1 Previous years’ figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 Including those apportionable to minority interests and policyholders. 3 Previous year’s figures adjusted owing to a change in the composition of the reporting segments.
» Key figures (IFRS) – Munich Re at a glance (XLS, 38 KB)
Gross premiums written €bn 31.6 31.5 Investments (incl. insurance-related investments)1 €bn 85.8 91.9 Net technical provisions €bn 68.1 67.1 Major losses (net) €m –4,314 –1,542 –1,046 –1,162 –1,689
Net expenses for claims and benefits €bn –41.6 –38.5 –38.7 –39.7 –39.9 Net operating expenses €bn –12.2 –12.3 –12.4 –12.0 –12.4
Munich Reinsurance Company’s market capitalisation at 31 December €bn 28.0 28.9 30.8 28.7 28.7
Corporate governance 7 Report of the Supervisory Board 9 Corporate governance report 14
This document is a translation of the original German version and is intended to be used for informational purposes only. While every effort has been made to ensure the accuracy and completeness of the translation, please note that the German original is binding.
Dr. Joachim Wenning Chairman of Munich Reinsurance Company’s Board of Management 2017 was one of the most loss-affected years in the history of our Company. Hurricanes Harvey, Irma and Maria, as well as the earthquakes in Mexico, caused misery and destruction across the Caribbean, Central America and the southern USA. Munich Re is paying out over €3,000m for these events alone, and is thus helping to alleviate the plight of those affected, at least financially. Although this unusual accumulation of severe catastrophes meant that our original profit guidance for 2017 was no longer attainable, we were well positioned to absorb even such heavy losses.
ERGO is making good progress with its Strategy Programme, having reached important milestones in 2017. ERGO is also delivering in terms of results: its profit of €273m surpassed our guidance for 2017, which we had already raised halfway through the year. But we still have a lot of hard work to do until the Strategy Programme is successfully completed. Our aim is
As regards our long-term investment horizon, we are seeking to improve our investment result by expanding our investments in less liquid markets and slightly raising the risk profile of our portfolio without abandoning our tried-and-tested policy of gearing our investments to the structure of our liabilities. Munich Re remains a conservative investor – both in absolute terms and by market comparison. As Munich Re invests heavily in interest-bearing securities, decisions made by central banks are of great significance to us. We are still not feeling any tailwinds in this respect, but at least the headwinds have eased. Interest rates have started to rise again slowly, particularly in the US where we are a heavyweight in reinsurance. Accordingly, in 2018 we should see an end to the falling running yield in reinsurance overall.
In the 2017 financial year, the Supervisory Board fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association and the rules of procedure. We monitored the Board of Management in its conduct of the business, and gave advice on all matters of importance for the Group. No inspection measures in accordance with Section 111(2) sentence 1 of the German Stock Corporation Act (AktG) were required at any time.
Outside of Supervisory Board meetings, the Board of Management informed us promptly about important events in the Group, in particular the impact of hurricanes Harvey, Irma and Maria, and the decision of the Board of Management of ERGO Group AG to end discussions concerning the sale of its traditional life insurance portfolio. The shareholder representatives and the employee representatives met regularly with the Chairman of the Board of Management for separate discussions in preparation for the meetings.
Between meetings, I met regularly with the Chairman of the Board of Management Nikolaus von Bomhard (until 26 April 2017) and Joachim Wenning (from 27 April 2017). We discussed individual questions of strategic orientation and risk management, as well as Munich Re’s current business situation. Also between meetings, the Chairman of the Audit Committee, Henning Kagermann, remained in close contact with Jörg Schneider, the member of the Board of Management responsible for Group reporting.
Focal points of the meetings of the full Supervisory Board There were six meetings of the Supervisory Board in the year under review. We regularly held in-depth discussions with the Board of Management about business performance and current topics, with a special focus on strategic considerations of the Board of Management with respect to the individual fields of business. The Board of Management reported regularly on Munich Re’s investments, addressing the development of the global economy and financial markets in detail, as well as their impact on the Group’s assets and earnings. The Board also supplied us with frequent updates on the implementation of the ERGO Strategy Programme. Following the rejection of the remuneration system at the 2017 Annual General Meeting, we addressed in detail the reasons for this decision in a number of meetings, and worked on a new remuneration system for the members of the Board of Management. Moreover, we took advantage of the opportunity to confer on matters involving the Board of Management even in the Board’s absence. We also dealt with the following topics in the individual meetings in 2017: The meeting on 14 March focused among other things on the Company and Group financial statements for 2016, the combined management report, and the motions for resolution by the 2017 Annual General Meeting. Furthermore, we conferred and took decisions regarding the extension of two appointments to the Board of Management
On 26 April, directly prior to the Annual General Meeting, we heard the Board of Management’s report on the present status of business performance in 2017. We also used the meeting to make last-minute preparations for the Annual General Meeting.
On 18 July, we were informed about the cyber insurance market and Munich Re’s strategy in this area. In addition, we adopted a Communications Policy setting out basic rules for the Supervisory Board’s communication with investors. Beyond this, we were briefed on the 2016 remuneration report in accordance with the German Remuneration Regulation for Insurance Companies (VersVergV) and adopted an amendment to the Guideline on fringe benefits.
Details of the tasks of the committees and their composition can be obtained on page 18 f. and from our website at www.munichre.com/supervisory-board.
The Audit Committee met six times in 2017, and two of these meetings were attended by the external auditor. The Committee discussed the Company and Group financial statements, the combined management report, the auditor’s report and the Board of Management’s proposal for the appropriation of the net retained profits for the 2016 financial year. The Audit Committee also considered the quarterly statements for 2017, and conducted a detailed review of the 2017 Half-Year Financial Report in conjunction with the auditor. The Committee heard regular reports on the key Solvency II figures and discussed the quarterly reporting to the Supervisory Authority in these meetings. Another key task of the Committee consisted of monitoring the Group’s risk situation and risk management on an ongoing basis, and discussing its risk strategy: the Group Chief Risk Officer regularly provided detailed verbal input at several meetings of the Committee in addition to the quarterly written reports submitted. The Head of the Actuarial Function also provided a report in a meeting. Further issues discussed regularly were the internal control system and compliance topics. The Group Chief Auditor informed the members of the Committee in full about the outcome of the audits for 2016 and the audit planning for 2017. The Committee received regular updates on the current status of individual compliance issues and the progress of audits. In the absence of the Board of Manage ment, the members of the Committee took advantage of the opportunity to confer amongst themselves or with the Group Chief Auditor, the Group Chief Compliance Officer, the Group Chief Risk Officer and the external auditor. Furthermore, the Audit Committee reviewed and monitored the auditor’s independence. It regularly called for reports on the auditor’s new activities beyond the auditing of the annual financial statements and on the utilisation of the statutory limit for awarding such contracts. The auditor presented the Audit Committee with explanations of the key audit matters for the 2017 financial year. Following a resolution by the full Supervisory Board, the Chair of the Committee commissioned KPMG with the audit for the 2017 financial year, and also commissioned the auditor’s review of the Half-Year Financial Report 2017.
The Nomination Committee met once in 2017, and discussed suitable candidates for election to the Supervisory Board. In proposing its nomination, the Committee took account of the objectives set by the Supervisory Board for the composition of the Board and the set of criteria, among other things.
There was no need to convene the Conference Committee in the 2017 financial year.
Dialogue with investors In my role as Chairman of the Supervisory Board, I held discussions with investors in 2017 and 2018. Following the rejection of the remuneration system for the members of the Board of Management at the Annual General Meeting in April 2017, these discussions often focused heavily on the remuneration system. The outcomes of these discussions were for the most part taken into consideration in the decision-making process and when drawing up the revised remuneration system proposal for the members of the Board of Management.
Corporate governance and Declaration of Conformity The Supervisory Board pays close attention to good corporate governance. Together with the Board of Management, we therefore published the mandatory annual Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG) in November 2017. We again complied with all recommendations of the German Corporate Governance Code, and will continue to do so in future. We confirmed the assessment that all 20 members of the Supervisory Board are to be regarded as independent and that they do not have any relevant conflicts of interests.
Changes on the Board of Management Nikolaus von Bomhard stepped down from the Board of Management and went into retirement at the end of the 2017 Annual General Meeting. Joachim Wenning took over as Chairman of the Board of Management on 27 April 2017. As a consequence of the change in management, the units belonging to the Group functions in the divisions for which Joachim Wenning and Jörg Schneider are responsible were reorganised in order to bring the functions related to the Group’s business development closer to the Chairman of the Board of Management and, at the same time, achieve a greater concentration of the governance functions in the division for which the Chief Financial Officer is responsible.
Member of the Board of Management Ludger Arnoldussen stepped down from the Board of Management as of 26 April 2017. Hermann Pohlchristoph was appointed his successor, and took responsibility for the Germany, Asia Pacific and Africa Division and the Central Procurement and Services central divisions.
Member of the Board of Management Pina Albo stepped down from the Board of Management as of 31 December 2017. Until further notice, Peter Röder has responsibility for the Europe and Latin America Division in addition to the Global Clients and North America Division.
The respective reports and the Board of Management’s proposal for appropriation of the net retained profits were submitted directly to the members of the Supervisory Board. At its meeting on 5 February 2018, the Audit Committee had the opportunity to confer in detail about the preliminary year-end figures as at 31 December 2017. On 13 March 2018, it prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. To this end, the Audit Committee examined in advance the Company and Group financial statements, the combined management report and the Board of Management’s proposal for appropriation of the net retained profits. It discussed these at length with the external auditor present at the meeting, and gave detailed consideration to the auditor’s reports. The Audit Committee paid particular attention to the key audit matters described in the auditor’s opinion, including audit activity. The Chair of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting. In its March meeting, the Audit Committee discussed the preliminary key figures under Solvency II reporting – and the solvency ratio under Solvency II in particular – and reported on this in the plenary session.
The full Supervisory Board also reviewed the Company and Group financial statements and the combined management report, and the proposal of the Board of Management for appropriation of the net retained profits. The auditor’s reports were available to all members of the Supervisory Board and were discussed in detail at the balance sheet meeting of the Supervisory Board on 14 March 2018 in the presence of the external auditor. The auditor reported on the scope, the main points, and the key results of the audit, going into particular detail on the key audit matters (please refer to auditor’s report on page 180 ff. for information) and the audit activity conducted. There were no reports of material weaknesses in the internal control system or the risk management system.
Words of thanks to the Board of Management and employees The Supervisory Board wishes to thank all members of the Board of Management and staff worldwide for their work and dedication in an eventful and challenging financial year.
The German Corporate Governance Code contains the main legal rules to be observed by listed German companies. In addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. We apply the highest standards to our operations and activities and therefore comply with all the recommendations and proposals of the German Corporate Governance Code. By adopting international guidelines such as the UN Global Compact, the Principles for Responsible Investment and the Principles for Sustainable Insurance, we further demonstrate our commitment to corporate responsibility.
Efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies and with the Group’s staff, an organisational structure that fits the purpose of the Group, and efficient processes for conducting business are core elements of good corporate governance. They help to secure the confidence of investors, clients, employees and the general public in our corporate activities.
The principle of “one share, one vote” applies at the Company’s Annual General Meeting. With the aim of making it easier for shareholders to take part and exercise their voting rights, the Company offers the possibility of postal and electronic voting as well as online participation in the Annual General Meeting.
The Board of Management is responsible for managing the Company, in particular for setting the Company’s objectives and determining strategy. In doing so, it is obliged to safeguard Company interests and endeavour to achieve a sustainable long-term increase in the Company’s value. It should take account of the interests of shareholders, employees, and other stakeholders of Munich Reinsurance Company. The Board of Management is responsible for effecting adequate risk management and risk control in the Company. It must ensure that statutory requirements and internal Company guidelines are abided by, and works to achieve their compliance by Group companies.
The Company’s Group Compliance division (GComp) manages the compliance activities of Munich Re (Group) through Group-wide terms of reference, monitoring their implementation by means of the compliance management system (CMS). The CMS is the methodical framework for the structured implementation of early warning, risk 1 In accordance with Section 3.10 of the German Corporate Governance Code.
− The Supervisory Board should have at least sixteen independent members within the meaning of Section 5.4.2 of the German Corporate Governance Code, including at least eight shareholder representatives. Members of the Supervisory Board should have no relevant conflicts of interest.
− In selecting candidates, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. No change has been made to the objective of having at least 30% of Supervisory Board seats filled by women at the start of the next term of office. At the end of the year under review, 45% of the Supervisory Board seats were held by women. The Supervisory Board’s objective has therefore already been exceeded at this juncture.
The Supervisory Board is of the opinion that all 20 of its members are to be regarded as independent within the meaning of Section 5.4.2 of the German Corporate Governance Code. The shareholder structure was taken into account. The Supervisory Board is not aware of any business or personal relationship between a member and the Company, its governing bodies, a controlling shareholder or an entity affiliated with such a shareholder, as a result of which a major and not only temporary conflict of interest could arise. The Supervisory Board assumes that the employee representatives on the Supervisory Board elected in accordance with the Act on the Co-Determination of Employees in Cross-Border control, consulting and supervision functions, as well as for the monitoring of legal frameworks.
At the instigation of the Board of Management, another channel has been established to complement the external, independent ombudsman and thus strengthen compliance within Munich Re: the compliance whistleblowing portal. Staff members and third parties can use this portal to anonymously report any activity that may cause reputational damage, suspected criminal behaviour such as bribery and corruption, contraventions of antitrust laws, insider trading rules and data protection laws, and any other violations of applicable legislation.
Pursuant to Munich Reinsurance Company’s Articles of Association, the Supervisory Board has 20 members. Half are representatives of the shareholders, elected by the Annual General Meeting. The other half are elected representatives of the Group’s employees in the European Economic Area.
The Supervisory Board monitors the Board of Management and gives counsel where appropriate, but it is not authorised to take management action in place of the Board of Management. In accordance with a special rule applicable to (re)insurance companies, the Supervisory Board also appoints the external auditor for the Company and Group financial statements and for the Half-Year Financial Report.
Life (until 31 January 2017) Human Resources (until 26 April 2017)
Since 27 April 2017: Group Holdings Group Strategy and M&A Group Communications Group Audit Economics, Sustainability & Public Affairs3
Giuseppina Albo (until 31 December 2017) Europe and Latin America IFG Companies, USA
Dr. rer. pol. Thomas Blunck Special and Financial Risks (until 31 January 2017) Life and Health (since 1 February 2017) Capital Partners Digital Partners Reinsurance Investments
Share trading and shares held by Board members The Company has to be notified promptly of the acquisition or sale of Company shares (or financial instruments based on these) by members of the Board of Management and Supervisory Board and by specified persons closely related to or connected with them. This notification must take place for acquisition and sales transactions totalling €5,000 or more in a single calendar year.
Mergers and the Co-determination Agreement are independent as a matter of principle.
The set of criteria also includes other personal qualities of the Supervisory Board members, such as corporate and international experience, a strong commitment to corporate governance and to a sustainable corporate strategy and business policy geared to creating long-term value for shareholders, strategic and problem-solving skills, and competence in dealing with change.
Health (until 31 January 2017) Special and Financial Risks (since 1 February 2017) Human Resources (since 27 April 2017)
DKV Deutsche Krankenversicherung AG, Cologne2 (Chair) ERGO Beratung und Vertrieb AG, Düsseldorf2
Financial and Regulatory Reporting Group Controlling Corporate Finance M&A (until 26 April 2017) Integrated Risk Management Group Legal Group Taxation Investor and Rating Agency Relations Group Compliance (since 27 April 2017)
MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH, Munich2 1 As at 31 December 2017; seats held on supervisory boards of German companies and memberships of comparable bodies of German and foreign business enterprises. 2 Own Group company within the meaning of Section 18 of the German Stock Corporation Act (AktG). 3 Including responsibility for environmental, social and governance (ESG) issues.
Prof. Dr. oec. Dr. iur. Dr. rer. pol. h.c. Ann-Kristin Achleitner Scientific Co-Director of the Center for Entrepreneurial and Financial Studies (CEFS) at the Technical University of Munich Member since 3 January 2013, last re-elected 30 April 2014
Christian Fuhrmann Head of Divisional Unit, Munich Reinsurance Company Member since 22 April 2009, last re-elected 30 April 2014
Prof. Dr. rer. nat. Dr. h.c. Ursula Gather Rector of TU Dortmund University Member since 30 April 2014
Prof. Dr. rer. nat. Peter Gruss President and CEO of OIST Graduate University, Japan Member from 22 April 2009 until 30 June 2017
Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann President of acatech – German Academy of Science and Engineering Member since 22 July 1999, last re-elected 30 April 2014
Dr. phil. Ron Sommer Chairman of the Supervisory Board of MTS OJSC, Russia Member since 5 November 1998, last re-elected 30 April 2014
Macroeconomic and industry environment 049 Capital markets 049 Insurance industry 049
Prospects 078 Comparison of the prospects for 2017 with the result achieved 078 Outlook for 2018 080
A core guiding principle for Munich Re is acting in a farsighted and responsible manner in the interests of both the Group and society. We have based our Group-wide corporate responsibility strategy on the shared-value approach. This means that, in our business operations, we bring together economic and social progress to counter the most significant global challenges. We are therefore concentrating on mitigating the consequences of climate change; improving access to healthcare for all levels of society worldwide; and increasing risk awareness within our Group, among our staff, clients, and shareholders, and in society.
We have the relevant abilities, resources and risk expertise to originate new, increasingly digital solutions. In close cooperation with recognised partners, we generate added value through our business solutions and initiatives. Our voluntary commitments, such as the ten principles of the United Nations Global Compact, the Principles for Responsible Investment, and the Principles for Sustainable Insurance are the foundations of our corporate responsibility approach. In our insurance business and investment management, we proactively embrace environmental and social factors, as well as governance aspects. We have built up a Group-wide environmental management system and our operations have been carbon-neutral since 2015. With our social involvement, we fulfil our role as a good corporate citizen, focusing on projects related to our core business. All information on our endeavours is available from our corporate responsibility portal at www.munichre.com/cr-en.
The non-financial reporting requirements of the European Union’s Corporate Social Responsibility (CSR) Directive have been transposed into the German Commercial Code (HGB) and apply as of the 2017 financial year. The following have been identified as aspects to be reported for Munich Re (Group) and Munich Reinsurance Company within the meaning of the legal requirements: − Munich Re as an employer of choice and diversity as a strategic success factor − Anti-corruption and bribery − Corporate responsibility (CR) in insurance and investments
The CR in insurance and CR in investment sections include information on the statutory aspects of environmental protection, social factors and human rights. The combined non-financial statement prepared in accordance with sections 289b(3) and 315b(3) of the German Commercial Code (HGB) can be found at www.munichre.com/cg-en in the information on corporate governance.
Demand for reinsurance is also growing with regard to the capital market risks often embedded in savings products. We provide our clients with comprehensive advice on product design while offering hedging for embedded options and guarantees linked to the capital markets. Our own exposure is transferred back to the capital markets.
The reinsurance business managed by Munich Health was transferred to the Life and Health Division as of 1 February 2017, and the reinsurance units of Munich Health were pooled with the life reinsurance units of the Life and Health Division. This enables us to leverage numerous synergies.
Our Europe and Latin America Division is responsible for property-casualty business with our clients from Europe (except Germany), Latin America and the Caribbean. Business Units – for example, in London, Madrid, Paris and Milan – afford us market proximity and regional competence. In the South American markets, our Brazilian subsidiary Munich Re do Brazil Resseguradora S.A. and our branch office in Bogotá help to ensure client proximity.
In reinsurance, we operate in life, health and property- casualty business. Under reinsurance, we also include specialised primary insurance activities that are handled by the reinsurance organisation and business from managing general agencies (MGAs). Munich Re does business with over 4,000 corporate clients from more than 160 countries.
Focus of life and health reinsurance operations Our international life business is written in the Life and Health Division. This is split into three geographical regions and one international unit that develops specialised solutions for capital market risks. The focus of the division’s business activities is on traditional reinsurance solutions that concentrate on the transfer of mortality risk. Moreover, we have been increasingly active in the market for living benefits products. These include products such as occupational disability, long-term care, and critical illness, which have seen increased demand. We also offer capacity for longevity risks. Until now, we have concentrated our efforts in this field on the United Kingdom.
With ERGO Versicherung AG, our primary insurance arm is one of Germany’s largest providers of property and legal protection insurance. As a specialist in capital-market- oriented insurance, ERGO Vorsorge Lebensversicherung AG is shaping change in the area of private provision and biometric risk products. ERGO Lebensversicherung AG and Victoria Lebensversicherung AG are responsible for running off our traditional life insurance portfolio. DKV Deutsche Krankenversicherung AG is a leading provider and specialist in the healthcare market, catering for privately and statutorily insured individuals alike with its broad range of supplementary covers. The specialist travel insurer ERV is a market leader internationally as well as in Germany. In Germany, ERGO’s own sales company, ERGO Beratung und Vertrieb AG, bundles the various sales channels under one roof. As part of the ERGO Strategy Programme, ERGO merged its tied agents’ organisations into a single sales organisation (ERGO tied agents’ organisation) as of 1 January 2017. ERGO Pro’s structured sales force will be developed further as a separate area of responsibility. The cooperation with UniCredit Bank AG in Germany was terminated as at 31 December 2017. As part of the Group’s Strategy Programme, responsibility for ERGO’s broker and partner sales channels was transferred to the life and health and property-casualty product divisions in 2016 to increase proximity to product providers.
Of ERGO’s European companies, those in Austria, Poland, the Baltic states and Greece have a particularly strong market presence. In Greece, ERGO became the market leader for property-casualty insurance in 2016 after acquiring a primary insurer there. As experienced experts, our legal protection insurers number among the leading players in each of their markets.
In Asia, ERGO is represented through partnerships in joint ventures in the rapidly growing markets of India and China, and in other countries. In India, HDFC ERGO continues to perform very pleasingly. In China, ERGO China Life – a joint venture with the state-owned financial investor SSAIH – is tapping into the potential of the major provinces of Shandong and Jiangsu. And in Thailand, too, our investment is performing well.
The Special and Financial Risks Division (SFR) is in charge of the classes of credit, marine, aviation and space, agriculture, enterprise, and other selected contingency risks. The Corporate Insurance Partner unit, which is dedicated to industrial clients and is part of Risk Solutions, also belongs to this division. Great Lakes Insurance SE, which is also assigned to this division, is a further key component of the risk solution strategy. It has its headquarters in Munich and a large branch office in London. It enables us to unlock business potential in niche primary insurance business which is close to reinsurance.
German, international, and direct and digital business are bundled in three separate units – ERGO Deutschland AG, ERGO International AG, and ERGO Digital Ventures AG – under the umbrella of ERGO Group AG. Traditional German business is concentrated in ERGO Deutschland AG. ERGO International AG manages the Group’s international business. The third pillar, ERGO Digital Ventures AG, is responsible for all of the Group’s digital and direct activities. Responsibility for the new ERGO Mobility Solutions unit has been assigned to ERGO Digital Ventures since 2017, given the growing significance of automotive financial services.
Remuneration of the members of the Board of Management in 2017 The full Supervisory Board decides on the remuneration system for the Board of Management, and reviews it regularly. The Personnel Committee of the Supervisory Board, comprising the Chairman of the Supervisory Board, one shareholder representative and one employee representative, prepared the resolutions for the full Supervisory Board in the year under review.
Basic remuneration plus remuneration in kind/ fringe benefits 30% Function, responsibility, length of service on Board
In the second year, on condition that 50% of the net amount paid out is invested by the Board member in Munich Re shares that must be held for at least a four-year period 70% multi-year performance (for 100% achievement of objectives/ performance evaluation)
Pension contribution > Retirement > Insured event > Premature termination 1 For variable remuneration, the share shown was based on 100% achievement of objectives/performance evaluation. 2 Target overall direct remuneration comprised basic remuneration plus variable remuneration based on 100% achievement of objectives/performance evaluation.
Fixed remuneration The fixed components of remuneration comprised basic remuneration plus remuneration in kind and fringe benefits such as company cars, insurance policies and healthcare. The payroll tax on the remuneration in kind and fringe benefits was borne by Munich Re.
The amount of variable remuneration depended on the extent to which the annually set objectives for annual and multi-year performance were met, and how the overall performance component was assessed.
Category of objective Share1 Assessment basis Parameters Collective contribution 40–60% to corporate success Group objective Derived from key performance indicators Return on risk-adjusted capital, RORAC2 in external reporting and other important portfolio and performance data Business-field objectives
– ERGO Value-based economic Economic earnings3 performance indicator Individual contribution 20–40% to corporate success Divisional objectives Value-based economic Components of performance indicators: economic earnings3: – Property-casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in-force business
Targets and achievement of objectives for variable remuneration The financial and personal objectives set for the members of the Board of Management up to 2017 were very granular and formulated very clearly to ensure that they were objective, and could be measured and monitored. They included commercially sensitive information that was highly relevant for the market and the competition, and covered clients’ interests. That is why we did not publish specific targets on the basis of the previous remuneration system. To enhance the transparency of the remuneration report, the overall achievement of objectives for each remuneration component is now also published in the remuneration tables in accordance with the German Corporate Governance Code.
– Reinsurance Value-based economic Components of performance indicators: economic earnings2: – Property-casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in-force business
– ERGO Value-based economic Economic earnings2 performance indicator Individual contribution 20–30% to corporate success Personal objectives Personal objectives Special focal points such as (three-year period) per Board member – Strategic goals – Client focus – Innovation initiatives – Digitalisation initiatives Overall performance evaluation 20% Overall performance of individual Assessment by Supervisory Board taking Board members and the Board into account Section 87 of the Stock of Management as a whole Corporation Act (AktG) and the German Corporate Governance Code (incl. corporate responsibility and compliance requirements)
Munich Re Group Annual Report 2017 at the date of transfer, which was maintained as a vested pension. For their service years as of 1 January 2009, they receive an incremental pension benefit based on the defined contribution plan.
payments. If the Board member’s activities are terminated prematurely by the Company without good cause, payments due may not exceed the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29(2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract if this is shorter. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is based on overall remuneration for the past financial year and, where appropriate, on the probable overall remuneration for the current financial year.
− In the case of a combination of defined benefit and defined contribution plans: Vested pension from the defined benefit plan and 80% of the insured occupational pension benefit up to age 59, with subsequent occupational pension based on the defined contribution plan.
Benefit: − In the case of defined contribution plans: Annuity based on the policy reserve or payment of the policy reserve as a lump sum at the date the pension benefit is claimed. − In the case of a combination of defined benefit and defined contribution plans: Entitlement of between 30% and 60% of pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 65th birthday; the Company pays the difference between the monthly occupational pension and the monthly incremental pension from the external insurance.
Vested benefits under the German Company Pension Act (BetrAVG): Board members have vested benefits under the German Company Pension Act if they leave the Company before reaching the age of 60 or 62 and the pension commitment has existed for at least five years previously.
Benefit: − In the case of defined contribution plans: Annuity based on the policy reserve or payment of the policy reserve as a lump sum at the date the insured event occurs. − In the case of a combination of defined benefit and defined contribution plans: The entitlement under the vested pension is a proportion of the vested pension based on the ratio of actual service with the Company to the period the Board member would have worked for the Company altogether up to the fixed retirement age (m/n-tel process, Section 2(1) of the Company Pension Act). The entitlement from the incremental pension comprises the pension benefits fully financed under the insurance contract up to the occurrence of the insured event based on the
Fixed and variable remuneration components The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €19.8m (23.1m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. Remuneration therefore declined by around €3.3m year on year, mainly because the achievement rate for the Group result is 0% owing to the 2017 hurricane losses and because the result of the assessment for the reinsurance field of business was lower year on year both on an annual and multi-year basis. The remuneration received by the individual members of the Board of Management is shown in the table below.
Board of Management remuneration under DRS 17 Under DRS 17, remuneration for annual performance in 2017 is shown as the provisions set aside for that purpose taking into account the relevant additional/reduced expenditure for the previous year, since the performance on which the remuneration is based has been completed as at the balance sheet date and the requisite Board resolution is already foreseeable. Under DRS 17, remuneration for multiyear performance 2014–2016 is recognised in the year of payment, i.e. in 2017.
2 The amounts paid out in 2017 were for multi-year performance 2014–2016, those paid out in 2016 were for 2013–2015. 3 Remuneration in kind/fringe benefits for 2017 including expenditure for security (Wenning) and anniversary payments (Albo). 4 As compensation for a post-contractual non-competition agreement, Ludger Arnoldussen was paid a total of €1,515,000 for the period May to December 2017. 5 The compensation components that Markus Rieß received for his work at ERGO Group AG are included in the remuneration. Remuneration in kind/fringe benefits for 2017 including expenditure for security. Other: Compensation, payable in four equal instalments, for the forfeited variable remuneration from the previous employer.
Remuner- Basic ation in Annual Multi-year Financial remuner- kind/fringe perform- perform- Name year ation benefits ance1 ance2 Other Total
Joachim Wenning3 (Chairman of the Board 2017 1,045,000 128,254 339,533 872,200 2,384,987 thereof for Munich Reinsurance Company 337,500 49,342 180,023 750,000 1,316,865 thereof for Munich Reinsurance Company 337,500 39,677 229,744 1,500,000 2,106,921
thereof for Munich Reinsurance Company 191,250 446,250 637,500 thereof for Munich Reinsurance Company 236,250 551,250 787,500
Munich Re Group Annual Report 2017 insurer under the defined contribution system, the visible pension costs since 2009 are noticeably higher. The Company accepts this increase in order to avoid higher costs in future and to eliminate long-term pensionspecific risks. The following defined benefits, present values, contribution rates and personnel expenses result for the individual members of the Board of Management: Pension entitlements Personnel expenses of €6.4m (6.5m) were incurred in the financial year to finance the pension entitlements for active members of the Board of Management. Of these, €1.3m was apportionable to defined benefit plans and around €5.1m to defined contribution plans. As a consequence of the risk transfer to an external pension
Defined benefit plan Present value Provisions of defined for Financial Defined benefit as at personnel Name year benefit1 31 December expenses2
Nikolaus von Bomhard3 (until 26 April 2017) 2017 407,100 17,641,804 0
Munich Re Group Annual Report 2017 for defined benefit plans and defined contribution plans) are in accordance with German Accounting Standard No. 17 (DRS 17). There are some deviations with regard to variable remuneration for annual and multi-year performance.
The basic remuneration, remuneration in kind/fringe benefits and pension expenses (sum of personnel expenses 1 In the case of Board members transferred from the old system to the new, the amount corresponds to the value of the annual vested pension at 31 December 2008. 2 Expenses for defined benefit plan, including provision for continued payment of salary for surviving dependants. 3 Left the Board as at 26 April 2017; has received a pension since 1 May 2017.
4 Entitled to occupational pension in the event of termination of employment owing to incapacity to work. 5 Entitled to a reduced occupational pension on early retirement in the event of premature or regular termination of employment. 6 Left the Board as at 31 December 2017; entitled to a pension with effect from 1 December 2024. 7 Left the Board as at 26 April 2017; entitled to a reduced occupational pension on early retirement with effect from 1 May 2019. 8 Entitled to a reduced occupational pension on early retirement in the event of premature termination of employment, and to an occupational pension in the event of regular termination of employment. 9 Entitled to vested benefits under the Company Pension Act in the event of premature or regular termination of employment. 10 Entitled to vested benefits under the Company Pension Act in the event of regular termination of employment. 11 Defined contribution plan within the meaning of IAS 19: Employee Benefits, so no present value shown.
Nikolaus von Bomhard3 (until 26 April 2017) 2017 17.00 247,690 9,659,613 238,000
thereof for Munich Reinsurance Company 25.50 18,382 –11 286,875 thereof for Munich Reinsurance Company 25.50 10,365 –11 286,875
Nikolaus von Bomhard Joachim Wenning Chairman of the Board of Management Board member (until 26 April 2017) (leaving date: 26 April 2017) Chairman of the Board of Management (since 27 April 2017)
Remuneration in kind/fringe benefits 11,664 11,664 11,664 35,783 128,254 128,254 128,254 139,039
Remuneration in kind/fringe benefits 127,420 127,420 127,420 21,959 13,811 13,811 13,811 90,384
Remuneration in kind/fringe benefits 31,466 31,466 31,466 31,700 32,105 32,105 32,105 33,356
Remuneration in kind/fringe benefits 36,179 36,179 36,179 37,801 29,940 29,940 29,940 –
Remuneration in kind/fringe benefits 30,278 30,278 30,278 35,034 41,782 41,782 41,782 37,011
Giuseppina Albo Ludger Arnoldussen Board member Board member (leaving date: 31 December 2017) (leaving date: 26 April 2017) Overall Overall performance performance evaluation evaluation
Basic remuneration 615,000 555,000 205,000 615,000 Remuneration in kind/fringe benefits 127,420 21,959 13,811 90,384 Total 742,420 576,959 218,811 705,384 One-year variable remuneration
Nikolaus von Bomhard Joachim Wenning Chairman of the Board of Management Board member (until 26 April 2017) (leaving date: 26 April 2017) Chairman of the Board of Management (since 27 April 2017) Overall Overall performance performance evaluation evaluation
Basic remuneration 420,000 1,260,000 1,045,000 615,000 Remuneration in kind/fringe benefits 11,664 35,783 128,254 139,039 Total 431,664 1,295,783 1,173,254 754,039 One-year variable remuneration
Thomas Blunck Doris Höpke Board member Board member Overall Overall performance performance evaluation evaluation
Multi-year variable remuneration Multi-year performance 2014–20161 1,264,690 89 – Multi-year performance 2015–20173 878,746 62 –
Munich Re Group Annual Report 2017 1 In the 2016 Annual Report, the amounts to be paid for the 2016 annual performance and multi-year performance 2014–2016 were recognised on the basis of the reserves, as no Supervisory Board resolution had yet been passed on the actual bonus amounts to be paid. The 2017 Annual Report shows the actual amounts set by the Supervisory Board and to be paid out for 2016. 2 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2017 annual performance; the amount shown is based on estimates and the relevant provisions posted.
4 Albo: The entitlement to variable remuneration not paid out was forfeited owing to departure. 5 Arnoldussen: Compensation for a post-contractual non-competition agreement totalling €1,515,000 for the period May to December 2017. 6 Rieß: Remuneration also includes compensation components and pension expenses for work at ERGO Group AG. 7 Rieß: Compensation, payable in four equal instalments, for the forfeited variable remuneration from the previous employer.
Markus Rieß Board member Total6 thereof for Munich Reinsurance Company Overall performance evaluation
Multi-year variable remuneration Multi-year performance 2014–20161 – – Multi-year performance 2015–20173 974,562 144,187 94
Peter Röder Jörg Schneider Board member Board member Overall Overall performance performance evaluation evaluation
Basic remuneration 615,000 615,000 885,000 885,000 Remuneration in kind/fringe benefits 30,278 35,034 41,782 37,011 Total 645,278 650,034 926,782 922,011 One-year variable remuneration
Other Total 1,449,340 1,969,954 2,267,412 2,810,576 Pension expenses 528,066 519,195 842,831 815,646 Total remuneration 1,977,406 2,489,149 3,110,243 3,626,222
New remuneration system from 2018 The Supervisory Board agreed a new remuneration system effective from 1 January 2018, partly because the remuneration system for the members of the Board of
Management was rejected at the 2017 Annual General Meeting. The new remuneration system complies with legal requirements as did the previous system, takes account of the major issues raised in the previous year and is much leaner, less complex and easier to comprehend. The major reduction in complexity, paired with externally accepted indicators, means that the Company will be able to disclose the assessment bases and evaluations for the Board of Management’s remuneration in a more transparent manner in future, and therefore better meet the requirements of shareholders and their representatives.
The new remuneration system for the Board of Management will be put to the vote at the Annual General Meeting on 25 April 2018.
Remuneration continues to comprise fixed (non- performance-related) and variable (performance-related) components and a company pension scheme. Details are included in the following table: 1 For the variable remuneration, the share shown presupposes 100% performance evaluation. 2 Target overall direct remuneration comprises basic remuneration plus variable remuneration based on 100% performance evaluation.
Structure of the remuneration system for the members of the Board of Management from 2018
Variable remuneration 50% Corporate performance Result of divisional unit Personal performance 30% annual bonus IFRS consolidated result Linear scaling Achievement of Evaluation of (for 100 % performance evaluation) 0 – 200% annual objective overall performance: (fully achieved Bonus scheme = 100 %) Adjustment of spanning achievement figures one calendar year by the Supervisory Board, taking into 70% multi-year bonus Total shareholder return Linear scaling Performance of account (for 100 % performance evaluation) (TSR) of Munich Re 0 – 200% Munich Re – individual and shares compared with a shares compared collective management Bonus scheme defined peer group with peer group performance; spanning – financial situation, five calendar years (Peer group: Allianz, Axa, performance and Generali, Hannover Re, future prospects of the SCOR, Swiss Re, Zurich Company.
Defined contribution plan Target overall direct Pension > Retirement remuneration2 contribution > Insured event > Premature termination
As only one financial indicator each is used in the annual and multi-year bonus, the variable remuneration component is easier to understand. The Company has deliberately decided in favour of this simpler method in order to reduce the complexity of the previous remuneration system. The IFRS consolidated result and TSR on Munich Re’s shares in comparison with the peer group are two ambitious and exacting indicators promoting long-term corporate strategy. Both indicators can be influenced by the Board of Management.
The share of basic remuneration in the target overall direct remuneration will be increased from 30% to 50%. The higher weighting of the basic remuneration ensures a greater balance in the composition of the overall remuneration, which is also a requirement under Solvency II. In accordance with Solvency II, fixed and variable remuneration components must be in balance, so that the fixed component represents a sufficiently high proportion of the total remuneration and enables the undertaking to apply a fully flexible bonus policy, including the possibility of paying no variable remuneration at all. The reduction in the variable component is designed to avoid providing Board members with the incentive to take excessive risk in order to achieve a higher bonus. Moreover, variable remuneration, which is geared solely to financial objectives and will in future only take qualitative aspects into consideration as part of the overall performance evaluation, will become significantly more volatile than was previously the case with qualitative objectives. Individual investors have also been increasingly requesting a strengthening of fixed remuneration. For these reasons, it seems appropriate to raise basic remuneration.
Annual and multi-year bonus: Criteria for the evaluation of overall performance
Targets for the annual bonus The aim of the annual bonus is to achieve a high IFRS consolidated result. A target of €2,300m was set for 2018, with the following linear scaling for the 0–200% target corridor: €1,600m = 0% achievement of objective €2,300m = 100% achievement of objective €3,000m = 200% achievement of objective
The target chosen for 2018 is a challenging objective for the members of the Board of management given the prevailing low-interest-rate policies and fierce competition in the reinsurance markets.
Targets for the multi-year bonus The objective of the multi-year bonus is the sustainable performance of Munich Re’s shares in terms of TSR in comparison with the peer group. The companies in the peer group were selected based on comparable business activities and size. Furthermore, they must be listed on the stock exchange and subject to similar accounting standards as Munich Re, which is why the peer group only includes European primary insurance and reinsurance companies. The peer group comprises Allianz, Axa, Generali, Hannover Re, SCOR, Swiss Re and Zurich Insurance Group. It is the same peer group as for the analysts’ conference.
The figures used for target assessment (scaling) will be decided by the Supervisory Board at its meeting in March 2018. As the editorial deadline for the Annual Report precedes the Supervisory Board meeting, this information could not be included in the remuneration report. However, it will be made available on the Munich Re website on 16 March 2018.
Limit to variable remuneration (malus) and clawback Given that the Supervisory Board can take into account a loading or discount of up to 20 percentage points on both the annual bonus and the multi-year bonus in order to reflect the achievements of the individual members of the Board of Management and the Board of Management as a whole, it has the option of reducing variable remuneration in the case of negative result contributions.
1 Last trading day in 2017. 2 The basic remuneration that Joachim Wenning received for 2017 is calculated on the basis of the basic remuneration for a period of four months as a full member of the
Other No guaranteed variable remuneration (sign-on bonuses/ recruitment bonuses) As a matter of principle, the Company does not pay guaranteed variable remuneration to members of the Board of Management. We only pay sign-on/recruitment bonuses in exceptional cases and on production of corresponding evidence if a new member of the Board of Management forfeits a bonus by a previous employer. Compensation for forfeiting variable remuneration components paid by a previous employer is in any case limited to the first year of employment. Payment is effected in several instalments, and is tied to prerequisites for disbursement.
Severance cap and change of control Members of the Board of Management appointed before 1 January 2017 have no contractual right to severance payments. If the Board member’s activities on the Board are terminated prematurely by the Company without good cause, payments due may not exceed the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29(2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract if this is shorter. If the employment contract is terminated for good cause on grounds that are within the Board member’s control, no payments are made to the Board member. The calculation is based on overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
Pay ratios In 2017, the ratio of the target overall direct remuneration of the Chairman of the Board of Management to the average target overall direct remuneration of all Company employees (excluding the Board of Management) was 37. The ratio of the average target overall direct remuneration of all members of the Board of Management to the average target overall direct remuneration of all employees (excluding the Board of Management) was 23.
External consultants Munich Re did not use the services of external consultants to draft and implement the remuneration system of the Board of Management effective from 2018.
Remuneration of the members of the Supervisory Board in 2017 In the year under review, each member of the Supervisory Board received fixed annual remuneration of €90,000. The Chairman of the Supervisory Board received annual remuneration of €180,000, and the Deputy Chairman received annual remuneration of €135,000.
Members of the Audit Committee each received an additional €45,000; members of the Standing Committee each received an extra €13,500; and members of the Personnel Committee each received an additional €27,000.
Remuneration of the members of the Supervisory Board in 2018 The proposed remuneration for serving on the R emuneration Committee, which was set up with effect from 1 January 2018, will be submitted to the 2018 Annual General Meeting for a resolution. According to this proposal, its members are to receive an extra €27,000 for their work on this committee. For members of the Supervisory Board that are on the Remuneration Committee and the Personnel Committee, the fees for serving on the Personnel Committee also cover their membership on the Remuneration Committee.
Remuneration of the members of the Supervisory Board from 2019 A proposal to increase the remuneration for members of the Supervisory Board with effect from 1 January 2019, which has remained unchanged since 2014, will be submitted to the 2018 Annual General Meeting. Additional legal requirements have an immediate impact on the requirement profiles and specific activities of the members of the Supervisory Board. Examples comprise the EU regulation on statutory audits which came into force in 2016, the German Audit Reform Act, the EU market abuse regulation and the Corporate Social Responsibility Directive Implementation Act which came into force in 2017. Moreover, these extended obligations of the Supervisory Board members will result in increased liability risks. To take account of the increased requirements, in particular of the Chairman of the Supervisory Board and the members of the Audit Committee, the remuneration of the Chairman of the Supervisory Board and the members of the Audit Committee is to be raised.
As a result, the annual remuneration for members of the Supervisory Board is to be increased from €90,000 to €100,000. The Chairman of the Supervisory Board is to receive annual remuneration of €220,000 in future, and the Deputy Chairman is to be paid €150,000. The members of the Audit Committee are to receive an additional €55,000, and the members of the Standing Committee are to be paid an additional €15,000. The members of the Personnel Committee and the Remuneration Committee are to receive an additional €30,000. For members of the Supervisory Board serving on both committees, the compensation for serving on the Personnel Committee also covers their membership on the Remuneration Committee. The chairs of these committees are to continue to receive double the amounts stated for members. As previously the case, no remuneration is to be paid for serving on the Nomination Committee or the Conference Committee. If there are several meetings on the same day, the attendance fee of €1,000 per meeting will continue to be paid only once. The remuneration of members of the Supervisory Board will continue to exclude variable remuneration components and pension benefits.
Once these adjustments have been made, the remuneration of the members of the Supervisory Board will be at the same level as that of comparable DAX 30 companies.
Munich Re Group Annual Report 2017 1 Plus value-added tax (USt) in each case, in accordance with the relevant Articles of Association. 2 The previous year’s figures do not include the remuneration of members who left the Supervisory Board in the 2016 financial year.
Ina Hosenfelder 2017 90,000 – 6,000 96,000 2016 90,000 – 6,000 96,000 Renata Jungo Brüngger 2017 90,000 – 3,000 93,000 (since 3 January 2017) 2016 – – – – Henning Kagermann 2017 90,000 130,500 17,000 237,500 2016 90,000 103,500 12,000 205,500 Beate Mensch 2017 90,000 – 6,000 96,000 2016 90,000 – 6,000 96,000 Ulrich Plottke 2017 90,000 – 6,000 96,000 35,000 17,500 – 52,500
Ron Sommer 2017 90,000 – 6,000 96,000 2016 90,000 – 6,000 96,000 Angelika Wirtz 2017 90,000 27,000 10,000 127,000 2016 90,000 27,000 8,000 125,000 Maximilian Zimmerer (since 4 July 2017) 2017 45,000 – 2,000 47,000 2016 – – – – Total2 2017 1,935,000 459,000 156,000 2,550,000 172,500 25,000 – 197,500
Global economic growth accelerated significantly in 2017. The economy in the USA, the eurozone and Japan continued to gain momentum. China’s growth rate remained high, and Brazil and Russia recovered from their recessions. Inflation rates in the developed economies were higher on average than in the previous year, but remained moderate overall.
Monetary policy divergence across the world increased in 2017. The US Federal Reserve continued its rate-hiking cycle, and also refrained from fully reinvesting expiring bonds in order to gradually reduce its portfolio. By contrast, the European Central Bank (ECB) stuck to its low- interestrate policy and asset purchase programme. However, it scaled back the volume of its monthly bond purchases and announced a further reduction from January 2018 onwards.
The low-interest-rate environment worldwide continued to pose a significant challenge for insurers’ investment activity. Yields on ten-year German government bonds reached a new record level of 0.6% in July, following speculation about an imminent end to the ECB’s expansionary monetary policy, but fell back again to 0.4% by the end of the year. Yields on government bonds remained at a relatively low level in the USA as well – despite strong economic growth and key-interest-rate increases. This was partly attributable to persistently weak core inflation.
At the beginning of the year, fears of potential electoral gains by nationalist parties and a renewed crisis in the eurozone led to a widening of the yield differential between German government bonds and those of other eurozone countries. Yet after the French presidential elections and electoral reform in Italy, the yield differential narrowed again over the course of the year.
The equity markets saw marked increases in prices, and volatility was very low. The EURO STOXX 50 climbed by around 6% in the period under review. The US Dow Jones Index rose by around 25% – driven by the expectation that many companies would benefit from the tax reform adopted at the end of the year.
According to provisional estimates, the German insurance industry’s premium income increased slightly in 2017. Premium volume growth in property-casualty business and health insurance was robust. By contrast, life insurance saw a slight decline.
The market environment in property-casualty reinsurance changed in 2017. Global demand for reinsurance was supported by robust growth in major primary insurance markets in both industrialised and emerging countries.
Our value-based management is characterised by the following aspects: − Risk capital, i.e. the capital required to cover the risks, is the basis of our value- and risk-based management. The capital requirement corresponds to the solvency capital requirement under Solvency II, as determined on the basis of our certified internal risk model. Information on the internal risk model is provided on page 69 ff. − Consequently, business activities are assessed not only according to their earnings potential, but also relative to the extent of the risks assumed. Only the risk-return relationship reveals how beneficial an activity is from the point of view of our shareholders. − With value-based corporate management tools, we ensure an economic valuation and the comparability of alternative initiatives.
On the one hand, the often complex economic realities should be reflected as closely as possible in order to emphasise added value as the Group’s overriding guiding principle, on the other hand target figures should be simple and easy to understand for investors, staff, and the public.
In applying the uniform Group performance-measurement model of economic earnings in the individual fields of business, we use conceptually consistent value-based and risk-capital-based measurement approaches that are individually geared to the characteristics of each of the respective businesses. They include the value added by property-casualty reinsurance and the excess return from our investment activity (asset-liability management). In life and health reinsurance, we apply value added by new business and the change in value of in-force business, which are based on the Solvency II balance sheet. The management tool economic earnings is used directly for ERGO, as no adjustments for this field of business are necessary. Group corporate management is designed to put us in a position to maximise value creation while observing subsidiary parameters.
The IFRS consolidated result is a performance measure derived from our external accounting. It serves as an important cross-line criterion for investors, analysts and the general public to assess corporate performance. With its standardised measurement basis, the IFRS consolidated result can be compared to the results of our market competitors and is thus a management tool used in Munich Re’s financial reporting.
Combined ratio The combined ratio is regularly posted for propertycasualty business. Calculated as the percentage ratio of the sum of expenses for claims and benefits plus operating expenses to earned premiums (all of which are net, i.e. after reinsurance cessions), the combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses.2 Operating expenses chiefly comprise the costs arising in the acquisition of new business and for the ongoing administration of insurance contracts.
2 Expenses for claims and benefits not taken into account in the calculation of the combined ratio are set out on page 122 in the notes to the consolidated financial statements.
We were unable to meet our profit guidance of €2.0–2.4bn for the year. Due to the significant impact of natural catastrophe claims, our consolidated profit was €392m (2,581m). This is in line with the expectations we published in the Quarterly Statement as at 30 September 2017, where we forecast that the Group would generate only a small profit for the year. The extraordinarily high levels of property damage from Hurricanes Harvey, Irma and
Business performance of the Group and overview of investment performance 1 Previous year’s figures adjusted owing to changes in segment allocation and IAS 8. 2 The RoE is calculated on the basis of the consolidated result, including the result attributable to non-controlling interests. To calculate the average equity for the year under review, we use the figures as at 31 December 2016 (€31.8bn), 31 March 2017 (€32.2bn), 30 June 2017 (€30.1bn), 30 September 2017 (€27.8bn) and 31 December 2017 (€28.2bn) as a basis.
Result from insurance-related investments €m 443 326 35.8 Operating result €m 1,241 4,025 –69.2 Taxes on income €m 298 –760 – Risk-adjusted capital (RORAC) % 1.5 10.9 Economic earnings €bn 0.5 2.3 –75.8 Return on equity (RoE)2 % 1.3 8.1 Consolidated result €m 392 2,581 –84.8 Investments €bn 217.6 221.8 –1.9 Insurance-related investments €bn 9.7 9.6 1.1 Net technical provisions €bn 205.8 202.2 1.7 Equity €bn 28.2 31.8 –11.3
Premium volume increased slightly in the year under review, mainly driven by large-volume treaties, the expansion of reinsurance business with existing clients, and growth in ERGO’s property-casualty and health business. Negative currency translation effects and the sale of ERGO Italia had a contrary effect.
Owing to the high claims expenditure from natural catastrophes, the return on risk-adjusted capital (RORAC) for the full financial year was only 1.5% (10.9%), and the return on equity (RoE) amounted to 1.3% (8.1%).
The revaluation of balance-sheet items in foreign currencies at period-end exchange rates led to a currency result of –€294m (485m), which is recognised in the “other non-operating result”. The figure was adversely impacted in particular by the revaluation of the euro against the US dollar.
Information on events after the balance sheet date can be found in the notes on page 169.
Carrying amounts Unrealised gains/losses1 Fair values €m 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year Land and buildings, including buildings on third-party land 5,121 4,444 2,744 2,413 7,865 6,857 Investments in affiliated companies, associates and joint ventures 2,216 1,711 959 903 3,008 2,445
The emphasis of our commitment in covered bonds remained on German securities, with around 37%. We also held bonds from France (20%) and the United Kingdom (9%) in our portfolio.
The regional weighting of corporate bonds in our portfolio is 36% for the USA and 36% for the eurozone.
Our investment in bank bonds is limited, and was further reduced in the course of the year. The share in our overall portfolio of interest-bearing securities was 2% at the reporting date. Financial instruments from states in southern Europe made up 2% of this portfolio. Most of our bank bonds were senior bonds (84%), i.e. bonds that are not subordinated or subject to loss participation. Subordinated bonds and loss-bearing bonds made up 16% of our bank bond holdings.
The carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies, associates and joint ventures at fair value) rose in the course of the year due to purchases and positive stock-market developments. The equity-backing ratio amounted to 7.3% (6.0%); including derivatives, it totalled 6.7% (4.9%). Besides this, we protect ourselves against accelerated inflation in an environment of continuing low interest rates by holding inflation-linked bonds with a fair value of €8.5bn (10.0bn). Real assets like shares, property, commodities, and investments in infrastructure, renewable energies and new technologies also serve as protection against inflation. Additionally, our investments in real assets have a positive diversification effect on the overall portfolio.
The carrying amount of our investment portfolio decreased mainly on account of the value-impairing effect of rising interest rates and the development of exchange rates on our fixed-interest securities.
Higher interest-rate levels and the realisation of valuation reserves were chiefly responsible for the decline in net unrealised gains on loans and other fixed-interest securities available for sale.
Covered bonds 23% (24%) Corporate bonds 11% (11%) Cash positions/other 4% (4%) Structured products (credit structures) 2% (2%) Bank bonds 2% (3%) Policy and mortgage loans 3% (3%)
Over half of our fixed-interest portfolio was invested in government bonds at the reporting date. The vast majority of these continue to come from countries with a high credit rating. Our portfolio of German and US government bonds at fair value was equivalent to 13.8% (14.3%) and 8.7% (9.6%) of the portfolio of interest-bearing securities. Government bonds from Italy and Spain each accounted for around 1.6% (1.7%) and 2.3 (1.7%) of the portfolio of interest-bearing securities. We did not hold bonds from Cyprus or Ukraine. In the year under review, we invested
Owing to the ongoing low reinvestment yield, the amount of regular income fell slightly against the previous year. Our reinvestment yield was 1.9% (1.8%). Due to the low levels of interest rates in the year under review, yields on new investments remained lower than the average return on our existing portfolio of fixed-interest investments.
Net gains on disposal were slightly lower than in the previous year, and chiefly came from our portfolio of fixedinterest securities.
We posted a negative balance from write-ups and writedowns of derivatives and on the disposal of derivatives. In primary insurance, positive stock-market developments led to losses on our equity derivatives. In reinsurance, we reduced the volume of our hedging derivatives, and therefore recorded lower losses from positive stock-market developments than in the previous year.
Our portfolio of physical equities benefited significantly from market developments in the financial year. The total return on our equity portfolio including equity derivatives increased to 8.0% (2.6)%.
By contrast, the rise in interest rates seen in the year under review had an adverse impact on the result from interest-rate derivatives. We posted losses in particular from ERGO’s interest-rate hedging programme, which provides protection against low interest rates for longterm interest-rate guarantees in life insurance.
1 Details of the result by type of investment are shown on page 157 in the notes to the consolidated financial statements. 2 Return in % p.a. on the average market value of the investment portfolio at the quarterly reporting dates. The overall investment portfolio used to determine the return for 2017 (3.2%) is calculated as the mean value of the investment portfolios (carrying amounts) as at 31 December 2016 (€221,752m), 31 March 2017 (€222,709m), 30 June 2017 (€217,808m), 30 September 2017 (€217,450m) and 31 December 2017 (€217,562m), and the off-balance-sheet unrealised gains and losses (excluding owner-occupied property) as at 31 December 2016 (€16,738m), 31 March 2017 (€14,853m), 30 June 2017 (€13,977m), 30 September 2017 (€13,863m) and 31 December 2017 (€14,323m).
Write-ups/write-downs of non-derivative investments –241 –0.1 –400 –0.2 Gains/losses on the disposal of non-derivative investments 2,494 1.1 2,603 1.1 Net balance of derivatives –470 –0.2 –713 –0.3 Other income/expenses –609 –0.3 –586 –0.2
Result from equities and equity derivatives1 €m 2017 Prev. year Regular income 606 556 Write-downs –133 –323 Realised gains/losses 886 440 Result from equities 1,359 672 Change in on-balance-sheet unrealised gains and losses in equity (gross) 337 478 Result from equity derivatives –363 –777 1 To calculate the total annualised returns on our portfolio equity, we calculate the ratio of the total result shown in the table and the mean value of the following figures: Equity portfolio (carrying amounts) at 31 December 2016 (€15,826m), 31 March 2017 (€17,048m), 30 June 2017 (€16,055m), 30 September 2017 (€16,799m) and 31 December 2017 (€17,359m).
In many of our most important markets, we experienced persistently high competition. Besides this, persistently low interest rates continued to have an adverse impact on our clients’ business development, and therefore also curbed demand for traditional reinsurance. Nevertheless, we were very satisfied with the development of new business in Asia and North America.
The technical result did not follow on from the very good result from the previous year.
The result is adversely impacted by the extraordinary recapture of loss-making US contracts in the second and third quarters. The recaptures create value and make sense from an economic perspective, as they improve the results for future years and also reduce uncertainty of performance. The cost of the recaptures was offset in part by some further special effects.
Across all markets, claims expenditure in life reinsurance was within the expected bounds. This applies in particular to mortality business in the USA. By contrast, claims expenditure in Australian disability business saw an increase across the full year, caused in particular by longer benefit periods. It was compensated for by lower claims expenditure in European markets and in Canada.
The result from the part of the business that is not posted in the technical result as a consequence of insufficient risk transfer remained very satisfying, and at €51m (41m) surpassed the level of previous year owing to business expansion.
Based on premium volume, over half (around 60%) of our global life and health reinsurance business is written in North America, where Canada (approximately 40%) ranks before the USA (about 20%). Around a fifth of our premium comes from Europe, with approximately 10% generated in the United Kingdom and about 5% in Germany. Further substantial shares derive from Asia (around 10%) and Australia/New Zealand (approximately 5%). We are also well positioned in Africa and Latin America, but due to the small size of the markets their share of our global business is modest (about 5% in total).
Premium income in property-casualty reinsurance increased slightly by 0.1% compared with the previous year. Changes in exchange rates had a negative impact on premium development. Approximately 11% of the portfolio is written in euros and 89% in foreign currency, of which 54 percentage points is in US dollars and 13 percentage points in pounds sterling. If exchange rates had remained the same, premium volume would have risen by 1.9% year on year.
Key figures 2017 Prev. year Change % Gross premiums written €m 17,843 17,826 0.1 Share of gross premiums written in reinsurance % 56.5 56.7 Loss ratio % 80.6 63.3
Thereof: Major losses Percentage points 25.8 9.1 Expense ratio % 33.5 32.4 Combined ratio % 114.1 95.7 Technical result €m –1,261 1,859 –
Premium income in Europe declined slightly to €2.3bn (2.4bn), of which €1.2bn (1.3bn) was from the United Kingdom, and a further €381m (407m) was from Germany. The decline in the United Kingdom is attributable to currency translation effects. Adjusted for these effects, premium volume would have remained largely stable, with longevity business accounting for a growing share of the premium. The technical result continued to develop at a very pleasing level.
The consolidated result and the operating result in property-casualty reinsurance decreased compared with the previous year. Expenditure for major losses was up on the previous year, and the technical result declined compared with an especially good prior-year figure. Adjusted for commissions, Munich Re’s customary review of provisions resulted in a reduction in the claims provisions for prior years of around €870m for the full year, which is equivalent to around 5.2 percentage points of the combined ratio. This positive development related to almost all lines in our portfolio. The safety margin in the provisions remained unchanged year on year.
Major losses totalled €4,314m (1,542m) in 2017, after retrocession and before tax. This amount includes run-off profits and losses for major claims from previous years, and is equivalent to 25.8% of net earned premium. Due to high natural catastrophe losses, major-loss expenditure was significantly higher than in the previous year, and also exceeded our major-loss expectation of 12% of net earned premium.
Aggregate losses from natural catastrophes totalled €3,678m (929m) for the full year. This figure is equivalent to 22.0% (5.5%) of net earned premium, and significantly exceeds the expected level of 8% of net earned premium. Hurricanes Harvey, Irma and Maria, which caused massive destruction in the Caribbean and the USA in August and September, were by far the most expensive loss events of the year. The overall cost of these events for Munich Re amounted to €2.7bn after retrocession. In addition, a series of major wildfires broke out in California in October and December; we expect our loss expenditure from these events to total nearly €500m. Further extensive losses (€270m) resulted from two earthquakes in Mexico in September. In addition, the severe flooding caused by Cyclone Debbie in Australia in March is expected to result in significant losses of approximately €100m.
At €636m, man-made major losses were also somewhat up on the previous year (€613m). This figure is equivalent to 3.8% (3.6%) of net earned premium. Development was marked by a variety of individual events, including the tragic fire at Grenfell Tower in London.
The combined ratio saw a significant deterioration to 114.1% (95.7%) because of high major-loss expenditure in 2017. Paid claims and the change in claims provisions totalled €13,474m (10,725m), along with net operating expenses of €5,600m (5,496m), compared to net earned premiums of €16,723m (16,946m).
The investment result was up €306m on the previous year, largely due to an improved net balance from equity derivatives and interest-rate derivatives.
In Canada, we are represented in the area of non-life business by the Munich Reinsurance Company of Canada and Temple Insurance Company. At €284m (311m), premium volume decreased slightly owing to our withdrawal from unprofitable business.
In Australia and New Zealand, we have withdrawn from primary insurance business, whilst in reinsurance we were able to retain our strong market position. Overall, premiums decreased to €698m (935m).
In Japan, premium income was slightly down on the previous year; it totalled €281m (292m).
In India, we continued to expand our business in 2017, and premium income increased to €120m (74m). Thanks to our local branch, we are well positioned to successfully participate in the expected future growth potential.
At €756m (989m), premium income in agricultural business was down by 24% year on year; we did not renew the business with one major client.
Marine business is heavily exposed to pricing pressure in selected segments, causing premium income to decline by 9% year on year to €766m (840m)1. The combined ratio improved despite the hurricanes.
In aviation and space business, premium income increased by 7% to €502m (468m)1 due to targeted portfolio growth and the generation of new business.
The Capital Partners unit offers our clients a broad spectrum of structured, individual reinsurance and capital market solutions. We also use this unit’s services for our own purposes in order to buy retrocession cover on the basis of our defined risk strategy. In 2017, we structured seven client transactions worth US$ 880m and €200m. In addition, Capital Partners placed a sidecar transaction amounting to US$ 360m (Eden Re II Ltd., Series 2017-1) in the capital markets for its own purposes.
Gross premiums written were up, mainly owing to higher premium in the Health Germany segment, where they benefited in particular from the positive development in comprehensive health insurance. Direct Germany also posted premium growth, whilst Life Germany saw a decline in premium volume. Life insurance business is also responsible for the decline in overall premium income for the segment.
Development of premium income and results by segment In the ERGO Life and Health Germany segment, we report on the ERGO divisions Life Germany, Health Germany and German direct business.
The decrease in premium volume was brought about by lower regular premium income owing to the ongoing portfolio reduction. The decline in single-premium income was caused chiefly by reduced new business production. Regular-premium new business was also under the level achieved in the previous year. In terms of annual premium equivalent (APE, i.e. regular premium income plus one-tenth of single-premium volume), which 1 Total premium income includes not only gross premiums written, but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the applicable statutory accounting guidelines.
Key figures 2017 Prev. year Change % Total premium income1 €m 9,902 10,009 –1.1 Gross premiums written €m 9,210 9,177 0.4 Share of gross premiums written by ERGO % 52.5 52.8 Technical result €m 435 270 60.8 Investment result €m 4,196 4,415 –5.0
Direct health insurance business accounts for around 46% of premium income for this field of business. Approximately 38% of the premium income derives from direct life insurance, and around 16% from direct propertycasualty insurance.
Key figures 2017 Prev. year Change €m €m % Total premium income1 1,057 1,094 –3.4 Gross premiums written 1,025 1,009 1.6 Technical result 84 91 –8.2 Operating result 61 74 –17.9 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
New business direct life Germany 2017 Prev. year Change €m €m % Regular premiums 25 29 –12.0 Single premiums 29 84 –65.8
Annual premium is the performance measure customary among investors, our new business volume dropped by 8.6%.
Our main classes of business are motor and personal accident insurance, which respectively account for around 20% and 19% of the segment’s premium income.
Premium income developed favourably year on year, mainly on account of growth of 18.0% in the other classes of business, including in marine insurance. Fire and property insurance also saw an increase in premium volume (+5.6%), as did legal protection insurance (+2.1%) and liability business (+0.2%). By contrast, in motor insurance (–0.2%) and personal accident insurance (–1.2%) we posted lower premium income than in 2016.
Key figures 2017 Prev. year Change % Gross premiums written €m 3,293 3,194 3.1 Share of gross premiums written by ERGO % 18.8 18.4 Loss ratio % 64.1 61.9 Expense ratio % 33.5 35.1 Combined ratio % 97.5 97.0 Technical result €m 138 139 –0.3
In international property-casualty business, the combined ratio improved year on year – above all in Poland, where business benefited from price adjustments, and in the Baltic States. The combined ratio also improved by 0.5 percentage points in international health business. Overall, paid claims and the change in claims provisions totalled €2,060m (1,942m) and net operating expenses came to €1,022m (990m), compared with net earned premiums of €3,236m (2,993m).
The figures for 2017 and the previous year include international health primary insurance business, which was transferred from Munich Health and integrated into the ERGO International segment of the ERGO field of business as of 1 February 2017.
With regard to the segment’s premium income, propertycasualty insurance accounts for around 52%, health for about 26% and life insurance for approximately 22%. Our biggest markets include Poland, accounting for approximately 26% of the premium volume, Belgium (approx. 20%) and Spain (approx. 14%).
At €1,164m (1,530m), overall premium income from international life insurance business was down compared with the previous year. This significant decrease is primarily due to the sale of our Italian business and to reductions in Poland and Austria. In terms of the annual premium equivalent, new business in international life insurance was down 45.2% year on year. Premiums in health business climbed by 3.7% to €1,405m (1,354m), thanks to growth in Spain and Belgium. In 2017, we posted premium volume of €2,783m (2,502m) in international property-casualty business, representing an increase of 11.2%. Growth was especially strong (+30.2%) in Poland, our largest market. We also increased our premium volume in Greece and the Baltic States.
Key figures 2017 Prev. year Change % Total premium income1 €m 5,352 5,387 –0.6 Gross premiums written €m 5,043 5,018 0.5 Share of gross premiums written by ERGO % 28.7 28.9 Loss ratio % 63.7 64.9 Expense ratio % 31.6 33.1 Combined ratio % 95.3 98.0 Technical result €m 20 –72 – Investment result €m 470 797 –41.0 Operating result €m 219 351 –37.4 Consolidated result €m 40 –1 –
Our primary insurance and reinsurance operations have a significant influence on the structure of our balance sheet: as we have consistently geared our Group towards value creation in its core business, investments serve to cover technical provisions (79% of the balance sheet total). Equity (11% of the balance sheet total) and bonds classified as strategic debt (1% of the balance sheet total) are the most important sources of funds.
The decrease in equity was attributable not only to the dividend payment and share buy-back programme but also in particular to a decline in the reserve for currency translation adjustments.
We define as strategic debt all financial instruments with the character of outside financing that do not have a direct link to our operative business. Strategic debt supplements our financial resources, is essentially designed to optimise the cost of capital, and ensures that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we quantify our debt leverage, which is pleasingly low compared with that of our competitors: it is defined as the ratio – expressed as a percentage – of strategic debt to the sum of Group equity and strategic debt. Our technical provisions are not considered, even though they are mostly available to us on a long-term basis as a source of financing for investment.
Debt leverage 31.12.2017 Prev. year Change €m €m % Strategic debt1 3,125 4,601 –32.1 Group equity 28,198 31,785 –11.3 1 The main components of our strategic debt are subordinated liabilities, and bonds and notes issued (see pages 144 and 153 of the notes to the consolidated financial statements).
Under the supervisory regulations of Solvency II, subordinated liabilities are recognised as own funds provided that they are available at all times to cover losses on a going-concern basis. Munich Re’s subordinated liabilities amount to €2,790m. Of this sum, €2,411m was recognised as eligible own funds under Solvency II at the reporting date. As a consequence, strategic debt is reduced to €714m and the debt leverage amounts to only 2.3%.
Munich Reinsurance Company has not been notified, nor has it otherwise learned, about any direct or indirect shareholdings in the Company that exceeded 10% of the voting rights as at 31 December 2017.
Through active capital management, we strive to ensure that Munich Re’s capital satisfies all applicable standards. In addition to the capital requirements determined using our internal risk model, more far-reaching requirements by regulatory authorities, rating agencies and our key insurance markets must be met. The Solvency II ratio is a fundamental measure of Munich Re’s capital strength. Further information on this ratio can be found on page 75 in the risk report. We aim to ensure that our financial strength is such that it enables us to take advantage of profitable opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group own funds as one which does not lastingly exceed that which is required. Excess capital is returned to our shareholders via attractive dividends and share buy-backs. In practice, capital repatriation comes up against limits because under German commercial law (HGB), our parent, Munich Reinsurance Company, is forced to maintain the claims equalisation provision in local GAAP accounting at a level that exceeds the economic requirements. This restricts the revenue reserves and profit distribution possibilities, but stabilises results in years with high claims expenditure. As at 31 December 2017, Munich Reinsurance Company’s claims equalisation provision totalled €7.7bn. Additional information can be found under Munich Reinsurance Company (Information reported on the basis of German accountancy rules) on page 86.
The legal parameters for the appointment and dismissal of members of the Board of Management are specified in the Company’s Co-determination Agreement, Articles 13(3) and 16 of the Articles of Association, Sections 84 and 85 of the Stock Corporation Act (AktG), and Sections 24, 47 and 303 of the German Insurance Supervision Act (VAG). Munich Re’s Co-determination Agreement and Articles of Association follow the legal tenets of the German Co-Determination Act (MitbestG). Pursuant to Article 16 of the Articles of Association, the Board of Management must comprise a minimum of two persons; beyond this, the number of members is determined by the Supervisory Board. There are currently eight members of the Board of Management (nine members until 31 December 2017). The Supervisory Board appoints the members of the Board of Management pursuant to Section 84 of the Stock Corporation Act and may dismiss them at any time for good cause. On initial appointment, members of the Board of Management are usually given contracts for a term of between three and five years, and extensions of up to five years are possible. For the appointment or dismissal of members of the Board of Management, Article 13(3) of the Articles of Association stipulates a two-thirds majority of the votes cast on the Supervisory Board. If the requisite majority is not obtained in the initial resolution, the appointment or dismissal of the Board of Management requires a simple majority of the votes cast. The second resolution is only possible following a suitable period of reflection and after the issue has been dealt with in the competent committee, but is thereafter also possible by written consent in lieu of a meeting. In exceptional cases, members of the Board of Management may also be appointed by a court of law, pursuant to Section 85 of the Stock Corporation Act.
The Stock Corporation Act contains special regulations on amendments to the Articles of Association where increases and reductions in share capital are concerned (Sections 182–240 of the Act). Under these regulations, resolutions on capital measures are generally to be made by the Annual General Meeting. Within a self-determined scope, however, the Annual General Meeting can authorise the Board of Management to initiate certain (capital) measures. The authorisations relating to Munich Reinsurance Company are listed below. In all such cases, a resolution of the Annual General Meeting is required that has been adopted by at least a three-quarter majority of the share capital represented in the vote. Where these resolutions are concerned, the Company’s Articles of Association again do not provide for other (i.e. higher) majorities or further requirements. Pursuant to Article 14 of the Articles of Association and Section 179(1) sentence 2 of the Stock Corporation Act, the Supervisory Board is empowered to make amendments to the Articles of Association which affect only the wording.
Combined management report Financial position up to 22 April 2020, convertible bonds, bonds with warrants, profit participation rights, profit participation certificates or combinations of such instruments (hereinafter collectively referred to as “bonds”) for a maximum nominal amount of €3bn with or without a limited term to maturity. Shareholders are generally entitled to a subscription right in respect of these bonds, but the Board of Management is authorised, with the consent of the Supervisory Board, to exclude this subscription right in the cases specified in the authorisation. The holders of such bonds may be granted conversion rights, warrants or conversion obligations in respect of shares issued by the Company up to a maximum amount of €117m of the share capital, in accordance with the respective bond or warrant conditions. As a precautionary measure, capital of €117m was conditionally authorised under Article 4(3) of the Articles of Association (Contingent Capital 2015).
− Under Article 4(1) of the Articles of Association, the Board of Management is authorised, with the consent of the Supervisory Board, to increase the Company’s share capital at any time up to 25 April 2022 by an amount of up to €280m by issuing new shares against cash or noncash contribution (Authorised Capital 2017). In accordance with the above-mentioned provisions of the Articles of Association, it may exclude subscription rights. As regards the resolution of 26 April 2017, the Board of Management declared that it will utilise the Authorised Capital 2017 only up to a maximum amount of 33% of the share capital at the time of the Annual General Meeting. It further stated that it will only exercise the authority to exclude shareholders’ subscription rights where such shares do not exceed 10% of the existing share capital at the time the authorisation is exercised for the first time.
Consolidated cash flow statement 2017 Prev. year Change €m €m % Cash flows from operating activities 1,833 2,975 –38.4 Cash flows from investing activities 2,326 –1,127 – Cash flows from financing activities –3,754 –2,531 –48.3 Cash flows for the financial year 405 –683 –
The cash outflows for financing activities stem mainly from the dividend payment in 2017, the share buy-back programme and the redemption of subordinated liabilities.
In the year under review, cash – which encompasses cash at banks, cheques and cash in hand – increased by €405m (including currency effects) to €3,628m overall. There were items pledged as security and other restrictions on title amounting to €45m (10m).
Risk identification is performed by means of appropriate processes and indicators, which are complemented by expert opinions. Our process for early identification of risks also encompasses emerging risks. We define emerging risks as trends or unexpected events that are characterised by a high degree of uncertainty in terms of occurrence probability, expected loss amount and potential impact on Munich Re.
As part of the risk analysis, a quantitative and qualitative assessment of all risks at consolidated Group level is made in order to take into account possible interactions between risks across all fields of business. Internal risk reporting provides the Board of Management with regular information on the risks in the individual risk categories and the Group as a whole. This ensures that negative trends are identified in sufficient time for countermeasures to be taken. The purpose of external risk reporting is to provide our clients, shareholders and the supervisory authorities with a clear overview of the Group’s risk situation. Actual risk limits are derived from the risk strategy. Taking the defined risk appetite as a basis, limits, rules and any risk-reducing measures required are approved and implemented. We also have a comprehensive early-warning system that draws our attention to any potential shortages of capacity.
Our definition of a risk is a possible future development or event that could result in a negative deviation from the Group’s prognoses or targets. We classify risks as “significant” if they could have a long-term adverse effect on Munich Re’s assets, financial situation or profitability. We have applied this definition consistently to each business unit and legal entity, taking account of its individual riskbearing capacity. In doing so, we differentiate between risks depicted in our internal model and other risks.
Risk Governance Our risk governance ensures that an appropriate risk and control culture is in place by clearly assigning roles and responsibilities for all significant risks. Risk governance is supported by various committees at Group and field-ofbusiness level. The Board of Management must consult the risk management function on major decisions to be taken.
Munich Re Group Annual Report 2017 property-casualty, life and health, market, credit, and operational risks. We use primarily historical data for the calibration of these distributions, complemented in some areas by expert estimates. Our historical data covers a long period to take account of the one-year time horizon and to provide a stable and appropriate estimate of our risk parameters. We continue to take account of diversification effects we achieve through our broad spread across various risk categories and the combination of primary insurance and reinsurance business. We also take into account dependencies between the risks, which can result in higher capital requirements than would be the case if no dependency were assumed. We then determine the effect of the loss absorbency of deferred taxes.
The table shows the solvency capital requirement for Munich Re and its risk categories as at 31 December 2017. 5100 A+B
Solvency capital requirement – Internal model Munich Re has a comprehensive internal model that determines the capital needed to ensure that the Group is able to meet its commitments even after extreme loss events. We use the model to calculate the capital required under Solvency II (the solvency capital requirement, or SCR). The SCR is the amount of eligible own funds that Munich Re needs to have available, with a given risk appetite, to cover unexpected losses in the following year. It corresponds to the value at risk of the economic profit and loss distribution over a one-year time horizon with a confidence level of 99.5%, and thus equates to the economic loss for Munich Re that, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. Our internal model is based on specially modelled distributions for the risk categories 1 Previous year’s figures adjusted owing to a change in the composition of the reporting segments. 2 Capital requirements for other financial sectors, e.g. institutions for occupational retirement provisions.
Property-casualty underwriting risk The property-casualty risk category encompasses the underwriting risks in the property, motor, third-party liability, personal accident, marine, aviation and space, and credit classes of insurance, together with special lines also allocated to property-casualty. Additional information on risks in property-casualty insurance can be found in the notes to the consolidated financial statements on page 161 ff.
Underwriting risk here is defined as the risk of insured losses being higher than our expectations. The premium and reserve risks are significant components of the underwriting risk. The premium risk is the risk of future claims payments relating to insured losses that have not yet occurred being higher than expected. The reserve risk is the risk of technical provisions established being insufficient to cover losses that have already been incurred. In calculating technical provisions, we follow a cautious reserving approach and assess uncertainties conservatively. In every quarter, we also compare notified losses with our loss expectancy, in order to ensure that the level of reserves always remains high.
In primary insurance, substantial risk minimisation is achieved through product design. In the event of adverse developments, parts of the provision for premium refunds – increases or reductions in which are recognised in profit or loss – make a significant contribution to balancing the risk. In health primary insurance, there is also a possibility of adjusting – or an obligation to adjust – premiums for most long-term contracts. In practice, however, there are limits to the resilience of policyholders.
Limits are laid down for the pandemic scenarios, which affect the portfolio in the shorter term, and the longevity scenarios with their longer-term effect in conformity with the risk strategy. We continue to analyse the sensitivity of the internal model to the input parameters on a regular basis. This relates to the interest rate and the biometric risk drivers.
Solvency capital requirement – Property-casualty The decrease in the solvency capital requirement for the basic losses was caused primarily by the appreciation of the euro. For the large and accumulation losses, the expansion of our business increased risk, while the appreciation of the euro against the US dollar in particular and the updates of models of large natural hazard scenarios led to a reduction in the solvency capital requirement.
Life and health underwriting risk The underwriting risk is defined as the risk of insured benefits payable in life or health insurance business being higher than expected. Of particular relevance are the biometric risks and the policyholder behaviour risks, for example lapses and lump-sum options. We differentiate between risks that have a short-term or long-term effect on our portfolio. In addition to the simple risk of random fluctuations resulting in higher claims expenditure in a particular year, the adverse developments with a shortterm impact that we model notably include the risk of claims in excess of actuarial estimates that could arise on the occurrence of rare but costly events such as pandemics. More information on the risks in life and health insurance can be found in the notes to the consolidated financial statements on page 159 ff.
Life insurance products in particular, and a large part of our health primary insurance business, are long-term in nature, and the results they produce are spread over the entire duration of the policies. This can mean that negative developments in risk drivers with long-term
Solvency capital requirement – Life and health In the reinsurance field of business, the decline in the solvency capital requirement was primarily due to the appreciation of the euro against the US dollar and the Canadian dollar, while in the ERGO field of business the moderate rise in euro interest rates led to a decrease in the solvency capital requirement.
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. It includes equity risk, general interest-rate risk, specific interest-rate risk, property-price risk and currency risk. The general interest-rate risk relates to changes in the basic yield curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, for example on euro government bonds from various issuers, or on corporate bonds. We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also the underwriting liabilities, especially in life insurance. Due to the long-term interest-rate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities can be highly dependent on conditions in the capital markets. Market risks are modelled by means of Monte Carlo simulation of possible future market scenarios. We revalue our assets and liabilities for each simulated market scenario, thus showing the probability distribution for changes to basic own funds.
General interest-rate risk 1,383 1,708 3,339 4,058 –1,306 –1,779 Specific interest-rate risk 1,394 1,447 3,329 4,376 –798 –825
Munich Re Group Annual Report 2017 changes in fair value caused by rating migrations and debtor default. The credit risk arising out of investments (including deposits retained on assumed reinsurance, government bonds and credit default swaps – CDSs) and ceded reserves is calculated by individual debtor. We use historical capital-market data to determine the associated migration and default probabilities. Correlation effects between debtors are derived from the sectors and countries in which they operate, and sector and country correlations are based on the interdependencies between the relevant stock indices. The calculation of the credit risk in “other receivables” is based on internal expert assessments. For life and health primary insurance business, we also take account of the share of the mitigating effect on the credit risk resulting from policyholders’ participation in profits. We also capitalise the credit risk for highly rated government bonds. Information on the ratings of the fixed-interest securities and loans can be found in the notes to the consolidated financial statements on page 133 f.
Solvency capital requirement – Market Equity risk The higher equities exposure after derivatives compared with the previous year was reflected in a rise in the solvency capital requirement.
Currency risk The currency risk was virtually unchanged from the previous year.
Munich Re determines credit risks using a portfolio model, which is calibrated over a longer period (at least one full credit cycle), and which takes account of both
Munich Re Group Annual Report 2017 communication of changes in uniform Group-wide rules is in place. Financial accounting and reporting are subject to materiality thresholds to ensure that the cost of the internal controls performed is proportionate to the benefits derived. The risks that are significant from a Group perspective for our financial reporting are covered by the ICS and are reviewed and adjusted by the risk carriers on a regular basis.
We use scenario analyses to quantify operational risks. The results are fed into the modelling of the solvency capital requirement for operational risks and are validated using various sources of information, such as the internal control system (ICS) and internal and external loss data.
We manage credit default risk in retrocession and external reinsurance with the assistance of limits determined by the Retro Security Committee. Our reserves ceded to reinsurers were assignable to the following rating categories as at 31 December: Further information on the risks arising out of receivables relating to insurance business can be found in the notes to the consolidated financial statements on page 137.
The dividend for the 2017 financial year approved by the Board of Management has been deducted from the eligible own funds as at the balance sheet date. In order to present the impact of possible further capital measures on the Solvency II solvency ratio more transparently for users of our financial statements, we decided to take into account a possible share buy-back programme in 2018/2019 in the amount of €1bn and a possible £300m repayment of a subordinated bond with a redemption option in 2018. No Board resolutions had been passed or approvals given for either measure at the time of preparation of the consolidated financial statements.
Economic and financial-market developments and regulatory risks Munich Re has substantial investments in the eurozone. We attach importance to maintaining a correspondingly broad diversification of investments to cover our technical provisions and liabilities in euros. However, low interest rates continue to pose major challenges for life insurance companies in the eurozone in particular. The fluctuations in the capital markets give rise to considerable volatility in investments and liabilities. We counter these risks with various risk management measures.
Political risks in the eurozone continue to exist owing to discord caused by the conflicting national interests of the individual member states. The reduction in the stimulus provided by the European Central Bank’s monetary policy could cause borrowing costs to rise for some countries. Though progress has been made recently in the exit negotiations between the EU and the United Kingdom, the possibility of a disorderly outcome (hard Brexit) with corresponding consequences for individual EU countries
Solvency II ratio1 31.12.2017 Prev. year2 Change Eligible own funds3 €m 35,060 40,667 –5,608 Solvency capital 1 Eligible own funds excluding the application of transitional measures for technical provisions; including the application of transitional measures for technical provisions, the eligible own funds amounted to €42.6bn (48.2bn); Solvency II ratio: 297% (316%).
2 The eligible own funds for 2016 do not take into account deductions for the dividend agreed by the Board of Management for the 2016 financial year, the possible redemption of a subordinated bond with a call option in 2017 and share buy-backs from the 2017/2018 share buy-back programme. 3 The capital measures included in the eligible own funds comprise €3.7bn for the dividend payment for the 2016 financial year, the 2017/2018 share buy-back programme, and the redemption of a subordinated bond in 2017, and €2.6bn for the dividend approved by the Board of Management for the financial year 2017, a possible share buy-back programme for 2018/2019, and the possible redemption of a subordinated bond. There is also a further €0.2bn for other measures.
As a result of the US tax reform, taxation regulations have been introduced that are disadvantageous for intra-Group retrocessions with non-US entities. To avoid the additional tax expenditure associated with this, Munich Re has amended the intra-Group retrocession structure for its US subsidiaries and has adjusted its recognition accordingly.
At the beginning of the year, we had forecast a result of €2.0–2.4bn for the 2017 financial year. The exceptionally high claims expenditure from hurricanes Harvey, Irma and Maria in the third quarter prompted us to abandon our result target, instead forecasting only a “small profit”. At €392m, we achieved the adjusted profit forecast for the year.
Our long-term objective of a 15% return on our riskadjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets was already difficult to achieve in the ongoing environment of very low interest rates on low-risk investments. For the above reasons, we were far from achieving it in 2017, managing only 1.5%. The return on total IFRS capital (return on equity, ROE) was 1.3%.
Gross premiums written €bn 48–50 49.1 Technical result life and health reinsurance1 €m at least 450 428 Combined ratio property-casualty reinsurance % 97 114.1 Combined ratio ERGO Property-casualty Germany % 99 97.5 Combined ratio ERGO Property-casualty International % 98 95.3 Return on investment2 % around 3 3.2
It is not only the obvious fluctuations in the incidence of major losses that make an accurate forecast of IFRS results impossible. The pronounced volatility of the capital markets and exchange rates, as well as the special features of IFRS accounting, also make this difficult. Thus, there may be significant fluctuations in the investment result, currency result and consolidated result, despite the fact that our assets are geared to the characteristics of our liabilities.
At €7.6bn, the Group’s investment result (excluding insurance-related investments) exceeded our expectations of over €7bn by a significant margin. In spite of persistent yield attrition, our regular income from investments fell only slightly. Gains on the disposal of fixed-interest securities and equities more than offset losses from hedging derivatives and impairment losses. Considering the situation in the capital markets, this investment result represents a relatively high annualised return of 3.2% in relation to the average fair value of the portfolio. We thus exceeded our originally anticipated return on investment of “around 3%”.
In the Property-casualty Germany segment, gross premiums of €3.3bn exceeded the target of “slightly over €3bn”. Our forecast at the start of the year for the combined ratio in property-casualty business in Germany had been around 99% – provided major losses remained within normal bounds. In our Half-Year Financial Report, we reduced our forecast for the combined ratio to 98% on the strength of lower costs. Although the loss ratio was negatively influenced by a major loss in the third quarter, we were below the adjusted projection, with a combined ratio of 97.5%.
At ERGO International, gross premiums written amounted to €5.0bn compared with our forecast at the beginning of the year of “slightly under €5bn”. At €5.4bn, total premium income fell slightly short of our expectations of around €5.5bn. At the beginning of the year, we had aimed for a combined ratio of around 98% in the ERGO Property-casualty International segment, provided major losses remained within normal bounds. Thanks to good performance in the first nine months, we were able to reduce our forecast to 97% in the third quarter. The positive performance continued into the fourth quarter, enabling us to achieve a combined ratio of 95.3% at year-end – considerably better than the adjusted forecast.
At the beginning of the year, we had forecast a result in the range of €150–200m for the ERGO field of business. Owing to the good results in the first half-year, we increased that target range in the Half-Year Financial Report to €200–250m. With a very pleasing consolidated result of €273m, ERGO significantly exceeded the revised forecast.
At the beginning of the financial year, we had forecast gross premiums written of between €31bn and €33bn in the reinsurance field of business. At €31.6bn, we achieved this target. Thanks to a number of large-volume treaties written in Australia, Asia and Canada, gross premiums written in life and health reinsurance totalled €13.7bn – towards the upper end of the expected range of €13–14bn. In property-casualty reinsurance, we had forecast gross premiums written of between €17.5bn and €18.5bn. Despite the reduction in treaty shares and the targeted withdrawal from unprofitable business, we remained within this range, achieving €17.8bn.
At the start of the year, we forecast a technical result for life and health reinsurance – including the result from reinsurance treaties with insufficient risk transfer – of at least €450m. Following lower-than-expected performance in the second and third quarters, partly as a result of the recapture of loss-making portfolios in the USA, we reduced our target for the financial year to approximately €400m. With good performance in the fourth quarter, the result, at €428m, was fortunately between the original and reduced targets.
At 114.1%, the combined ratio in property-casualty reinsurance was significantly higher than the around 97% initially envisaged. Exceptionally high property damage caused by hurricanes Harvey, Irma and Maria prompted us to significantly increase the expected combined ratio for the full year to 112% in the third quarter. We missed the adjusted figure by 2.1 percentage points due primarily to considerable expenditure for major natural catastrophe losses in the fourth quarter. In 2017, a contrary effect derived from the release of provisions for basic losses in prior years. For the financial year, we released loss reserves (adjusted for commissions) of around €870m.
Munich Re Group Annual Report 2017 negotiations, reinsurance capacity remained at a high level. Prices for reinsurance cover therefore did not increase across the board. While prices in markets affected by natural catastrophes rose considerably, they stabilised in loss-free areas around the world.
In this market environment, the price level of our portfolio up for renewal in January increased for the first time in four years (0.8%), even without consideration of the interest-rate increase, which also benefits us. The positive development (0.5%) in our dominant proportional book was topped by even greater improvement in nonproportional business (3.0%). The key drivers of this were significant price increases for loss-afflicted business, both as regards the original covers as well as in reinsurance.
The renewals at 1 April 2018 (mainly Japan) and 1 July 2018 (parts of the portfolio in the USA, Australia and Latin America) will involve the renegotiation of a premium volume of around €4bn in reinsurance treaty business. Munich Re expects market conditions to continue to improve in the remaining renewal rounds, although claims experience in the individual market segments will play a major role.
For 2018, we anticipate gross premiums written of €19.5– 20.5bn in property-casualty reinsurance, representing up to €2.7bn more than the previous year. This is due in part to the conclusion of new large-volume treaties in the USA and Australia. We anticipate a combined ratio of 99% of net earned premiums, with expected reserve releases for claims from prior years of at least four percentage points. The sharp reduction of around 15 percentage points in the combined ratio compared with last year’s figure is largely due to randomly high losses from natural catastrophes in 2017. For 2018, we again anticipate major losses in the order of €2bn, corresponding to 12% of net earned premiums.
Gross premiums written €bn 46–49 Technical result life and health reinsurance1 €m at least 475 Combined ratio property-casualty reinsurance % 99 Combined ratio ERGO Property-casualty Germany % 96 Combined ratio ERGO Property-casualty International % 97 Return on investment2 % around 3 Consolidated result €bn 2.1–2.5 1 Including the result from reinsurance treaties recognised in the non-technical result owing to insufficient risk transfer. 2 Excluding insurance-related investments.
For our investments, we expect to generate slightly lower regular income from fixed-interest securities and loans in 2018, because of currency translation effects in particular. As in the previous year, we want to incrementally increase our widely diversified investments and investment commitments in the area of alternative investments. We also intend to only minimally change our moderate equitybacking ratio of 7.3%, so that write-down risks continue to be limited. Regular income from our investments should come to around 2.8%, slightly above last year’s level. Overall, we expect the investment result to be lower than last year at some €7bn, equivalent to an annual return on investment of around 3%.
The consolidated profit should be significantly up on the previous year, which was marked by high losses from natural catastrophes. Furthermore, there is still exceptionally high political and macroeconomic uncertainty overall, in all markets relevant to us. Nevertheless, we still envisage a consolidated result for 2018 of €2.1–2.5bn. The effective tax rate should be around 20%. This profit guidance is subject to claims experience with regard to major losses being within normal bounds, to claims provisions remaining unchanged and to our income statement not being impacted by severe currency or capital market movements, significant changes in fiscal parameters, special restructuring expenses, or other special factors.
In the ERGO Life and Health Germany segment, we expect total premium income of €9.5–10bn, and gross premiums written of around €9–9.5bn. We expect overall premium volume in the Life Germany segment to decrease to around €3–3.5bn in the 2018 financial year, partly owing to the shrinking portfolio, with gross premiums written in the range of €2.5–3bn. In our Health Germany segment, we anticipate that gross premiums written will be up on the previous year’s level, at €5–5.5bn. Gross premiums written for direct business in Germany should increase slightly in 2018, at around €1–1.2bn.
In the Property-casualty Germany segment, we envisage gross premiums written of €3–3.5bn. The combined ratio should be around 96%, provided major losses remain within normal bounds.
We aim to achieve gross premiums written of €4.5–5bn for the ERGO International segment in 2018, and generate overall premium volume of about €5–5.5bn, with uncertainty concerning the demand for single-premium business in life insurance. In health business and in property-casualty business, we project a slight fall in premium. Contingent upon major losses being within normal bounds, we are aiming for a combined ratio of around 97%.
We expect that the Group’s gross premiums written for 2018 will be in the range of €46–49bn; the median value is approximately €1.5bn below the previous year’s level.
Munich Reinsurance Company’s 2017 financial year was marked by exceptionally high expenditure for property damage from hurricanes Harvey, Irma and Maria, which caused massive destruction in the Caribbean and in the USA in August and September. Major-loss expenditure was therefore significantly higher than in the previous year, and was well above the expected range. In contrast, the release of loss reserves for prior accident years, which we were able to make following a review of our reserving position, once again made a positive contribution to the technical result before claims equalisation provision. The accounting result of Munich Reinsurance Company developed as follows: Munich Reinsurance Company (information reported on the basis of German accountancy rules)
The annual financial statements of Munich Reinsurance Company are prepared in accordance with German accounting rules. By contrast, the consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs). As a result, there are some deviations in the accounting policies – mainly
Condensed income statement for Munich Reinsurance Company 2017 Prev. year Change €m €m % Earned premiums for own account 20,525 20,976 –2.2 Interest on technical provisions for own account 469 418 12.2 Other underwriting income for own account 39 5 666.3 Claims incurred for own account –16,711 –14,795 –13.0 Change in other technical provisions for own account –552 –147 –275.6 Expenses for premium refunds for own account –1 –3 53.2 Operating expenses for own account –5,736 –5,851 2.0 Other underwriting expenses for own account –23 –8 –202.9 Subtotal –1,990 596 – Change in claims equalisation provision and similar provisions 2,382 –391 – Underwriting result for own account 392 205 91.4 Investment income 4,333 5,829 –25.7 Investment expenses –1,257 –1,922 34.6 Interest income on technical provisions –493 –452 9.1 Other income 204 996 –79.5 Other expenses –546 –585 –6.7 Non-technical result 2,241 3,866 –42.0 Operating result before tax 2,634 4,071 –35.3 Taxes on income and profit, and other taxes –434 –659 34.1 Profit for the year 2,199 3,411 –35.5 Profit brought forward from previous year 52 48 8.5 Transfers from other revenue reserves 0 0 – Appropriations to revenue reserves –918 –1,706 46.2 Net retained profits 1,333 1,754 –24.0
83Combined management report Munich Reinsurance Company Information reported on the basis of German accountancy rules
In property-casualty reinsurance, man-made losses totalled €554m (496m), equivalent to 4.0 (3.6) percentage points of net earned premiums.
The technical result for 2017 did not follow on from the very good result from the previous year. It was adversely impacted by reserve strengthening in Israel and increased claims expenditure in Australian disability business, in particular as a result of longer benefit periods. Apart from this, claims expenditure across all other markets was within the expected bounds. This applies in particular to mortality business in the USA, which had been adversely impacted by major losses in the previous year. The technical result for the markets of Asia and the United Kingdom continued to develop favourably.
Life 2017 Prev. year Change % Gross premiums written €m 7,719 7,930 –2.7 Underwriting result before claims equalisation provision and similar provisions €m –111 164 –
In property-casualty reinsurance, we posted a reduction in premium income of 6.7% to €11,813m (12,659m) in 2017. This was mainly due to the reduction in treaty shares across all lines of business and regions and the targeted withdrawal from unprofitable business (especially large proportional treaties in China). This erosion was only partially offset by selective underwriting of attractive new business and organic growth of our business with existing clients. Negative currency translation effects also played a role in the fall in premium volume. If currency exchange rates had remained unchanged, premium volume would have fallen by only 5.3%. The 2017 renewals again took place in a highly competitive market environment, not least because there continued to be sufficient reinsurance capacity in all classes of business. Prices declined, but to a much lesser degree than in previous years’ renewals, confirming the signs of stabilisation previously seen in the marketplace. In a few markets, we were able to selectively exploit business opportunities that offered adequate margins. Overall, we are adhering to our profit-oriented underwriting policy.
Motor reinsurance showed a marginal reduction in premium volume owing to negative currency translation effects in the 2017 financial year. The technical result was much lower than in the previous year, primarily on account of reduced reserve releases for claims from prior accident years.
Motor 2017 Prev. year Change % Gross premiums written €m 2,970 3,082 –3.6 Combined ratio % 105.9 100.0 Underwriting result before claims equalisation provision and similar provisions €m –153 –2 <–1,000.0
Personal accident 2017 Prev. year Change % Gross premiums written €m 236 198 19.2 Combined ratio % 55.8 31.5 Underwriting result before claims equalisation provision and similar provisions €m 105 120 –11.9
Premium income in aviation reinsurance, which comprises the aviation and space classes, increased in the financial year. The result in aviation reinsurance was also up on the previous year.
The decline in premium income in fire reinsurance was largely attributable to treaty terminations. After having generated a pleasing profit in the previous year, the technical result before claims equalisation provision fell into very negative territory in the year under review. This was primarily due to the high claims expenditure from hurricanes Harvey, Irma and Maria.
Investment result €m 2017 Prev. year Regular income 3,152 3,134 Write-ups and write-downs –70 94 Realised gains/losses on the disposal of investments 170 1,022 Other income/expenses –175 –343 achieved in the previous year was chiefly due to the sale of a block of shares to a subsidiary of Munich Reinsurance Company for the purpose of optimising Munich Re’s structure taking into account tax and commercial law aspects.
Despite high natural catastrophe losses, Munich Reinsurance Company generated a profit of €2,199m (3,411m). The technical result was stabilised by withdrawals from the claims equalisation provision. Compared with the previous year, the decline is primarily attributable to the non-technical result, which in turn was impacted by the loss of one-off effects in the investment and currency translation results.
Balance sheet structure of Munich Reinsurance Company 2017 Prev. year Change €m €m % Intangible assets 188 12 >1,000
87Combined management report Munich Reinsurance Company Information reported on the basis of German accountancy rules
Pursuant to German commercial and corporate law, dividends and share buy-backs may only be paid out of profits and revenue reserves. Besides the expenses and income incurred in the current year, changes in the claims equalisation provision also have a significant influence on the level of profits.
The target or maximum amount allowed for the claims equalisation provision, which is essentially calculated on the basis of earned premiums and the standard deviation of the loss ratio in the respective class of insurance, determines the amount of the annual non-performancerelated allocation to the claims equalisation provision. The performance-related change in the claims equalisation provision is added to this figure in years in which claims experience is favourable (i.e. when the random occurrence of claims is below average), whereas amounts are withdrawn in years in which claims experience is adverse (i.e. the random occurrence of claims is above average).
1 Information on Section 160 (1) no. 2 of the German Stock Corporation Act can be found on page 21 of Munich Reinsurance Company’s Annual Report 2017.
In contrast, the claims equalisation provision was increased in some classes of business owing to positive business performance: by €166m (82m) in accident, €72m (259m) in all other classes, and €77m (66m) in motor.
The current level of the claims equalisation provision is 100% of the legally stipulated maximum amount in the motor and marine classes of business, and more than 50% in fire, liability, credit, and accident.
Against this background, and after making allowance for the effects of intra-Group retrocession, Munich Reinsurance Company should post gross premium of around €22bn in the 2018 financial year – assuming that exchange rates remain constant. We expect the combined ratio to be around 99% of net earned premiums. An accurate forecast is not possible, partly due to the obvious fluctuations in the incidence of major losses. Assuming average claims experience, we project that the technical result before claims equalisation provision for the 2018 financial year will be significantly better than in the year under review.
Assets A Intangible assets 108 B Investments 108 C Insurance-related investments 110 D Ceded share of technical provisions 111 E Receivables 111 F Cash at banks, cheques and cash in hand 111 G Deferred acquisition costs 111 H Deferred tax assets 111 I Other assets 111 J Assets held for sale 111
Equity and liabilities A Equity 112 B Subordinated liabilities 112 C Gross technical provisions 112 D Gross technical provisions for unit-linked life insurance 114 E Other provisions 114 F Liabilities 114 G Deferred tax liabilities 114 H Liabilities related to assets held for sale 114
Notes to the consolidated balance sheet – Assets 02 Other intangible assets 125 03 Land and buildings, including buildings on third-party land 127 04 Hierarchy for the fair value measurement of investments 127 05 Investments in affiliated companies, associates and joint ventures 133 07 Other securities available for sale 134 08 Other securities at fair value through profit or loss and insurance-related investments 135 09 Deposits retained on assumed reinsurance 136 10 Other investments 136
91Consolidated financial statements Contents 11 Ceded share of technical provisions 137 12 Other receivables 137 13 Deferred acquisition costs 137 14 Deferred tax 138 15 Other assets 139 16 Assets held for sale 140
Notes to the consolidated income statement 31 Income from technical interest 155 32 Expenses for claims and benefits 156 33 Operating expenses 156 34 Investment result 157 35 Insurance-related investment result 157 36 Other operating result 157 37 Other non-operating result, impairment losses on goodwill and net finance costs 158 38 Taxes on income 158
List of shareholdings as at 31 December 2017 pursuant to Section 313(2) of the German Commercial Code (HGB) 170
V. Deposits retained on assumed reinsurance (9) 5,690 5,240 450 8.6
D. Ceded share of technical provisions (11) 4,169 3,669 500 13.6 E. Receivables I. Current tax receivables 440 623 –183 –29.4
F. Liabilities I. Bonds and notes issued (26) 277 324 –46 –14.2 II. Deposits retained on ceded business (27) 593 828 –236 –28.4 III. Current tax liabilities 2,439 2,429 10 0.4
Ceded share –1,528 –1,546 18 1.2 2. Income from technical interest (31) 6,376 6,390 –14 –0.2 3. Expenses for claims and benefits (32) Gross –43,194 –39,167 –4,027 –10.3
Thereof: Attributable to Munich Reinsurance Company equity holders 375 2,580 –2,205 –85.5 Attributable to non-controlling interests (17) 17 1 16 >1,000.0
Gains (losses) recognised in equity –1,837 345 Recognised in the consolidated income statement 0 0
Change resulting from equity method measurement Gains (losses) recognised in equity –20 12 Recognised in the consolidated income statement 0 0
Change resulting from cash flow hedges Gains (losses) recognised in equity –1 –1 Recognised in the consolidated income statement 0 0
Consolidated cash flow statement for the financial year 2017 €m 2017 Prev. year Consolidated result 392 2,581
Net change in technical provisions 6,003 2,783 Change in deferred acquisition costs 107 –203 Change in deposits retained and accounts receivable and payable –1,580 90 Change in other receivables and liabilities –1,544 –571 Gains and losses on the disposal of investments and insurance-related investments –2,134 –2,029 Change in securities at fair value through profit or loss 300 –920 Change in other balance sheet items –286 737 Other non-cash income and expenses 575 508
I. Cash flows from operating activities 1,833 2,975 Change from losing control of consolidated subsidiaries 9 235 Change from obtaining control of consolidated subsidiaries –48 –397 Change from the acquisition, sale and maturity of investments and insurance-related investments 2,142 –1,043 Change from the acquisition and sale of investments for unit-linked life insurance contracts 99 –8
II. Cash flows from investing activities 2,326 –1,127 Inflows from increases in capital and from non-controlling interests 0 0 Outflows to ownership interests and non-controlling interests –1,034 –974 Dividend payments –1,338 –1,330 Change from other financing activities –1,382 –227
III. Cash flows from financing activities –3,754 –2,531 Cash flows for the financial year (I + II + III)1 405 –683
Effect of exchange-rate changes on cash and cash equivalents –130 –5 Cash at the beginning of the financial year 3,353 4,041 Cash at the end of the financial year 3,628 3,353
Additional information Income tax paid (net) – included in the cash inflows from operating activities –225 –231 Dividends received 638 594 Interest received 5,236 5,533 Interest paid –362 –359 1 Cash mainly comprises cash at banks. 2 For a definition of the disposal group, see Assets – J Assets held for sale.
Retrospective adjustments have been made to the figures from the consolidated balance sheet for the financial years 2015 and 2016, the consolidated income statement, and the relevant items of the notes to the consolidated financial statements for the year 2016 (see section “Changes in accounting policies and other adjustments”). The other previous-year figures have been calculated on the same basis as the figures for the financial year 2017.
In the 2017 financial year, the following amended IFRSs had to be applied for the first time, after having been adopted into European law.
Use of judgements and estimates in recognition and measurement In preparing the consolidated financial statements, we have to use our judgement in applying accounting policies and to make estimates and assumptions that affect the year-end items shown in the consolidated balance sheet, the consolidated income statement and the disclosures on contingent liabilities.
In November 2017, the Board of Management and Supervisory Board of Munich Reinsurance Company published an updated Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG), and made this Declaration permanently available to shareholders on the internet at www.munichre.com/cg-en.
Munich Re Group Annual Report 2017 aim of improving its informational value. The calculation of the income from technical interest now no longer defines technical result components in the allocation to the provision for premium refunds. This change has been made retroactively in accordance with IAS 8.14.
Interest receivables not due have been shown in the past under “other receivables”. They are now allocated to the various items of the underlying, interest-bearing financial instruments. The respective items have been adjusted accordingly. This change has been made retroactively in accordance with IAS 1.41 to be consistent with disclosure practices used in the banking sector, in particular.
In addition, in September 2017 the IASB published a second Practice Statement “Making Materiality Judgements”. The document provides entities with guidance on whether information is of decision-making relevance for users of financial statements and therefore requires disclosure. It is not an IFRS and is therefore non-mandatory. However, entities have been permitted to take the Practice Standard into consideration since the date it was published. Munich Re will make use of this option if the guidance in the Practice Statement is useful for our decision-making.
Consolidated balance sheet 31.12.2016 Changes due as originally to adjustments recognised in 2016 31.12.2016 €m Assets B. Investments III. Loans 53,691 993 54,684 IV. Other securities 150,515 1,239 151,754 2. At fair value through profit or loss 2,672 23 2,695 VI. Other investments 3,814 104 3,918 E. Receivables II. Other receivables 13,919 –2,337 11,583
Consolidated income statement 2016 Changes due as originally to adjustments recognised in 2016 2016 €m 2. Income from technical interest 6,490 –100 6,390 10. Deduction of income from technical interest –6,490 100 –6,390
In October 2017, the IASB issued an amendment to IFRS 9 (rev. 10/2017), Prepayment Features with Negative Compensation. This amendment clarifies how certain financial instruments with prepayment features are to be classified and therefore measured under IFRS 9. This amendment is to be applied from 2019 onwards and will be taken into consideration by Munich Re as part of its overall IFRS 9 project. The amendment has not yet been adopted into European law.
IFRS 9 (7/2014), Financial Instruments, replaces IAS 39 as regards the requirements relating to recognition and measurement of financial instruments. Under this revision, in future financial assets will be categorised on the basis of contractual cash flow characteristics and the business model to which the asset is allocated. Accordingly, subsequent measurement is made at amortised cost, at fair value without impact on profit or loss, or at fair value through profit or loss.
In IFRS 17 (5/2017), Insurance Contracts, the IASB has for the first time published a standard that governs the recognition, measurement and disclosure of insurance contracts in a comprehensive manner; the rules require extensive disclosures in the notes to the consolidated financial statements. The new standard will replace IFRS 4, Insurance Contracts.
IFRS 17 is applicable to all primary insurance contracts, to reinsurance assumed and ceded, and to investment contracts with a discretionary participation in surplus. The valuation rules are mainly based on a “building block approach”, which is made up of a fulfilment value (discounted expected future cash flows and an explicit risk margin) and a contractual service margin. Under certain conditions, a simplified measurement approach is permitted for short-term contracts. The general measurement model in adjusted form is to be applied to primary insurance contracts with a discretionary participation in surplus and to ceded reinsurance, in order to take account of the special features of this business.
IFRS 15 (05/2014), Revenue from Contracts with Customers, governs the time and amount of revenue to be recognised by an entity. As the recognition of revenue from insurance contracts and financial instruments does not fall within the scope of the new standard, it is not material for the accounting of our core business. The amount of revenue to be recognised in accordance with IFRS 15 in relation to gross premiums written is likely to amount to around 1%. For this reason, and due to the fact that there are no significant deviations from our existing accounting rules in the few cases in which IFRS 15 applies to Munich Re, the implementation of this standard is not expected have any material effects. Such cases of application at Munich Re mainly involve technical engineering and inspection services, assistance services, investment management services and services in connection with the provision of insurance-related software.
An amendment to IFRS 15, Clarifications to IFRS 15, was already issued in April 2016, but it has no material effects on Munich Re. Overall, the standard is mandatory for financial years beginning on or after 1 January 2018. Owing to new rules about unbundling certain components from insurance contracts under IFRS 17, the effects of IFRS 15 will have to be re-evaluated when the new standard on recognition and measurement of insurance contracts is introduced. These analyses are an integral part of the comprehensive project to implement IFRS 17.
Based on an initial analysis, we expect that assets and liabilities from operating leases will have to be recognised for property, office premises and equipment, and the vehicle fleet. Previous leasing expenditure will continue to be recognised by means of an amortisation expense for rights of use and interest expenses for the liabilities.
The IASB has also published amendments to the following standards, which – with the exception of IFRS 2 and the “Annual Improvement to IFRSs 2014–2016” – have not yet been adopted into European law.
− Amendments to IFRS 10 and IAS 28 (rev. 9/2014), Sale or Contribution of Assets between an Investor and its Associate or Joint Venture − Amendments to IFRS 2 (rev. 6/2016), Classification and Measurement of Share-based Payment Transactions − Amendments to IAS 40 (rev. 12/2016), Transfers of Investment Property
Other assets 48 189 Technical provisions (net) –1 –723 Other liabilities –375 –167
Other intangible assets 0 –2 Investments 0 –5,045 Cash 0 –59 Other assets –2 –371 Technical provisions (net) 0 3,157 Other liabilities 0 1,801 Total –2 –520
Cash flows and net assets from obtaining and losing control of consolidated subsidiaries or other operations are shown in the tables:
Business combinations occurring during the reporting period On 1 January 2017, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the wind park company Eolus Vindpark Tolv AB, Hässleholm, Sweden, from Eolus Vindpark Elva AB, Hässleholm, Sweden. Eolus Vindpark Tolv AB was renamed Wind Farm Iglasjön AB immediately after the acquisition, and owns wind power plants with a total installed capacity of 26.4 megawatts. The acquisition is part of our infrastructure investment strategy.
On 20 June 2017, Munich Re acquired an additional 10.6% of the shares in the special fund MEAG European Prime Opportunities (MEAG Euro Pro) for a total payment in cash of €58.6m. This raised Munich Re’s holding to a total of 54.8%, thus giving it control of the fund. The acquisition was made via the subsidiaries ERGO Lebensversicherung Aktiengesellschaft, Hamburg, DKV Deutsche Kranken versicherung Aktiengesellschaft, Cologne, ERGO Versicherung Aktiengesellschaft, Düsseldorf, ERGO Pensionskasse AG, Düsseldorf, ERGO DIREKT Lebensversicherung AG, Fürth, and Vorsorge Lebensversicherung Aktiengesellschaft, Düsseldorf. The investment focus of MEAG Euro Pro is high-value, long-term let office buildings, mainly in cities in western Europe. The investment in MEAG Euro Pro was made via direct investment and participations. The acquisition boosts the Group’s investment property portfolio. The fair value of Munich Re’s equity in MEAG Euro Pro immediately prior to the acquisition was €244.5m. The remeasurement of this share resulted in a realised profit of €1.4m, which was recognised in investment income as a gain from the disposal of available-for-sale securities. For the period between 20 June and the balance sheet date, the consolidated income statement includes income and expenses of MEAG Euro Pro. Investment income of €24.6m was recognised. The contribution to the consolidated result was €8.4m. If the business combination had already been complete on 1 January 2017, MEAG Euro Pro would have contributed investment income of €43.9m and a result of €14.0m to the consolidated result.
The fair values of the assets and liabilities at the time of acquisition are as follows: On 30 June 2017, Munich Re acquired 100% of the voting shares in Allianz Life and Annuity Company, Minneapolis, Minnesota, USA, via its subsidiary Munich American Holding Corporation, Wilmington, Delaware, USA. After the acquisition, Allianz Life and Annuity Company was renamed Munich Re US Life Corporation. The company offers life and pension insurance, and is licensed in 46 US states and in the District of Columbia. The acquisition expands Munich Re’s capabilities in the structuring of life reinsurance in the USA.
Fair values of the assets and liabilities at the acquisition date €m Purchase price 59 Assets acquired 930
We recognise our share of assets, liabilities, income and expenses of joint operations in which we have joint control in the balance sheet in accordance with the relevant IFRSs.
The maximum exposure to loss relates to the loss of future management fees. Fund management activities generated income of €41m (34m) in the financial year. The value of fund assets under management provides information about the size of the unconsolidated structured entities. As at 31 December 2017, the managed fund assets amounted to €4,239m (3,836m), and Munich Re itself also holds a small interest in these funds.
Deposits retained on assumed reinsurance 0 0 0 436 436 Investments for unit-linked life insurance contracts 0 7,346 0 0 7,346 Ceded share of technical provisions 0 0 0 85 85
Goodwill resulting from the first-time consolidation of subsidiaries is tested for impairment at least annually. We additionally carry out ad-hoc impairment tests if there are indications of impairment. For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units expected to derive benefit from the synergies of the business combination. To ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cashgenerating unit or group of cash-generating units is compared with that unit’s or group’s recoverable amount. The recoverable amount is the greater of the fair value less costs of disposal and the value in use. If this recoverable amount is lower than the carrying amount, a write-down for impairment is made on the goodwill. To determine the recoverable amount, numerous assumptions are required which may lead to significant differences in value. Information on the key assumptions is provided in the Notes to the consolidated balance sheet – Assets (1) Goodwill. Sensitivity analyses of changes to the key assumptions – which we consider realistic – are performed as part of the impairment tests. If as a result of these analyses the recoverable amount has fallen below the carrying amount, this is reported in the abovementioned note.
Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated on a straight-line basis in accordance with the component approach, depending on the weighted useful life for their specific building class. The underlying useful lives mainly range between 40 and 55 years. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount.
Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are measured at amortised cost in accordance with the effective interest method. Writedowns for impairments are made in cases where the repayment of a loan can no longer be expected.
Assets allocated to Level 2 are valued using models based on observable market data. If the financial instrument concerned has a fixed contract period, the inputs used for valuation must be observable for the whole of this period. Moreover, we have allocated to this level such assets for which prices are provided by price quoters but for which there is no proof that these were based on actual market transactions. The financial instruments we have allocated to this level mainly comprise bearer bonds and bond funds, borrowers’ note loans, covered bonds, subordinated securities, derivatives not traded on the stock market, and physical gas.
Securities at fair value through profit or loss comprise securities held for trading and securities classified as at fair value through profit or loss. Securities held for trading mainly include all derivative financial instruments with positive fair values which we have acquired to manage and hedge risks but which do not meet the requirements of IAS 39 for hedge accounting. Securities designated as at fair value through profit or loss comprise structured securities and securities designated as at fair value to avoid accounting mismatches.
Repurchase agreements and securities lending Under repurchase agreements we, as the lender, acquire securities against payment of an amount with the obligation to sell them back to the borrower at a later date. As the risks and rewards from the securities remain with the borrower, the amounts paid are not posted as such in our accounts but are shown as a receivable from the borrower under “other investments, deposits with banks”. Interest income from these transactions is recognised in the investment result.
IAS 39.59 contains a list providing evidence of impairment of financial assets. In addition, IAS 39.61 states that, for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. These rules are given more concrete form by means of internal guidelines. For equities quoted on the stock exchange, we assume a significant decline in fair value if the market price at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. In the case of fixedinterest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.
Net insurance-related investment result The composition of the net result from insurance-related investments corresponds to that of the net investment result.
Current tax receivables comprise current taxes on income of the individual companies, including any interest on taxes, based on their respective national taxation. Other tax receivables are shown under “other receivables”.
Other assets are generally recognised at amortised cost. Amortisations mainly occur on a straight-line basis, the underlying useful lives amounting to up to 55 years. Where required, impairment losses are recognised or reversed for the Group’s owner-occupied property. These impairment losses and impairment losses reversed are distributed between the functional areas.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. The posting of unearned premiums is restricted to shortterm underwriting business; i.e. property-casualty business and parts of accident and health business. In the case of long-term business, a provision for future policy benefits is established.
Other technical provisions mainly include the provision for premium refunds in primary insurance and the provision for profit commission in reinsurance. The former is posted in life and health primary insurance for obligations involving policyholder bonuses and rebates that have not yet been irrevocably allocated to individual contracts at the balance sheet date. These provisions are posted on the basis of national regulations only for German primary insurance business; a retrospective approach is usually taken based on supervisory or individual contract regulations.
In primary insurance, measurement is generally carried out individually for each risk. For German life primary insurance, biometric actuarial assumptions based on the tables of the German Association of Actuaries (Deutschen Aktuarvereinigung e. V.) are used. We also largely use the tables of the national actuarial associations for the rest of primary insurance business. The actuarial interest rate employed for discounting in life primary insurance is limited by the respective maximum actuarial interest rate prescribed by the supervisory authorities. In health primary insurance, discount rates are chosen that reflect the best estimate of expected investment income, less a safety margin.
Deferred tax liabilities must be recognised if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company, and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); see notes on Assets – H Deferred tax assets.
In contrast to this, currency translation differences are largely recognised in profit or loss in our subsidiaries’ financial statements, and shown under “other nonoperating result”.
We have identified five segments to be reported: − Life and health reinsurance (worldwide life and health reinsurance business) − Property-casualty reinsurance (global property-casualty reinsurance business) − ERGO Life and Health Germany (German life and health primary insurance business, German property-casualty direct insurance business, and global travel insurance business) − ERGO Property-casualty Germany (German propertycasualty insurance business, excluding direct business) − ERGO International: ERGO’s primary insurance business outside Germany
C. Gross technical provisions for unit-linked life insurance contracts 0 0 0 0 5,809 5,341 0 0 3,162 3,088 8,971 8,429
E. Liabilities related to assets held for sale 0 0 0 0 3 0 0 0 63 0 65 0
V. Deposits retained on assumed reinsurance 3,759 3,749 1,870 1,436 40 34 21 21 1 0 5,690 5,240
D. Ceded share of technical provisions 735 923 2,727 2,004 15 17 78 128 615 597 4,169 3,669 1 Previous year’s figures adjusted owing to changes in segment allocation and IAS 8; see “Changes in accounting policies and other adjustments”.
B. Investments I. Land and buildings, including buildings on third-party land 309 291 1,532 1,683 2,961 2,200 200 154 119 117 5,121 4,444 II. Investments in affiliated companies, associates and joint ventures 44 42 1,225 735 331 299 72 54 544 582 2,216 1,711 Thereof: Associates and joint ventures accounted for using the equity method 28 29 1,164 701 282 262 24 23 513 550 2,010 1,565
IV. Other securities 1. Available for sale 20,675 21,272 51,883 58,268 51,727 50,187 4,409 4,549 15,151 14,783 143,845 149,059 2. At fair value through profit or loss 75 63 378 358 1,024 1,710 14 21 488 543 1,979 2,695
Reinsurance ERGO Total Life and Health Property-casualty Life and health Property-casualty Germany Germany International €m 2017 Prev. year 2017 Prev. year 2017 Prev. year 2017 Prev. year 2017 Prev. year 2017 Prev. year 3. Net expenses for claims and benefits –10,842 –10,581 –13,467 –10,730 –11,734 –11,633 –2,069 –1,985 –3,533 –3,569 –41,645 –38,498 4. Net operating expenses –2,815 –2,697 –5,600 –5,496 –1,195 –1,384 –1,072 –1,108 –1,504 –1,610 –12,186 –12,295 8. Other operating result 25 14 –105 –129 –46 –43 –4 –17 –15 –19 –146 –194 9. Deduction of income from technical interest –602 –576 –1,083 –1,138 –4,180 –4,142 –75 –73 –435 –461 –6,376 –6,390 12. Other non-operating result, net finance costs and impairment losses on goodwill –82 85 –284 293 –437 –475 –185 –242 –158 –345 –1,146 –684
Reinsurance ERGO Total Life and Health Property-casualty Life and health Property-casualty Germany Germany International €m 2017 Prev. year 2017 Prev. year 2017 Prev. year 2017 Prev. year 2017 Prev. year 2017 Prev. year
Adjusted net expenses for claims and benefits –13,474 –10,725 –2,053 –1,955 –2,060 –1,942 1 Information on the combined ratio is provided in the management report under “Important tools of corporate management”. 2 Property-casualty business and short-term health business (excluding health insurance conducted like life insurance). 3 No adjustment for reinsurance property-casualty.
Amortisation and impairment losses –9 –28 Carrying amount at 31 Dec. financial year 2,584 2,817 Accumulated amortisation and impair- ment losses at 31 Dec. financial year –1,550 –1,541 Gross carrying amount at 31 Dec. financial year 4,134 4,358
Goodwill shown under various cash-generating units is not significant in comparison with the total goodwill, either individually or in total. We regard amounts of 10% or more of total Group goodwill as significant.
Cash-generating unit or group of Property-casualty ERGO cash-generating units reinsurance segment and divisions Property-casualty Germany segment
Munich Re Group Annual Report 2017 environment. After the detailed planning phase, we estimate the target results achievable long term on the basis of the last adjusted planning year and taking into account growth rates and RoI derived from macroeconomic forecasts.
The calculation of these values in use is based on distributable target results derived from the current market environment and the latest corporate planning approved by management. Prepared in an interactive process involving the operational units, the responsible controlling units and the Board of Management, the corporate plans are reviewed and updated at least every quarter. The aforementioned key assumptions regarding premium income development and combined ratios derive from the aggregation of the company plans of the individual companies of a cash-generating unit, or of a group of cash-generating units. The key assumptions regarding developments in the equity market and interestrate level are defined on the basis of the current market 2 Other intangible assets
Intangible assets pledged as security and other restrictions on title amount to €115m (127m).
Amortisation –2 –2 –24 –25 –13 –13 Impairment losses 0 –2 –7 –24 0 –7
Carrying amount at 31 Dec. financial year 29 36 111 158 211 222 Accumulated amortisation and impairment losses at 31 Dec. financial year –193 –199 –568 –576 –84 –76 Gross carrying amount at 31 Dec. financial year 222 235 679 733 295 298
Carrying amount at 31 Dec. financial year 18 21 1,105 1,303 Accumulated amortisation and impairment losses at 31 Dec. financial year –66 –64 –3,137 –2,974 Gross carrying amount at 31 Dec. financial year 85 85 4,243 4,277
Munich Re Group Annual Report 2017 3 Land and buildings, including buildings on third-party land
Reclassifications –3 12 Carrying amount at 31 Dec. financial year 5,121 4,444 Accumulated amortisation and impairment losses at 31 Dec. financial year –1,302 –1,224 Gross carrying amount at 31 Dec. financial year 6,423 5,668
Property pledged as security and other restrictions on title amount to €916m (853m). Contractual commitments to acquire property amount to €239m (46m).
All assets recognised at fair value are allocated to one of the fair value hierarchy levels of IFRS 13, as are those assets which are not recognised at fair value in the balance sheet but for which a fair value has to be disclosed in the notes. Information on the criteria for allocation to the individual levels of the fair value hierarchy can be found under Assets – B Investments – Determining fair values. Regularly, at each reporting date, we assess whether the allocation of our assets to the levels of the valuation hierarchy is still appropriate. If changes in the basis of valuation have occurred – for instance, if a market is no longer active or the valuation was performed using inputs requiring another allocation – we make the necessary adjustments.
Munich Re Group Annual Report 2017 market quotes available from market data providers is insufficient, so we use broker valuations. With these investments, we thus do not perform our own valuations using inputs not based on observable market data. We regularly subject the valuations supplied to plausibility tests on the basis of comparable investments.
At 31 December 2017, around 13% (12%) of the investments measured at fair value were allocated to Level 1 of the fair value hierarchy, 83% (84%) to Level 2 and 4% (4%) to Level 3, as shown in the table below.
Among the associates and joint ventures accounted for using the equity method, there is only one company for which a quoted market price is available. This price amounts to €104m (96m) and is allocated to Level 1 of the fair value hierarchy.
The inputs requiring consideration in measuring variable annuities are derived either directly from market data (in particular volatilities, interest-rate curves and currency spot rates) or from actuarial data (especially biometric and lapse rates). The lapse rates used are modelled dynamically and range between 0.5% and 50%, depending on the specific insurance product and current situation of the capital markets. A 10% increase or decrease in the lapse rates would lead to a change of –/+1% in the fair value of the portfolio. The assumptions with regard to mortality are based on published mortality tables, which are adjusted with a view to the target markets and the actuaries’ expectations. The impact of these and other non-observable assumptions is not material. The dependency between different capital market inputs is modelled by correlation matrices. We allocate these products to Level 3 of the fair value hierarchy.
Allocation of investments (including insurance-related investments) to levels of the fair value hierarchy €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 171 171 Investments in associates and joint ventures measured at fair value 0 0 34 34 Other securities available for sale
Other securities at fair value through profit or loss Held for trading, and hedging derivatives1 224 1,424 2 1,649 Designated as at fair value through profit or loss 187 169 0 357
Investments not measured at fair value Loans 0 64,082 1,393 65,475 1 Including hedging derivatives of €27m (68m) accounted for under “other assets”.
Prev. year €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 138 138 Investments in associates and joint ventures measured at fair value 0 0 8 8 Other securities available for sale
Investments not measured at fair value Loans 0 67,250 1,000 68,251
Transfer out of Level 3 0 –886 –30 –961 Changes in the fair value of derivatives 3 0 3 0 Carrying amount at 31 Dec. financial year 304 277 6,082 5,959 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 45 116 70 121
Gains (losses) recognised in the income statement 0 0 0 0 –1 7 Gains (losses) recognised in equity 0 0 0 0 0 0
Carrying amounts €m 31.12.2017 Prev. year Mortgage loans 5,842 5,606 Loans and advance payments on insurance policies 266 297 Other loans 48,595 48,781
The fair value of the loans is based on recognised valuation techniques in line with the present value principle and taking observable market inputs into account; see (4) Hierarchy for the fair value measurement of assets. The fair value totalled €65,490m (68,276m) at the reporting date.
Rating of “other loans” on the basis of amortised cost €m 31.12.2017 Prev. year
Impairment losses with respect to these companies amounted to €11m (14m). They are distributed between the following different Group segments: €0m (14m) is apportionable to property-casualty reinsurance, and €11m (0m) is apportionable to ERGO International.
Further information about affiliated companies, associates and joint ventures can be found in Other information (48) Contingent liabilities, other financial commitments, (49) Significant restrictions, and in the List of shareholdings as at 31 December 2017 pursuant to Section 313(2) of the German Commercial Code (HGB).
Non-fixed-interest securities Shares 13,013 11,174 2,709 2,327 10,304 8,847 Investment funds
The insurance-related investments include investments for unit-linked life insurance contracts of €8,772m (8,428m) and other insurance-related investments of €891m (1,130m).
Rating of fixed-interest securities according to fair values €m 31.12.2017 Prev. year
Fair value hedges In the case of fair value hedges, the change in the fair value of the hedging instrument and the change in the fair value of the hedged instrument are generally recognised in profit or loss under the item “investment result”. Munich Re uses hedging relationships in the form of fair value hedges to selectively and efficiently mitigate interest-rate and other market risks. The main types of transaction employed for hedging are swaps and forwards. No fair value hedges existed at year-end, as Munich Reinsurance Company’s hedged subordinated bond had been redeemed in June 2017. The fair value of
No Insurance-related investments 853 1,046 Yes Other assets 27 68 No Negative
Of the amounts held on deposit with banks, €3,122m (3,027m) is due within one year. With these deposits, the fair values largely correspond to the carrying amounts. Assets pledged as security and other restrictions on title amount to €12m (14m) for deposits with banks.
Impairment losses reversed 4 0 Depreciation and impairment losses Depreciation –36 –36
Carrying amount at 31 Dec. financial year 468 482 Accumulated amortisation and impairment losses at 31 Dec. financial year –231 –195 Gross carrying amount at 31 Dec. financial year 699 676
Other investments comprise deposits with banks totalling €3,138m (3,029m), investments in renewable energies amounting to €468m (482m), physical gold of €357m (361m), and forestry investments of €46m (47m). Deposits with banks include receivables of €134m (117m) from borrowers under repurchase agreements that have been booked by us as the lender.
Development of gross deferred acquisition costs €m 31.12.2017 Prev. year Status at 31 Dec. previous year 9,634 9,428 Currency translation differences –257 –44 Change in consolidated group/Other –4 90 New deferred acquisition costs 2,533 3,823 Changes
Assets pledged as security and other restrictions on title amount to €62m (54m).
The miscellaneous receivables contain cash collateral of €356m (534m), mainly for derivative transactions.
As at 31 December 2017, our accounts receivable on ceded reinsurance business were split between the following ratings (based on those of Standard & Poor’s): Ceded share of technical provisions €m 31.12.2017 Prev. year Unearned premiums 328 317 Provision for future policy benefits 760 862 Provision for outstanding claims 2,957 2,491 Other technical provisions 125 –1
The deferred tax assets and liabilities recognised in the consolidated balance sheet concern the following balance sheet items.
No deferred taxes were posted for temporary differences of €52m (52m) in connection with investments in subsidiaries and associates, also referred to as outside basis differences.
Tax loss carry-forwards and tax credits 31.12.2017 Prev. year For which For which For which For which deferred deferred deferred deferred tax assets tax assets tax assets tax assets are are not are are not €m recognised recognised Total recognised recognised Total Corporation tax loss carry-forwards
Expiring in up to three years 13 0 13 0 0 0 Expiring in over three years and up to ten years 104 0 104 40 0 40 Expiring in over ten years 0 0 0 0 0 0
Reclassification –14 –1 0 –15 Carrying amount at 31 Dec. financial year 2,374 272 11 2,657 Accumulated amortisation and impairment losses at 31 Dec. financial year –1,179 –765 –24 –1,967 Gross carrying amount at 31 Dec. financial year 3,554 1,038 34 4,625
In the segment reporting, we disclose how the noncurrent assets held for sale are allocated between the segments. Transactions between the disposal group and the Group’s continuing operations continued to be fully eliminated. The assets and liabilities of the disposal groups and assets held for sale are shown in the following table: The “land and buildings, including buildings on thirdparty land” shown in the table are allocated to Level 3 of the fair value hierarchy. Of the “other securities available for sale”, €52m is allocated to Level 1 and €23m to Level 2 of the fair value hierarchy.
In December 2017, ERGO Group AG reached an agreement with Allianz Group about the sale of its legal protection subsidiary, D.A.S. Switzerland. As at 31 December 2017, the assets and liabilities of this company are shown separately as a disposal group in our balance sheet. The portfolios of the D.A.S. legal protection subsidiaries in Luxembourg and Slovakia, which are also to be sold to Allianz Group, have not been reclassified in the balance sheet for lack of materiality. Measurement as “held for sale” in accordance with IFRS 5 did not result in any value adjustments. The sale underpins ERGO’s strategic focus. We expect a disposal gain in the low two-digit million euro range. The sale is still subject to approval by the competent authorities. We expect the transaction to be completed – and thus the deconsolidation to take place – in the second quarter of 2018.
Number of shares 2017 Prev. year Status at 31 Dec. previous year 156,902,293 162,782,591 Additions
Composition of equity €m 31.12.2017 Prev. year Issued capital 573 573 Capital reserve 6,845 6,845 Retained earnings 15,036 14,890 Other reserves 5,183 6,628 Consolidated result attributable to Munich Reinsurance Company equity holders 375 2,580 Non-controlling interests 186 269 Total equity 28,198 31,785
Unrealised gains and losses €m 31.12.2017 Prev. year Unconsolidated affiliated companies, associates and joint ventures not accounted for using the equity method 78 90 Associates and joint ventures accounted for using the equity method 89 80 Other securities available for sale
Less Provision for deferred premium refunds recognised in equity –4,837 –5,609 Deferred taxes recognised in equity –1,193 –1,381 Non-controlling interests –10 –16 Consolidation and currency translation effects –200 –297
Unrealised gains and losses on investments 167 193 360 241 25 265 Change resulting from equity method measurement –15 –5 –20 12 0 12 Change resulting from cash flow hedges –1 0 –1 –2 1 –1 Remeasurements of defined benefit plans 31 –67 –36 –108 32 –76
Other liabilities at fair value through profit or loss €m 31.12.2017 Prev. year Carrying amount at 31 Dec. previous year 545 413 Gains and losses 51 –90
Liabilities not measured at fair value Subordinated liabilities 4,659 66 1 4,725 Bonds and notes issued 410 0 0 410 Amounts due to banks 0 139 266 405
The fair value of the subordinated liabilities at the balance sheet date amounted to €3,309m (4,725m). For the Munich Reinsurance Company bonds, we take the stock market prices as fair values. For the other subordinated liabilities, we determine the fair values using net presentvalue methods with observable market inputs.
Breakdown of subordinated liabilities €m A.M. Best Fitch Moody’s S&P 31.12.2017 Prev. year Munich Reinsurance Company, Munich, 6.25% until 2022, thereafter floating, €900m, Bonds 2012/2042 a+ A – A 896 896 Munich Reinsurance Company, Munich, 6.625% until 2022, thereafter floating, £450m, Bonds 2012/2042 a+ A – A 506 526 Munich Reinsurance Company, Munich, 6.00% until 2021, thereafter floating, €1,000m, Bonds 2011/2041 a+ A – A 995 994 Munich Reinsurance Company, Munich, 5.767% until 2017, thereafter floating, €1,349m1, Bonds 2007/perpetual – – – – 0 1,380 Munich Reinsurance Company, Munich, 7.625% until 2018, thereafter floating, £300m, Bonds 2003/2028 aa– A+ A2 (hyb) A 338 351 ERGO Versicherung Aktiengesellschaft, Vienna, secondary market yield on federal government bonds (Austria) +70 BP, €12m2, Registered bonds 2001/perpetual – – – – 6 12 ERGO Versicherung Aktiengesellschaft, Vienna, secondary market yield on federal government bonds (Austria) +70 BP, €13m3, Registered bonds 1998/perpetual – – – – 7 13 HSB Group Inc., Delaware, LIBOR +91 BP, US$ 76m, Bonds 1997/2027 – – – – 42 47 1 In the second quarter 2017, the issuer redeemed the entire bond.
2 In the first quarter 2017, the issuer redeemed bonds with a nominal value of €6m. 3 In the first quarter 2017, the issuer redeemed bonds with a nominal value of €7m.
Munich Re Group Annual Report 2017 21 Provision for future policy benefits
Gross provision for future policy benefits according to type of insurance cover €m 31.12.2017 Prev. year Life and health 108,287 107,436
Scheduled changes in the provision for future policy benefits contain the changes deriving from prospective calculation as a result of premium payments, benefit cases and the unwinding of discount in the 2017 financial year.
The claims expenses for the financial year show payments made for the financial year and expenses for posting the claims reserve in that year. The provisions set up for claims from previous years are regularly updated using best estimates based on exposure and claims information and past claims experience. The respective change is shown under “claims expenses for previous years”. The gross provision for outstanding claims of the disposal group amounting to €30m is recognised under Changes in consolidated group/Other.
Reinsurance ERGO % 31.12.2017 Prev. year 31.12.2017 Prev. year Up to one year 34.9 32.2 32.8 34.0 Over one year and up to five years 44.5 44.9 37.8 39.4 Over five years and up to ten years 11.7 12.5 15.1 14.8 Over ten years and up to fifteen years 3.9 4.6 5.2 5.0
Claims payments for the individual accident years (per calendar year, net)
31 Dec. 2007 49,058 31 Dec. 2008 48,729 13,108 31 Dec. 2009 48,550 13,508 13,034 31 Dec. 2010 47,965 13,474 12,973 13,412 31 Dec. 2011 47,761 13,202 12,529 13,578 17,241 31 Dec. 2012 46,915 13,064 12,418 13,466 17,307 14,200 31 Dec. 2013 46,611 12,892 12,407 13,550 17,039 13,982 14,155 31 Dec. 2014 46,267 12,636 12,085 13,581 16,668 13,786 14,360 14,113 31 Dec. 2015 45,738 12,488 11,881 13,390 16,534 13,587 14,321 14,143 13,449 31 Dec. 2016 45,502 12,424 11,846 13,174 16,095 13,551 14,038 14,122 13,499 14,370 31 Dec. 2017 45,401 12,377 11,829 13,053 16,075 13,445 13,935 13,910 13,297 14,244 17,390 184,956
The run-off triangles are prepared on a currency-adjusted basis. For this purpose, all figures are translated from the respective local currency into the Group currency (euro). This ensures that currency translation does not lead to run-off effects.
Thereof resulting from unrealised gains and losses on investments (recognised directly in equity) 4,820 5,589 Thereof resulting from other remeasurements (recognised in profit or loss) 4,889 4,566
The above change resulting from unrealised gains and losses on investments reflects the proportional allocation to expected future policyholders’ bonuses of the change in fair values that occurred in the past year.
Development of gross provisions €m 2017 Prev. year Balance at 31 Dec. previous year 8,429 8,201 Changes in consolidated group/Other 43 47 Savings premiums 755 659 Unrealised gains/losses on fund asset 414 178 Withdrawal for expenses and risk –63 –59 Withdrawal for benefits –606 –597 Balance at 31 Dec. financial year 8,971 8,429
Breakdown of other provisions €m 31.12.2017 Prev. year Provisions for post-employment benefits 2,982 3,058 Other provisions 1,526 1,837
Change in the present value of the defined benefit obligations €m 2017 Prev. year Status at 31 Dec. previous year 6,095 5,389 Currency translation differences –150 –4 Changes in consolidated group 1 4 Current service cost 163 157 Past service cost –41 –1 Gains and losses from plan settlements 0 –1 Contributions by plan participants 7 8 Interest expense 120 136 Payments –145 –142 Payments from plan settlements –3 –3 Transfer of obligations 4 0 Actuarial gains/losses: Change in demographic assumptions –9 –13 Actuarial gains/losses: Change in financial assumptions –58 384 Actuarial gains/losses: Experience adjustments –30 –23 Other –29 205 Status at 31 Dec. financial year 5,924 6,095
There was an effect of €13m (9m) resulting from the asset ceiling on overfunded defined benefit plans.
% 2017 Prev. year Discount rate 2.1 2.2 Future increases in entitlement/salary 2.0 1.9 Future pension increases 1.4 1.4 Medical cost trend rate 3.7 4.3
Change in the fair value of plan assets for defined benefit plans €m 2017 Prev. year Balance at 31 Dec. previous year 3,388 2,847 Currency translation differences –109 –19 Changes in consolidated group 0 0 Interest income 74 79 Return excluding interest income –75 322 Contributions by the employer 84 75 Contributions by plan participants 6 5 Payments –78 –54 Payments from plan settlements –5 –6 Transfer of assets –1 0 Other –30 140 Balance at 31 Dec. financial year 3,253 3,388
Funded status of defined benefit plans €m 31.12.2017 Prev. year Obligations funded through provisions
Munich Re uses generally recognised biometric actuarial assumptions, adjusted as a rule to take account of company-specific circumstances. The average remaining life expectancy of a 65-year-old plan participant is 24.2 years for women and 24.2 years for men.
Munich Re Group Annual Report 2017 components for multi-year performance and for the medium-term incentive plans. The other miscellaneous provisions comprise a large number of different items. The provisions for restructuring, early-retirement benefits/semiretirement, anniversary benefits, multi-year performance and medium-term incentive plans are mainly long term, whereas the provisions for earned commission, salary obligations, other remuneration for desk and field staff, and miscellaneous are essentially short term.
The provisions for restructuring mainly concern €39m (69m) for the ERGO Group’s “Continuous improvement of our competitive position” project and €170m (214m) for the comprehensive restructuring of the ERGO Group’s sales organisations. ERGO also posted restructuring provisions of €333m (391m) for the ERGO Strategy Programme, plus another €30m (136m) for the discontinuation of new business and the winding up of the sales organisation in Belgium. The provision for multi-year variable remuneration includes
Contractual period to maturity of pension obligations €m 31.12.2017 Prev. year Up to one year 151 157 Over one year and up to five years 679 690 Over five years and up to ten years 975 996 Over ten years and up to twenty years 2,398 2,536 Over twenty years 6,037 6,852
The following table provides information on the remaining contractual maturities of the items shown under “other liabilities”. The amounts payable on primary insurance business are directly linked to the underlying insurance business, and therefore not taken into account here. This currently also applies to the derivatives embedded in variable annuity business; see Disclosures on risks from insurance contracts, (39) Disclosures on risks from life and health insurance business. The derivatives listed below are recognised at fair value.
Outflows of liquidity occur annually in the amount of the interest payments until the notes mature. These totalled US$ 25m (25m) in the financial year. The fair value at the reporting date amounts to €354m (410m).
Of the amounts due to banks, €110m (127m) is attributable to bank borrowing by Group companies acquired by Munich Re under its infrastructure investment strategy.
Between the beginning of the financial year and the balance sheet date, there were the following cash and non-cash changes in liabilities arising from financing activities: Long-term borrowings include subordinated liabilities and bonds and notes issued.
Cash changes –13 –1,368 0 –1,382 Currency translation effects 0 –79 0 –79 Changes in fair value 0 –31 31 –1 Changes in consolidated group/Other 220 5 0 224
Premiums €m 2017 Prev. year Total gross premiums 50,251 50,052 Gross premiums written 49,115 48,851 Change in gross unearned premiums –424 –188 Gross earned premiums 48,691 48,664
The change in the provision for future policy benefits (net) contains €414m (178m) in unrealised gains/losses from unit-linked life insurance. Expenses for claims and benefits include expenses for policyholders’ bonuses. Of this, €1,009m (985m) is for the allocation to the provision for premium refunds on the basis of national regulations, €319m (208m) for the change in the provision for deferred premium refunds recognised in the income statement, and €107m (166m) for direct crediting. The other technical result for life primary insurance mainly includes interest on policyholders’ accumulated credit.
Operating expenses €m 2017 Prev. year Gross Acquisition costs, profit commission and reinsurance commission paid –9,615 –9,753 Administrative expenses –2,962 –2,945 Change in deferred acquisition costs and contingent commissions, amortisation and impairment losses on acquired insurance portfolios 78 42 Gross operating expenses –12,498 –12,655
Ceded share Acquisition costs, profit commission and reinsurance commission paid 355 355 Change in deferred acquisition costs and contingent commissions –42 6 Operating expenses – Ceded share 313 360
Net operating expenses –12,186 –12,295 32 Expenses for claims and benefits
Provision for future policy benefits –914 –322 Provision for outstanding claims –6,577 –799 Provision for premium refunds –1,968 –1,969
Net Claims and benefits paid –32,547 –34,785 Change in technical provisions
Provision for future policy benefits –926 –354 Provision for outstanding claims –5,931 –1,219 Provision for premium refunds –1,969 –1,969
Other operating expenses –924 –938 Thereof: Interest charges –119 –89 Write-downs of other operating assets –34 –71
Other operating income mainly comprises income of €497m (527m) from services rendered, interest and similar income of €111m (70m), income of €29m (57m) from the release/reduction of miscellaneous provisions and provisions for bad and doubtful debts, and income of €30m (48m) from owner-occupied property, some of which is also leased out.
The other operating result includes the result from reinsurance treaties with insufficient risk transfer totalling €55m (43m), of which €51m (41m) derives from the life and health reinsurance segment.
Other securities available for sale Fixed-interest 3,637 4,857 Non-fixed-interest 1,359 672 Other securities at fair value through profit or loss Held for trading
Munich Re Group Annual Report 2017 37 Other non-operating result, impairment losses on goodwill and net finance costs
The effective tax burden is the ratio between the “taxes on income shown” and the “result before taxes on income (after “other tax”)”. In the 2017 financial year, there was tax relief of 315.0% (previous year: tax burden of 22.7%).
1 €79m impact of US tax reform, including the one-off taxation of reinvested foreign profits.
Munich Re Group Annual Report 2017 39 Disclosures on risks from life and health insurance business
The disclosures in the risk report largely adopt a purely economic view. The report provides an account of the organisation of risk management and Munich Re’s risk strategy, briefly outlines the main risks we are exposed to, and describes the economic risk capital calculated by means of our internal risk model. The report also contains information on specific risk complexes.
In the notes to the financial statements, we describe in detail uncertainties involved in measuring insurance contracts. For risks from financial instruments, IFRS 7 stipulates that the disclosures must comprise information on the remaining terms and the rating.
If provisions are covered by deposits retained on assumed reinsurance, the interest is directly secured by an inflow of investment income generally guaranteed by the cedants. Consequently, for provisions for which at least the discount rate is guaranteed by the cedants, there is no interest-rate risk. As in the previous year, cedants provide an interest-rate guarantee for all deposits retained.
In life primary insurance, an implicit or explicit interestrate guarantee is granted for the majority of contracts over their whole duration, based on a fixed interest rate applying at the time the contract is concluded. The discount rate used to calculate the provision for future policy benefits is identical with this interest rate for the majority of contracts in our portfolios. An appropriate minimum return needs to be earned in the long term from the investment result (possibly also with assistance from the technical result) for the contractually guaranteed benefits. In long-term health primary insurance, a discount rate is also used for calculating the provision for future policy benefits. However, this rate can generally be altered by way of premium adjustment. For short-term business, there is no direct interest-rate risk.
In primary insurance, the discount rates relevant for the portfolio in calculating the provision for future policy benefits and the provision for outstanding claims are as follows: The lump-sum option in the case of deferred annuity policies gives policyholders the option of having their annuity paid out in a single payment at a fixed date. As a result, there is a potential risk if an unexpectedly large number of policyholders exercise their option at an interest-rate level markedly higher than the discount rate used for the annuity calculation. But there is no direct interest-rate sensitivity or market sensitivity, since the exercise of the option by the policyholder is determined to a crucial extent by individual factors and relates to the insurance components.
Life Health Total €m 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year
Major losses in 2017 were mainly attributable to hurricanes Harvey, Irma and Maria. Further information on risks from large and accumulation losses can be found in the section on business performance, and in the risk report.
A particular sensitivity to reserve risks exists in the case of contracts with long run-off periods. This characteristic applies especially to casualty insurance, where liabilities may manifest themselves after a considerable latency period. Particularly with regard to asbestos insurance liabilities, we cover losses from policies taken out decades ago that manifest themselves after a latency period of as long as 30–50 years. In response, we have posted provisions for claims under long-cancelled general liability policies which provided coverage according to the legal environment applicable at that time.
Thereof losses from natural catastrophes –3,678 –929 –149 –537 –764 Thereof other accumulation losses –636 –613 –897 –625 –925
Reinsurance Primary insurance Total €m 31.12.2017 Prev. year 31.12.2017 Prev. year 31.12.2017 Prev. year
No personnel expenses for pension commitments were incurred for pension commitments to retired members of the Board of Management. After deduction of plan assets held by a separate entity (under a contractual trust agreement), there were no pension provisions or provisions for comparable benefits for retired members of the Board of Management or their surviving dependants.
Incentive Incentive Incentive Incentive Plan 2014 Plan 2015 Plan 2016 Plan 2017
Fair value 2017 for one right 0.00 € 457.30 € 482.59 € 508.69 € Number of rights (for 100% achievement of objectives) on 1 January 2014 0 0 0 0
Number of rights (for 100% achievement of objectives) on 31 December 2014 42,233 0 0 0 Number of rights (for 100% achievement of objectives) on 1 January 2015 42,233 0 0 0
Number of rights (for 100% achievement of objectives) on 31 December 2015 41,649 38,217 0 0 Number of rights (for 100% achievement of objectives) on 1 January 2016 41,649 38,217 0 0
Number of rights (for 100% achievement of objectives) on 31 December 2016 41,467 38,004 32,525 0 Number of rights (for 100% achievement of objectives) on 1 January 2017 41,467 38,004 32,525 0
Besides this, Munich Re has entered into various other financial obligations amounting to €395m (380m) for work and service contracts and €1,821m (1,265m) for investment obligations, of which €74m (79m) is from our investments in joint ventures. At the reporting date, there were loan commitments amounting to €1,093m (1,029m). These figures represent undiscounted nominal amounts. There are other financial commitments amounting to €7m (7m).
There are no other financial commitments of significance for the assessment of Munich Re’s financial position. No contingent liabilities have been entered into for the benefit of Board members.
The German public auditor responsible for carrying out the audit within the meaning of Section 24a(2) of the Professional Statutes of German Accountants/Certified Auditors (Berufssatzung WP/vBP) is Dr. Frank Ellenbürger. He first took charge of the audit of the Company and Group financial statements for the financial year ending 31 December 2013.
The carrying amounts of Group assets with restrictions on title can be found in the Notes to the consolidated balance sheet – Assets. The restrictions primarily result from contractual agreements, including pledged securities deposits to collateralise payment obligations from insurance business, the collateralisation of derivative transactions with securities and cash collateral or of bank liabilities with non-financial assets.
Individual national regulations require that assets held to cover insurance liabilities be managed separately. In principle, there are special supervisory regulations governing access to these assets and their use.
Our subsidiary Munich American Reassurance Company reported a negative earned surplus in its local financial statements as at 31 December 2017 (Statutory Accounting Principles). For this reason, the company can only pay dividends or transfer capital to the parent company with the approval of the competent US regulatory authority.
There were several finance leases for property at the balance sheet date, which are listed in the following table: Future minimum lease payments under operating leases €m 31.12.2017 Prev. year Up to one year 92 97 More than one year and up to five years 184 236 More than five years 133 162
Due dates 31.12.2017 Prev. year Gross Interest Net Gross Interest Net €m investment element investment investment element investment Minimum lease payments up to one year 0 0 0 0 0 0 Minimum lease payments of more than one year and up to five years 2 1 1 2 1 1 Minimum lease payments of more than five years 71 56 15 72 56 15
Under the share buy-back programme decided on by Munich Reinsurance Company’s Board of Management in March 2017, we repurchased a further 1.3 million Munich Re shares with a volume of €236m from the balance sheet date to the end of February 2018.
Earnings per share 2017 Prev. year Consolidated result attributable to Munich Reinsurance Company equity holders €m 375 2,580 Weighted average number of outstanding shares 154,060,991 159,975,155 Earnings per share € 2.44 16.13
The retrospective adjustment of the previous year’s figures did not result in a change to the earnings per share in the previous year (see Recognition and measurement – Changes in accounting policies and other adjustments). The number of outstanding shares decreased by 5,642,862 (5,880,298) over the course of the financial year 2017, essentially owing to the share buy-back programme.
List of shareholdings as at 31 December 2017 pursuant to Section 313(2) of the German Commercial Code (HGB)
ERGO Private Capital Gesundheit GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Komposit GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Leben GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Vierte GmbH & Co. KG, Düsseldorf 100.0000 ERGO Private Capital Zweite GmbH & Co. KG, Düsseldorf 100.0000 ERGO Sigorta A.Ş., Istanbul 100.0000 ERGO Versicherung Aktiengesellschaft, Düsseldorf 100.0000 ERGO Versicherung Aktiengesellschaft, Vienna 100.0000 ERGO Vida Seguros y Reaseguros S.A., Zaragoza 100.0000 ERGO Vorsorge Lebensversicherung AG, Düsseldorf 100.0000 ERGO životno osiguranje d.d., Zagreb 100.0000 ERV Evropská pojišťovna, a.s., Prague 90.0000 Euro-Center Holding SE, Prague 83.3332 Europaeiske Rejseforsikring A/S, Copenhagen 100.0000 EUROPÄISCHE Reiseversicherung Aktiengesellschaft, Munich 100.0000 Everything Legal Ltd., Bristol 100.0000 FAIRANCE GmbH, Düsseldorf 100.0000 Flexitel Telefonservice GmbH, Berlin 100.0000 Forst Ebnath AG, Ebnath 100.0000 FOTOUNO S.r.l., Brixen 100.0000 FOTOWATIO ITALIA GALATINA S.r.l., Brixen 100.0000 Fundo Invest Exclusivo referenciado di Munich Re Brasil, São Paulo4 98.2000 Gaucheret S.A., Brussels 100.0000 GF 65, Vienna4 100.0000 Global Standards LLC, Dover, Delaware 100.0000 Globality S.A., Luxembourg 100.0000 Great Lakes Insurance SE, Munich 100.0000 Group Risk Services Limited, London 100.0000 Groves, John & Westrup Limited, London 100.0000 Habiriscos – Investimentos Imobiliários e Turísticos S.A., Lisbon 100.0000 Hartford Steam Boiler (M) SDN BHD, Kuala Lumpur 100.0000 Hartford Steam Boiler (Singapore) Pte. Ltd., Singapore 100.0000 Hartford Steam Boiler International GmbH, Rheine 100.0000 HMV GFKL Beteiligungs GmbH, Düsseldorf 100.0000 HSB Brasil Serviços de Engenharia e Inspeção Ltda, São Paulo 100.0000 HSB Engineering Finance Corporation, Dover, Delaware 100.0000 HSB Engineering Insurance Limited, London 100.0000 HSB Engineering Insurance Services Limited, London 100.0000 HSB Group Inc., Dover, Delaware 100.0000 HSB International (India) Private Limited, Gujarat 100.0000 HSB Japan K.K., Minato-KU, Tokyo 100.0000 HSB Secure Services Inc., Hartford, Connecticut 100.0000 HSB Solomon Associates Canada Ltd., Saint John, New Brunswick 100.0000 HSB Solomon Associates LLC, Dover, Delaware 100.0000 HSB Specialty Insurance Company, Hartford, Connecticut 100.0000 HSB Technical Consulting & Service (Shanghai) Co., Ltd., Shanghai 100.0000 Ibero Property Portugal – Investimentos Imobiliários S.A., Lisbon 100.0000
MEAG German Prime Opportunities (GPO), Munich4 100.0000 MEAG HBG 1, Munich4 100.0000 MEAG HM Sach Rent 1, Munich4 100.0000 MEAG HMR 1, Munich4 100.0000 MEAG HMR 2, Munich4 100.0000 MEAG Hyperion Fund, Munich4 100.0000 MEAG IREN, Munich4 100.0000 MEAG Janus, Munich4 100.0000 MEAG Kapital 2, Munich4 100.0000 MEAG Kapital 5, Munich4 100.0000 MEAG Kubus 1, Munich4 100.0000 MEAG Lambda EUR EM Local, Grünwald4 100.0000 MEAG Lambda EUR, Grünwald4 100.0000 MEAG Lambda GBP, Grünwald4 100.0000 MEAG Lambda USD, Grünwald4 100.0000 MEAG Multi Life, Munich4 100.0000 MEAG Multi Sach 1, Munich4 100.0000 MEAG MUNICH ERGO AssetManagement GmbH, Munich 100.0000 MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH, Munich 100.0000 MEAG Munich Re Placement, Grünwald4 100.0000 MEAG New York Corporation, Wilmington, Delaware 100.0000 MEAG PEGASUS, Munich4 100.0000 MEAG Pension Invest, Munich4 100.0000 MEAG Pensionskasse Nord, Munich4 100.0000 MEAG Pensionskasse West, Munich4 100.0000 MEAG Premium, Munich4 100.0000 MEAG Prof III Beteiligungsgesellschaft mbH, Düsseldorf 100.0000 MEAG Property Fund I, Munich4 100.0000 MEAG Property Fund III, Munich4 100.0000 MEAG RenditePlus, Munich4 100.0000 MEAG REVO, Munich4 100.0000 MEAG SAG 1, Munich4 100.0000 MEAG Tandem, Munich4 100.0000 MEAG US Fonds, Munich4 100.0000 MEAG Venus, Munich4 100.0000 MEAG Vidas Rent 3, Munich4 100.0000 MEAG VLA, Munich4 100.0000 MedNet Holding GmbH, Munich 100.0000 MedWell Gesundheits-AG, Cologne 100.0000 Merkur Grundstücks- und Beteiligungs-Gesellschaft mit beschränkter Haftung, Düsseldorf 100.0000 Meshify Inc., Dover, Delaware 100.0000 MFI Munich Finance and Investment Holding Ltd., Ta’ Xbiex 100.0000 MFI Munich Finance and Investment Ltd., Ta’ Xbiex 100.0000 Midland-Guardian Co., Amelia, Ohio 100.0000 Midwest Enterprises Inc., Miami, Florida 100.0000 MR Beteiligungen 1. GmbH, Munich3 100.0000 MR Beteiligungen 16. GmbH, Munich3 100.0000 MR Beteiligungen 17. GmbH, Munich 100.0000 MR Beteiligungen 18. GmbH & Co. Immobilien KG, Grünwald2 100.0000 MR Beteiligungen 19. GmbH, Munich 100.0000