only partially included in IFRS equity, which is why we make an adjustment to include it. On the other hand, capitalised goodwill is included in the Group’s IFRS equity. As it must be assumed that this might lose value in the event of a severe loss event, it is deducted.
Available fi nancial resources 24.6 34.3 –9.7 55_Lagebericht_e 16755_Lagebericht_e 167 10.03.2009 11:59:05 Uhr10.03.2009 11:59:05 Uhr
In calculating RORAC (see definition on page 59), the factor “additional available economic equity“ is also relevant. It is the difference between the economic equity and the economic risk capital and totalled €3.1bn (12.9bn) in the year under review.
(C) Available fi nancial resources after dividend and share buy-back 23.5 32.8
A current example of overarching accumulations is the impact of the financial crisis. The starting point for this now global problem was the subprime loan crisis emanating from the US markets that provided mortgage loans to borrowers with low credit ratings. The crisis has had overarching effects because it impacts not only the capital market side but also the underwriting side of our activities.
The upheavals on the international financial markets resulting from the financial crisis already led to setbacks in the most significant economies in 2008, with the related rise in insolvency rates leading to higher claims costs in credit reinsurance. A further increase is to be expected in the course of 2009, particularly in the case of a prolonged recession. In the renewals at 1 January 2009, we have taken account of this development through adjustments in our underwriting policy and in our terms and conditions.
Munich Re has not written reinsurance of financial guarantee companies in the USA (so-called credit enhancement business) since 2003. In 2008, we were able to significantly reduce the remaining liabilities through negotiations with cedants. The decrease in liabilities has been achieved without adversely affecting our result and is a further step in reducing risk positions. We do not expect any significant losses from the remaining liabilities, which are in the low threedigit million range.
On the investment side, the financial crisis gave rise to major upheavals on the equity and bond markets in 2008. Our exposure in the financial sector – measured at market values – amounted to around €69bn at the end of the financial year. A total of 73% of this is attributable to covered securities (pfandbriefs and securities with state guarantees), with the main emphasis on Germany (56%).
Meanwhile, we have reduced the remaining exposure in subprime-related securities to €244m, which is around 0.1% of our overall investment portfolio at carrying amounts. With the subprime crisis developing into a global financial crisis, other investments of the Munich Re Group were affected by losses. Details can be found in the investment performance section on page 101. As a reaction to the continuing financial crisis, we took various measures in our credit risk management in 2008 to reduce our exposures in particular sectors and markets. Since the start of 2008, for instance, we have consistently reduced 55_Lagebericht_e 16955_Lagebericht_e 169 10.03.2009 11:59:05 Uhr10.03.2009 11:59:05 Uhr
A further example of an overarching accumulation risk is a major pandemic.
As a result of our global activities, we are subject to a large number of supervisory regulations in different countries. These may give rise to legal and regulatory risks. In late 2004, the US Securities and Exchange Commission (SEC) and the Office of the New York State Attorney General initiated inquiries of Munich Re with respect to “certain loss mitigation insurance products”. Subsequently, a number of other authorities in the USA and elsewhere made both formal and informal requests for similar information from Munich Re and some of its subsidiaries. We are fully cooperating with these inquiries.
C. Investments for the benefi t of life insurance policyholders who bear the investment risk 2,874 2,178 696 32.0 1,820
D. Ceded share of technical provisions (11) 5,251 5,623 –372 –6.6 6,585
I. Issued capital and capital reserve 7,388 7,388 – – 7,388
II. Provision for future policy benefi ts (20) 98,738 94,933 3,805 4.0 94,653
III. Provision for outstanding claims (21) 45,031 44,560 471 1.1 47,072
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (23) 2,940 2,308 632 27.4 1,930
I. Bonds and notes issued (25) 302 341 –39 –11.4 378
Thereof: Amounts due to banks relating to disposal groups (16) 19 19 – – 231
Earnings per share (51) 7.48 17.83 –10.35 –58.0 1 Adjusted pursuant to IAS 8.
Actuarial gains and losses on defi ned benefi t plans –53 74
Thereof: Attributable to Munich Re equity holders –1,411 2,394 Attributable to minority interests –154 37
Retained Own Unrealised Reserve Valuation earnings shares gains from result before held and currency from deduction losses translation cash of own fl ow €m shares hedges
Thereof: Adjustments pursuant to IAS 8 – – –31 – – 1 – –21 – –51
Dividend – – – – – – – –988 –14 –1,002
Share buy-backs – – – –2,305 – – – – – –2,305
Allocation to retained earnings – – 2,716 – – – – –2,716 – –
Total recognised income and expenses – – –167 – –2,725 –25 3 1,503 –154 –1,565
Share buy-backs – – – –1,414 – – – – – –1,414
Our reporting on the Group cash flow is based on IAS 7 and the principles of German Accounting Standard No. 2 (DRS 2) issued by the German Standards Board (DSR) for the presentation of cash flow statements. This has been supplemented by the requirements of DRS 2–20, which applies specifically to insurance companies. In accordance with the recommendations of the DSR for insurance companies, we have applied the indirect presentation method. The “cash fund” within the meaning of the German Accounting Standard is limited to cash and cash equivalents shown under balance sheet item F “cash at bank, cheques and cash in hand”. Further information on the consolidated cash flow statement can be found in the management report on page 120.
Change from the acquisition, sale and maturities of other investments –3,461 –4,791
Change from the acquisition and sale of investments for unit-linked life insurance –380 –353
Cash at the end of the fi nancial year 2,354 2,505
Interest paid 799 784 65_Abschluss_e 17965_Abschluss_e 179 10.03.2009 11:24:51 Uhr10.03.2009 11:24:51 Uhr
The individual fields of business are shown after consolidation of internal transactions within the individual field but before consolidation across segments. This is shown sep arately in the “consolidation” column.
I. Land and buildings, including buildings on third-party land 399 452 696 649
C. Investments for the benefi t of life insurance policyholders who bear the investment risk – – – –
Thereof: Other segment liabilities relating to disposal groups – – – –
Life and health Property-casualty €m 31.12.2008 Prev. year1 31.12.2008 Prev. year1
Thereof: From insurance transactions with other segments 677 704 657 824 From insurance transactions with external third parties 6,453 6,589 13,995 13,400 1. Earned premiums 2. Investment result 4. Expenses for claims and benefi ts 5. Operating expenses 7. Result before impairment losses of goodwill 934 1,078 2,822 3,063 8. Impairment losses of goodwill – 3 – –
Segment reporting 1 After elimination of intra-Group transactions across segments. 2 Adjusted pursuant to IAS 8.
Africa, Near and Middle East 65_Abschluss_e 18665_Abschluss_e 186 10.03.2009 11:24:52 Uhr10.03.2009 11:24:52 Uhr
Equity and liabilities (A) Equity 206 (B) Subordinated liabilities 206 (C) Gross technical provisions 206 (D) Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 209 (E) Other accrued liabilities 209 (F) Liabilities 210 (G) Deferred tax liabilities 210
(29) Investment result 247 (30) Other income 248 (31) Net expenses for claims and benefits 249 (32) Operating expenses 250 (33) Other expenses 250 (34) Finance costs 250 (35) Taxes on income 251
Disclosures on type and extent of risks from insurance contracts and financial instruments (36) Risks from insurance contracts in the life and health segment 253 (37) Risks from insurance contracts in the property-casualty segment 259 (38) Credit risks from ceded reinsurance business 264 (39) Market risks from financing instruments – Sensitivity analysis 265
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). Insofar as we do not explicitly refer to a particular standard, we use the two terms synonymously. In accordance with the rules of IFRS 4, underwriting items are recognised and measured on the basis of US GAAP (United States Generally Accepted Accounting Principles ). We have also observed the German accounting standards (DRSs) adopted by the German Standardisation Council (DSR) provided they do not contradict the applicable IFRSs.
The income and expenses for the months of April to December have been recognised in the consolidated income statement. In these months, Midland contributed –€19.3m to the consolidated result. In the financial year 2008, Midland posted a result of €26.7m and gross premiums written of €740.7m.
Bank Austria Creditanstalt Versicherung AG On 30 September 2008, through its subsidiary ERGO Austria International AG, the Munich Re Group acquired a further 60.54% of the shares in Bank Austria Creditanstalt Versicherung AG for a price of €416.1m, thus increasing its stake to 90%. Bank Austria Creditanstalt Versicherung AG is a specialty life, pension and personal accident insurer. The company is the fifth-largest life insurer (in terms of market share) in the Austrian market.
The opening balance sheet of Bank Austria Creditanstalt Versicherung AG at the time of acquisition includes the following IFRS figures (the figures in brackets are the amounts directly prior to the business combination): intangible assets of €403.7m (0.9m), investments of €3,850.6m (3,850.6m), a ceded share of technical provisions of €306.7m (306.7m), other assets of €255.0m (502.0m), gross technical provisions of €3,920.1m (4,097.5m), and other provisions and liabilities of €559.5m (485.6m). In addition, a contingent liability of €3.8m was assumed for a letter of support.