1 Adjusted pursuant to IAS 8. 2 Including amounts attributable to minority interests and policyholders.
4 Before elimination of intra-Group transactions across segments. 5 Adjusted pursuant to IAS 8.
Management report 43 Munich Re Group 45 Parameters 62 Business performance 69 Financial position 100 Other success factors 111 Corporate governance report 119 Prospects 131 Risk report 139
All our fields of business contributed substantially to last year’s record profit. And our very positive overall performance is not diminished by the fact that the profit for the year benefited from one-off income of around €400m due to the German tax reform and from an above-average investment result of €9.3bn. I attach particular importance in our operative business to the vision and the results being right, and I can say unreservedly that they are.
A word about the current turbulence on the global credit and financial markets, triggered by the crisis in the US market for subprime mortgages. We provided for extensive transparency at a very early stage, making clear that the subprime issue only resulted in relatively low costs for us – an initial estimate we were later able to confirm. This is certainly thanks in large measure to our pronounced scepticism towards the general assessment of credit risks. We believe that the risk spreads have almost always been too low in recent years, which is why we took such a restrained approach, especially to structured credit products. The relatively low impact of the crisis on us reflects this fact.
What do I expect for the business year 2008? Our financial goals are again ambitious in the current year. With another RORAC target of at least 15% and against the backdrop of increasing competition in reinsurance, we are aiming at a consolidated result of €3.0–3.4bn, which is around €200m more than the €2.8–3.2bn range set a year ago for 2007. We can achieve this excellent result by resolutely pursuing our strategy geared to sustained profitability and, as a primary insurer and reinsurer, selectively exploiting the opportunities that the global risk market presents.
Dr. Nikolaus von Bomhard Chairman of Munich Re’s Board of Management e_01_Inhalt_AktBrief_1-3 3e_01_Inhalt_AktBrief_1-3 3 10.03.2008 14:00:11 Uhr10.03.2008 14:00:11 Uhr
Winning is usually expressed in numbers. In sport, these may be times, distances or heights. In our business, they are data in the financial statements. For example, the record profit we achieved for the fourth time in a row. But numbers can scarcely reflect what else winning entails. They say little about the fitness needed to compete, the technique and ability required to break records, or the will and endurance essential to lasting success. Above all, figures do not reveal anything about the sheer joy of winning.
That is what we feel when we develop insurance solutions designed to protect livelihoods in Latin America and elsewhere. When, with intelligence and resolve, we take the sting out of the seemingly inevitable cycle. When we take the idea of legal expenses insurance to a culture where legal practice was previously based on Confucian tradition. When, in the booming CIS states, we take the lead in life reinsurance. And when we develop smart solutions to insure the Caribbean island states against windstorm losses. And this joy of winning spurs us on to ever greater success.
Since November 2007, a property policy has also been available for insuring houses, shops and goods. The perils covered include not only burglary, theft, robbery and fi re but also natural hazards. People with microbusinesses often live and work in poorly structured buildings situated in very vulnerable locations. Munich Re’s Geo Risks Research unit has calculated special insurance rates for these risks. As the sums insured are very low, the monthly premiums range between only US$ 0.3 and US$ 10. The third product, which is currently about to be marketed, is not directly related to microbusiness but covers the microbank’s liquidity in the event of an earthquake.
Munich Re is examining the potential of microinsurance not only in Latin America but also in other parts of the world. In Indonesia, for instance, special fl ood coverage could be an interesting proposition, and a study has already been carried out for this region in cooperation with GTZ, the German Society for Technical Cooperation. When devising microinsurance products, the watchwords are “simple and effi cient” – in distribution, in underwriting, and particularly in benefi t management, which primarily requires the swift and uncomplicated payment of a fi xed amount.
Since its formation in 2005, the Munich Re Foundation has also been closely involved with the subject of microinsurance, albeit at a different level. Given its objective – concerning itself the challenges of population growth and fi ghting poverty – the foundation is committed to creating sustainable structures for microinsurance and facilitating contact between those affected, insurers, regulatory authorities and fi nance institutions.
In November 2007, more than 300 experts from over 50 countries met to discuss the latest trends in this area at the third International Microinsurance Conference in Mumbai, an event organised by the Munich Re Foundation in collaboration with the CGAP Working Group on Microinsurance. The fact that every third conference participant was a representative from a private insurer bodes well for the future provision of this cover for the less well-off.
Small businesses like the one run by the ice-cream vendor in Bucaramanga, above, benefit from microinsurance, which gives them a buffer above the poverty line if they are hit by an insured event.
Microinsurance prevents business start-ups from falling below the poverty line if an insured event occursBusiness start-ups
In the past, reinsurers sometimes even fuelled this trend themselves. Since, in a favourable environment, they were able to achieve large profi ts on the capital markets, they expanded their market shares, practising “cash fl ow underwriting”, which frequently disregarded the technically required price for the reinsurance cover and focused only on growth. But what is the technically correct price? In calculating this fi gure, there was often a tendency to take a purely retrospective approach, determining the expected costs for future business on the basis of historical loss experience. But particularly in the light of growing climate change, we know that the past is no longer a reliable guide for the future: extreme events will increase, as will the economic and insured losses that they trigger.
Independent of the cycle: US insurer Midland insures not only classic cars but also watercraft, such as these boats in Boston Harbour.
In order to react faster and more incisively to new market developments, we are also making our operative units in property-casualty reinsurance more effective: by combining marketing and customer care for the respective markets in client management units and separating these functions from the actual underwriting, we will ensure that acknowledged experts are deployed in every position – on the one hand, dedicated client managers with excellent market knowledge and, on the other, technically skilled underwriters who can concentrate fully on the operative challenges. Special training courses support this organisational change, which we are also promoting through suitable incentives.
In the renewals at 1 January 2008, we demonstrated that this strategy can be successful even in a competitive environment where prices are coming under increasing pressure. We renewed some two-thirds of our treaty business in property-casualty and kept average price erosion down to 2.8%. The market values our capital strength and the fi rst-rate services we offer: in one-third of our treaty business, we benefi t from being the sole reinsurer or from having agreed special conditions. Excellence in underwriting, good client relationships, intelligent distribution channels and a well-diversifi ed portfolio – these are the platform for our continued high earnings potential in the future.
Dr. Oliver Büsse (Group Development) and Vanessa Schonder (Corporate Underwriting ) consider the perspectives of underwriting and Group strategy in their work on cycle management.
Ongoing processPrudent risk underwriting and monitoring e_02_Magazin_4-26 13e_02_Magazin_4-26 13 07.03.2008 18:55:11 Uhr07.03.2008 18:55:11 Uhr
One positive factor when it came to devising the company’s fi rst product of this nature outside Europe was that the basic legal set-up and main legal principles in South Korea are comparable with Western standards, having been infl uenced by German and American law in the 20th century. In designing the individual cover, D.A.S. was therefore able to draw on its enormous experience with such policies in 15 European countries. A particular challenge was to come up with a product that was cost-effective and affordable despite the monopoly lawyers enjoy under the law and the dominant position of the legal profession (altogether, there are only 8,000 lawyers in South Korea).
The authorisation process for D.A.S. Gwolli Boho Boheom Jusikhoesa is currently taking place. The new company is set to commence operations with its extensive range of products by summer 2008 at the latest.
– Lawyer’s fees – Court costs – Experts’ fees – Opposing party’s costs if case is lost – Bail – Interpreter’s fees – Costs of copies, postage, etc.
The new company is a joint ven ture: besides D.A.S. Rechtsschutzversicherung AG, Munich, with a stake of 75%, other partners are South Korean shareholders Green Fire & Marine Insurance (property insurer), CJ Home Shopping (whose business includes marketing insurance on television) and the legal services provider Law Market Asia. The Munich company’s wealth of experience in legal protection and the franchise strength of the Korean partners are a perfect com bination for tapping the potential of this new niche market. Close cooperation between staff in Munich and Seoul, where the company has just moved into its new offi ce premises, secures the necessary knowledge transfer and will le verage the new product’s success. Over a fi ve-year period, an insurance portfolio with a volume of €25m is to be built up, although this fi gure is based on a very conservative prognosis. The market potential is estimated at several hundred million euros in the medium to long term.
The careful preparation of the whole project and the convincing negotiations that D.A.S. representatives conducted with the authorities in recent months promise swift progress in obtaining authorisation from the South Korean fi nancial supervisory authority. D.A.S. legal expenses insurance is scheduled to be launched in South Korea in summer 2008 at the latest. Then those who want to be sure of protecting their rights if a dispute arises can take out insurance – with the certainty that they will not have to run fi nancial risks in order to get justice.
Dr. Dong-Ho Lee, general manager of D.A.S. Gwolli Boho Boheom Jusikhoesa in Korea, will be launching an innovative product on a market in which tradition is all-pervasive.
The joy of winning e_02_Magazin_4-26 19e_02_Magazin_4-26 19 07.03.2008 19:00:11 Uhr07.03.2008 19:00:11 Uhr
To enjoy carefree days like these pensioners in St. Petersburg, people in the CIS states will have to make provision for their old age in future.
The joy of winning e_02_Magazin_4-26 20e_02_Magazin_4-26 20 07.03.2008 19:00:15 Uhr07.03.2008 19:00:15 Uhr
Ralf Linder (left), responsible for life business in central and eastern Europe, and Dmitri Demidov (right), now head of the subsidiary in Moscow, built up the new company together.
The joy of winning e_02_Magazin_4-26 21e_02_Magazin_4-26 21 07.03.2008 19:00:16 Uhr07.03.2008 19:00:16 Uhr
Motivated by the terrible damage wreaked by the 2004 hurricane season, which claimed thousands of lives in the Caribbean, the World Bank set about planning a viable insurance solution for this region. The island states, while particularly exposed, had no adequate means of insuring themselves against natural catastrophe losses and the fi nancial consequences. Their economic situation was all the more precarious because storm losses also wiped out their main sources of income, tourism and agriculture. The only relief was provided by donor countries via the World Bank, but this aid was usually not paid out to the countries affected until weeks or months after the event – too late to repair the worst damage or to help the people in the regions hardest hit.
Given our expertise in this area, the Word Bank approached Munich Re at the beginning of 2006 to ask for our support with the project. Our experts examined the concept and also the trigger function (which ensures that the parametric criteria are related as closely as possible to the probable losses in each individual country) and proposed several modifi cations.
Munich Re Group Annual Report 2007 e_02_Magazin_4-26 24e_02_Magazin_4-26 24 07.03.2008 19:00:53 Uhr07.03.2008 19:00:53 Uhr
The CCRIF carries losses of up to US$ 10m per year itself and has obtained additional cover of US$ 110m. This is placed on the reinsurance market but also on the cap ital markets where, for risks of US$ 20m, Munich Re’s Risk Trading Unit designed a natural catastrophe swap, which was concluded between the Word Bank and the CCRIF. Under an identical swap between the World Bank and Munich Re, these risks were subsequently passed on to Munich Re. This means that for the fi rst time emerging countries, too, are indirectly using the capital market to cover natural catastrophe risks.
Threatened paradise: Previously, the Caribbean island states were scarcely able to insure themselves against natural catastrophes. Thomas Raab (left), Underwriting Manager for the Caribbean, and Andreas Moser (right) from the Innovative Solutions Team, worked successfully to change this.
International Health expands US business By purchasing the US health insurer Sterling Life Insurance Company, Munich Re further develops its International Health segment and strengthens its competence as a global provider of integrated health management solutions, particularly in growth markets for seniors. Munich Re America HealthCare also consolidates its business relationship with the US company Cairnstone, a leading provider of stop-loss covers for US employers, by increasing its stake in the company to 100%. Page 79
Notable events in 2007 e_02_Magazin_4-26 26e_02_Magazin_4-26 26 07.03.2008 19:00:55 Uhr07.03.2008 19:00:55 Uhr
Munich Re Group in 2007 Members of the Board of Management 28 Report of the Supervisory Board 30 Munich Re shares 34 Strategy 40
Munich Re Group Annual Report 2007 27 e_03_MR-Gruppe_27-33.indd 27e_03_MR-Gruppe_27-33.indd 27 08.03.2008 9:12:20 Uhr08.03.2008 9:12:20 Uhr
Dr. jur. Nikolaus von Bomhard Chairman of the Board of Management Chairman of the Group Committee Born 1956, lawyer, with Munich Re since 1985 – Group Investments – Group Development – Press – Internal Audit – Executive Offices,
Dr. rer. pol. Thomas Blunck Born 1965, graduate in business management, with Munich Re since 1999 – Special and Financial Risks – Central Procurement – Organisational Design and
Munich Re Group Members of the Board of Management e_03_MR-Gruppe_27-33 29e_03_MR-Gruppe_27-33 29 10.03.2008 15:10:23 Uhr10.03.2008 15:10:23 Uhr
The Board of Management consulted us in good time on all decisions of fundamental significance and informed us regularly and comprehensively about all important business transactions, thus satisfying its reporting obligations towards the Supervisory Board at all times. We discussed its written and oral reports thoroughly at our meetings. The Board of Management was open and cooperative in every respect as regards the Supervisory Board’s suggestions and proposals for improvement. Collaboration was constructive and characterised by a spirit of trust.
Focal points of the meetings Four meetings of the Supervisory Board took place in 2007. Apart from one of the full Supervisory Board meeting, where two members were unable to attend, there was full attendance on each occasion. Once again, a representative of the German Federal Financial Supervisory Authority (BaFin) took part as a guest at two of the meetings. In addition, resolutions were twice adopted by written consent in lieu of a meeting.
Munich Re Group Annual Report 2007 e_03_MR-Gruppe_27-33.indd 30e_03_MR-Gruppe_27-33.indd 30 08.03.2008 9:12:23 Uhr08.03.2008 9:12:23 Uhr
We continued to monitor the business situation of Munich Re America very closely. Other focal points of our work were compliance and anti-fraud, where the Board of Management gave us a wide-ranging overview of the preventive measures that Munich Re has taken to date. Besides this, we received ongoing information on the Changing Gear programme and the related change in corporate culture. The Supervisory Board welcomes this initiative of the Board of Management, which involves significant measures to boost efficiency and profitable growth and to increase the share price.
In preparing for the 2007 Annual General Meeting, we concerned ourselves inter alia with share buy-backs – for the first time also by means of derivatives – and the use of the shares acquired, as well as with amendments to the Articles of Association and with a domination and profit-transfer agreement with DKV International Health Holding AG. We naturally also discussed at length the Company financial statements and the Group financial statements for the previous financial year (2006). Beyond this, we dealt at our meetings with special topics from the Group primary insurance segment, such as ERGO in the light of industrialisation in the insurance sector, and with the question of how economic value can be created in insurance companies using investments.
Work of the committees The composition of the committees of the Supervisory Board (Standing Committee, Personnel Committee, Audit Committee, Nomination Committee and Conference Committee) is shown in the overview on page 59.
The Standing Committee met three times in 2007, devoting itself mainly to the preparation of Supervisory Board meetings, topics of corporate governance, and reports on the development of the shareholders’ register.
Munich Re Group Annual Report 2007 e_03_MR-Gruppe_27-33.indd 31e_03_MR-Gruppe_27-33.indd 31 08.03.2008 9:12:24 Uhr08.03.2008 9:12:24 Uhr
concerned itself several times with compliance and fraud topics in the Group. At the suggestion of the Chairman of the Audit Committee, the Compliance Officer will in future report regularly in person to the Audit Committee on these issues. This occurred for the first time at the meeting on 24 February 2008. Another topic dealt with in depth was active capital management by the Board of Management, particularly the share buy-back programme and the raising of additional hybrid capital.
The Nomination Committee was established at the end of 2007. Its task is to propose to the Supervisory Board suitable candidates for election as shareholders ’ representatives by the Annual General Meeting. The committee will begin its work in 2008.
Dr. Schmidt as Chairman of the Audit Committee, and I as Chairman of the other committees, provided detailed information on the committees’ work at the meetings of the full Supervisory Board.
Corporate governance Munich Re’s Supervisory Board concerned itself on an ongoing basis with and declaration of conformity the further development of corporate governance topics. In response to changes in the German Corporate Governance Code, we have expanded the Supervisory Board‘s rules of procedure so that the Audit Committee’s duties now include the topic of compliance, and a nomination committee has been established. In the year under review, the Standing Committee examined the efficiency of our Supervisory Board activities on the basis of an extensive questionnaire distributed to the full Supervisory Board. It subsequently considered the results, which it used to develop improvement proposals to be discussed by the full Supervisory Board. Further information on corporate governance is available in the joint corporate governance report of the Board of Management and Supervisory Board on page 119 ff.
In November 2007, the Board of Management and Supervisory Board submitted their annual declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act, which can be read on page 122 of this report and on the Company’s website.
Company and Group KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsfinancial statements prüfungsgesellschaft audited the following documents and gave them an unqualified auditor‘s opinion: Munich Reinsurance Company‘s financial statements and Group financial statements as at 31 December 2007, and the management reports for the Company and the Group. The auditor’s reports were sent without delay to all members of the Supervisory Board. At its meeting on 24 February 2008, the Audit Committee conferred in detail about the preliminary year-end figures as at 31 December 2007 and, on 10 March 2008, prepared the Supervisory Board‘s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. In this context, it examined in advance the Company financial statements and Group financial statements, the management reports and the Board of Management ‘s proposal for appropriation of the net retained profits. It discussed them closely with the auditor, who was present at the meeting, and also gave consideration to the auditor‘s reports. The Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting on 11 March 2008.
Subsequent to the Audit Committee, the Supervisory Board also checked the Company financial statements, the Group financial statements, the Company management report, the Group management report and the proposal of the Board of Management for appropriation of the net retained profits. After conducting its own concluding examination, the Supervisory Board had no objections to the Company financial statements and Group financial statements, and agreed with the outcome of the external audit. On the basis of the Audit Committee‘s prior examination and the result of its own examination, the Supervisory Board approved the Company financial statements and Group financial statements at the balance sheet meeting on 11 March 2008. The Supervisory Board also agreed with the Board of Management‘s proposal for appropriation of the net retained profits.
Words of thanks to the Board The Supervisory Board wishes to thank the members of the Board of of Management and employees Management and all staff members in the Group for their successful work and great personal commitment, which was a major factor in the excellent business performance. Also worthy of special mention in this context is the palpable willingness throughout the Group to live the corporate culture together.
Munich Re Group Annual Report 2007 e_03_MR-Gruppe_27-33.indd 33e_03_MR-Gruppe_27-33.indd 33 08.03.2008 9:12:24 Uhr08.03.2008 9:12:24 Uhr
After the banking sector, insurance company stocks were among the biggest losers in the stock market year 2007, with the MSCI insurance index falling by 11.9%.
Munich Re shares started 2007 at €130.42. After a subdued beginning, the share price fell to its year low of around €112 in mid-March. Our spring announcement of the Changing Gear initiative, coupled with our excellent business results, ensured that the share price rose strongly until the start of June, with investors particularly rewarding Munich Re’s continued pursuit of active capital management and our intention to pay out more than €8bn to shareholders by the end of 2010 through share buy-back programmes and dividends.
The stock markets experienced considerable volatility in 2007. Financial stocks in particular suffered in the second half-year from the mortgage loan crisis in the USA. Munich Re shares were one of the few European insurance stocks whose price developed positively.
Dividend to increase again On the basis of the record result in 2007, the dividend proposal of the Board of Management and Supervisory Board at the Annual General Meeting on 17 April 2008 will be the payment of an increased dividend of €5.50 per share (€1.00 higher than last year). Altogether, we will thus distribute a record amount of €1,124m (988m) to shareholders.
With a dividend yield of approximately 4.1% (in relation to the year-end share price), Munich Re shares remain an attractive equity investment, which is also included in the DivDax, a subindex of Deutsche Börse AG that features the 15 DAX companies with the highest dividend yields.
In former years, Munich Re’s dividend remained more or less constant, independent of results. Since 2004, we have been pursuing a more flexible dividend policy – in conjunction with our active capital management – where the amount distributed mainly depends on the result for the year and our capital requirements. Nonetheless, our aim is to pay out at least 25% of the annual result to our shareholders. For the financial year 2007 and the next two years, we have announced a minimum dividend of €1bn.
This share buy-back, with a total value of €2bn, was already completed by the end of January 2008, with Munich Re repurchasing 15.1 million shares at an average price of €131.96. Further details of the share buy-back programme can be viewed under Investor Relations > Our Shares >> Share buy-back at www.munichre.com.
Munich Re Group Munich Re shares e_04_Aktie_34-42 35e_04_Aktie_34-42 35 07.03.2008 16:50:22 Uhr07.03.2008 16:50:22 Uhr
Share profile Munich Re shares are no-par-value registered shares. Each share carries one vote. First admitted for trading on the stock exchange in Munich on 21 March 1888, they are today listed on all the German stock exchanges. The major part of the trading (99.0%) takes place on the electronic platform Xetra.
In the year under review, the average daily turnover of Munich Re shares amounted to €295m, putting us in eleventh place among the DAX stocks at year-end 2007. In terms of market capitalisation, we ranked 12th, with nearly €29bn.
Munich Re Group Munich Re shares e_04_Aktie_34-42 36e_04_Aktie_34-42 36 07.03.2008 16:50:22 Uhr07.03.2008 16:50:22 Uhr
Private investors 6.9% Free float 1 Percentage of share capital at 31 December 2007. Source: Munich Re share register
Munich Re Group Munich Re shares e_04_Aktie_34-42 37e_04_Aktie_34-42 37 07.03.2008 16:50:22 Uhr07.03.2008 16:50:22 Uhr
Changing Gear, primarily in the USA and Europe. Management also held over 150 individual meetings with investors and analysts at our offices. Additionally, as in previous years, Munich Re participated in several investor conferences staged by various investment banks.
Our work again received recognition from external specialists last year. Based on a survey of sell-side analysts, Munich Re received the award for “Most Improved Investor Relations” in the European insurance sector from the Institutional Investor Research Group.
We publish all important investor relations information on our website. The service pages of our shareholder portal (www.munichre.com/register) offer our shareholders various facilities, such as registering to receive documents for the Annual General Meeting by e-mail or updating their registered shareholder data online.
Information regarding our forthcoming Annual General Meeting on 17 April 2008 can be found on our website www.munichre.com/agm and in the dedicated section of our shareholder portal at www.munichre.com/register.
Munich Re Group Munich Re shares e_04_Aktie_34-42 38e_04_Aktie_34-42 38 07.03.2008 16:50:22 Uhr07.03.2008 16:50:22 Uhr
Current bonds issued by the Munich Re Group Issuer Munich Reinsurance Company Munich Re America Inc.
Volumen €1.5bn €3.0bn4 £300m4 US$ 0.5bn 1 First callable on 12 June 2017.
2 First callable on 21 June 2013. 3 First callable on 21 June 2018.
To improve its capital structure, Munich Re issued another subordinated bond with a volume of €1.5bn on 12 June 2007. It is a perpetual bond and callable by Munich Re from ten years after the date of issue. Up to then, it will have a fixed coupon rate of 5.767% and thereafter a floating rate. This bond closed the year at 94.6%.
The prices of the subordinated bonds issued in 2003 fell in 2007 as a result of the upheavals on the credit markets. At year-end, the euro tranche was listed at 105.3% and the pound-sterling bond at 109.6%. Munich Re America’s senior bonds closed the year at 107.3%.
Other capital market instruments of the Munich Re Group 39Munich Re Group Annual Report 2007
Munich Re Group Munich Re shares e_04_Aktie_34-42 39e_04_Aktie_34-42 39 07.03.2008 16:50:22 Uhr07.03.2008 16:50:22 Uhr
In recent years, we have continually refined the strategic guidelines that govern our business policy, and presented these in our annual reports. In the 2007 financial year, our application of these guidelines was again key to our success. 2007 was also the year we embarked on our Changing Gear programme for profitable growth. Our objective is and will remain a sustained increase in Group earnings per share via controlled risk.
With our integrated business model, we utilise synergies between primary insurance and reinsurance, opening up profitable new business opportunities.
We aim to achieve these ambitious goals by concentrating on three main areas: – Ambitious growth targets – Best in class – Capital efficiency
From these, we derive concrete measures and initiatives for each of the three current business segments.
In the primary insurance business segment, which in terms of economic weight is dominated by ERGO, our aim is to firmly establish ERGO’s position among the leading European primary insurers. Profitability definitely comes first in the primary insurance sector as well, which is made absolutely clear by our ambition to increase annual profits to over €900m by 2012.
ERGO has a five-pillar strategy for the realisation of these targets by 2012: – Reinforcing franchise strength – Realigning offerings for the private-provision market – Increasing the share of international business – Optimising the capital structure – Strengthening entrepreneurial initiative
ERGO expanding selectively abroad Germany is ERGO’s home market. Apart from the option of market-consolidating mergers, the majority of the growth we aspire to even in the crowded German market is mainly realisable organically. The reinforcement of franchise strength is therefore the focal point of a specially targeted initiative. By contrast, expanding business by founding and acquiring new subsidiaries makes sense in selected international markets which are critical to the success of ERGO’s expansion strategy due to their economic significance, growth and profitability potential. Besides southern and – especially – eastern Europe, these include India, China and a number of other particularly promising Asian markets. In recent months, we have made acquisitions in the primary insurance business segment that illustrate this thrust. We remain open to other strategically and economically viable acquisitions as long as the prices and profitability prospects are right and the countries concerned fit in with our international strategy.
Munich Re Group Strategy e_04_Aktie_34-42 42e_04_Aktie_34-42 42 07.03.2008 16:50:23 Uhr07.03.2008 16:50:23 Uhr
Financial position Analysis of our capital structure 100 Asset-liability management 101 Capital management 101 Group equity 103 Information in accordance with Section 315 para. 4 of the German Commercial Code and explanatory report of the Board of Management 104 Strategic debt 106 Group solvency 107 Rating 108 Analysis of the consolidated financial statements 109
The reinsurance companies in our Group operate globally. Our primary insurers traditionally concentrate on Germany and European markets with strong growth, but are now looking to extend their activities to high-potential Asian markets such as Korea, India or China. We conduct our business from our respective headquarters and also via a large number of branches, subsidiaries and affiliated companies in such countries as the USA, Canada, the UK, France, Spain, Italy, Poland, Switzerland, China, India, Korea, South Africa, and Australia. Domination and profit-transfer agreements are in place with many subsidiaries, especially between the ERGO Versicherungsgruppe AG and its subsidiaries. In 2005, Munich Reinsurance Company and the ERGO Insurance Group adopted a Group directive governing the distribution of responsibilities and competencies between Group management and ERGO with regard to key decisions. As a result, there is “unified control” within the meaning of the German Stock Companies Act.
This management report summarises the activities of our Group according to the business fields of reinsurance, primary insurance and asset management rather than on the basis of the Group’s legal or corporate structure. Such segmentation is determined by how we manage our business internally. The International Health field of business has not yet reached a size that would justify separate presentation. Information on the health business written (reinsurance worldwide and primary insurance outside Germany) is therefore included in the relevant primary insurance and reinsurance segments.
Reinsurance Primary insurance e_05_Lagebericht_43-61 45e_05_Lagebericht_43-61 45 07.03.2008 16:50:05 Uhr07.03.2008 16:50:05 Uhr
Reinsurance group Of the gross premiums totalling €21.5bn written in 2007, around 66% came from property-casualty and 34% from life and health business.
As at 31 December 2007, our reinsurance business was organised in seven divisions. Overall responsibility for the client accounts always lies in one pair of hands, but as part of Changing Gear we are adjusting our set-up with effect from 1 April 2008 to the new requirements in our business environment by creating Client Executive positions and separate underwriting units in the divisional units. The operative divisions are also responsible for our business units abroad, including our subsidiaries.
Our Europe and Latin America Division is responsible for the property-casualty business of our clients from Europe (except Germany) and Latin America.
The Germany, Asia Pacific and Africa Division takes care of property-casualty business with our German clients and with cedants in Africa, Asia, Australia and the Pacific Islands.
Corporate Underwriting/Global Clients handles our accounts with major international insurance groups (hence “Global Clients”) and writes business worldwide in special classes such as agriculture, workers’ compensation and marine. Moreover, it performs an important corporate underwriting function for the reinsurance group in the property-casualty segment: its staff clarify fundamental, cross-divisional issues of underwriting policy, oversee quality assurance, integrate mathematical methods into our business processes, and set standards for claims management.
Atlanta, Brisbane, Chicago, London, Munich Reinsurance Company of Australasia Melbourne, Moscow, Mumbai, Perth, Munich American Reassurance Company Santiago de Chile, Sydney, Toronto, Munich Reinsurance Company Canada Branch (Life) Waltham, Warsaw Munich Reinsurance Company UK Life Branch Munich Reinsurance Company Life Reinsurance Eastern Europe/Central Asia
Beijing, Hong Kong, Kolkata, Munich Reinsurance Company Beijing Branch Kuala Lumpur, Mumbai, Shanghai, Munich Reinsurance Company Singapore Branch Seoul, Singapore, Taipei, Tokyo Munich Reinsurance Company Hong Kong Branch Munich Reinsurance Company Malaysia Branch Munich Reinsurance Company Korea Branch
Geneva, London, Munich, New York New Reinsurance Company Great Lakes Reinsurance (UK) Munich American Capital Markets Munich-American RiskPartners GmbH
London Munich Re Underwriting MSP Underwriting e_05_Lagebericht_43-61 47e_05_Lagebericht_43-61 47 07.03.2008 16:50:05 Uhr07.03.2008 16:50:05 Uhr
Primary insurance group The second pillar of the Munich Re Group is primary insurance business. Beyond our core markets of Germany and Europe, we are seeking to develop business in Asian primary insurance markets long term.
1 Only ERGO companies with a premium volume of more than €50m are listed by name.
Management report Munich Re Group 95% of our premium income derives from the ERGO Insurance Group, which is made up of the long-established German companies Victoria, Hamburg-Mannheimer, DKV and D. A. S., and also KarstadtQuelle Versicherungen. ERGO’s main companies outside Germany are the life insurer ERGO Previdenza in Italy, the health insurer DKV Seguros in Spain, the Polish property-casualty insurer ERGO Hestia, and the Turkish ERGO-İsviçre Group. ERGO’s life, health and property-casualty segments are managed centrally; its individual brands provide significant franchise strength and enjoy a high profile among clients. ERGO’s marketing strategy is built on the interplay of different distribution channels. Apart from its own strong sales organisations and direct selling, its wide variety of broker relationships and extensive banking cooperation with the UniCredit Group are important.
Our primary insurance segment also comprises Europäische Reiseversicherung, the Watkins Syndicate, and the assistance services provider Mercur Assistance. With numerous subsidiaries and affiliated companies in 12 countries, as well as a network of strategic cooperation agreements, Europäische Reiseversicherung is an effective international alliance. Its most important product is travel cancellation insurance.
The Watkins Syndicate, which operates within Lloyd’s of London and has been part of the Munich Re Group since 1997, specialises in marine insurance business. It has taken advantage of the favourable conditions over the last few years to significantly strengthen its market position. Today it is the largest marine insurance syndicate at Lloyd’s and is represented in the UK, Hong Kong, Singapore and Dubai.
Our International Health Board, established in 2006, manages international health primary insurance and global reinsurance activities across all segments.
Asset management MEAG MUNICH ERGO AssetManagement GmbH combines Munich Re’s and the ERGO Insurance Group’s investment activities. Virtually the entire asset management of the Munich Re Group has been concentrated in MEAG, which at the end of 2007 had a total of around €172bn in Group assets under management. The subsidiary MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH is one of the major investment fund companies in Germany, managing around €9bn in special and retail funds.
Value-based management – The Munich Re Group’s objective is to analyse insurable risk from every conMunich Re’s management ceivable angle and to assess and diversify it, thereby creating lasting value philosophy for its shareholders, clients and staff. A guiding principle of our entrepreneurial thinking and activity is to increase Munich Re’s share price on a sustained basis. This is also the aim of our active capital management, be it through the payment of dividends or the repurchasing of shares if added value cannot be created for our shareholders through other measures. The main features of our shareholder value approach in practice are the consistent application of value-based management systems within the Group.
Besides value-based performance measures, we observe a range of important additional conditions in managing our business. These conditions may be reflected in supplementary targets within the Group, or in isolated cases may even determine a unit’s short-term orientation in a particular situation. They include the rules of local accounting systems, tax aspects, liquidity requirements, and supervisory parameters.
Our value-based management is characterised by the following aspects: – We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed, which is material in measuring added value. Only the risk-return relationship reveals how beneficial an activity is from the shareholder point of view.
– With clearly defined value-based performance indicators, we ensure the necessary comparability of alternative initiatives as a basis for setting priorities.
Our value-based management In our non-life business, which is mainly of a short-term nature, we employ system takes into account the the following simple formula for measuring the value added annually by our individual characteristics of the insurance business and for managing and monitoring our business activities: business segments
The products of life primary insurance and reinsurance, and the bulk of our health primary insurance business, are characterised by their long-term nature and the distribution of results over the duration of the policies. For valuing such long-term portfolios, whose performance cannot be reasonably measured on the basis of a single year, we follow the Principles and Guidance of European Embedded Value, published by the CFO Forum in May 2004.
The development of the insurance portfolio is modelled according to the current expectations for biometrics, lapses and costs. In primary insurance, the participation of policyholders in surplus is modelled according to the current planning and in line with the statutory regulations, and thus taken into account in the valuation. The rates used for determining the participation in surplus are shown in Note (22) in the notes to the financial statements. The embedded value is also shown after deduction of taxes to be paid by the Group in connection with the valued business. For the individual companies, the tax rates and calculations used are based on national regulations; in addition, tax loss carry-forwards are included in the calculation. Withholding taxes on dividends of Group companies are disregarded. The cost of holding capital includes not only the taxes and costs of investment management but also the not explicitly modelled risks of the business and, for primary insurance, the participation of policyholders in profits.
The change in embedded value within one year, adjusted for effects of exchange rate fluctuations, acquisition or sale of companies, dividends and capital injections, is shown by us as the total embedded value earnings. Adjustments to eliminate the influences of changes in fiscal and capitalmarket parameters give the operating embedded value earnings, which are a measure of the operative business performance for one year.
Our steering of Munich Re’s investments is strongly geared to the structure of the liabilities on our balance sheet. With the help of asset-liability management, we determine the “economic neutral position“. This involves a synthetic investment portfolio which – taking into consideration significant additional parameters in the investment of capital – best reflects the characteristics of our liabilities towards clients.
As part of an optimisation process, a benchmark portfolio is developed that takes account of our own risk-bearing capacity and other investor preferences on the basis of long-term expectations of capital market yields. Our asset manager MEAG is responsible for implementing this strategic benchmark portfolio based on the market view for the respective financial year. The target return, i.e. the expected income from the benchmark portfolio, is compared with the return from the actual portfolio, bearing in mind the risk capital required for deviating from the benchmark portfolio. MEAG’s performance is measured in terms of the excess return it achieves.
In 2007, paid claims and the change in claims provisions in the property-casualty primary insurance segment (including legal expenses insurance) totalled €2,569m (2,218m) and net operating expenses €1,520m (1,390m), compared with net earned premiums of €4,380m (3,975m). Our combined ratio in primary insurance thus amounts to 93.4% (90.8%) – an excellent figure both in absolute terms and in comparison with competitors.
When it comes to interpreting the combined ratio, the particular circumstances of the class of business in question have to be taken into account. The composition of the portfolio, for example, is of great significance. The following factors (among others) are important: – The more the claims burden fluctuates over time, the greater the risk is, and so the premiums needed to cover the risk must be higher. Loss ratios in good years, as well as average loss ratios, have to be all the lower to provide the reinsurer with an adequate return for assuming this risk. This is particularly true in the case of natural catastrophes, which may occur rarely, but are often very severe when they do.
– Another important distinguishing feature relates to the time-lag between premiums being received and claims being paid. The longer these periods are, the longer the premiums received can be invested in the capital markets. High combined ratios in classes of business in which claims settlement takes a long time (e.g. casualty) therefore generally entail higher returns from investments with which the loss reserves are covered. These returns are not reflected in the combined ratio.
Rather, the key factor we consider is economic value added, which cannot be properly reflected by the combined ratio. We pursue this target internally through the performance indicator of value added, which measures value creation not only on the basis of current and forecast profits but also taking into account the size of the risks assumed. Thus, when considering Group performance, we gear targets (by way of a common, linking element) to a risk-adjusted return. Although this is not a direct performance measure, it is a strong indication of the Group’s value creation.
RORAC is defined as follows: The numerator in the formula comprises the published IFRS net income adjusted for post-tax income (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. The basis for the adjustment is the capital exceeding the necessary risk-based capital (additional available equity). This is calculated as follows: the starting point is the equity recognised in the IFRS financial statements, from which the “economic equity“ is derived by means of various adjustments. These include the addition of the unrecognised valuation reserves and the unrecognised portion of the embedded values in life and health insurance, and the subtraction of goodwill and deferred tax assets. From this economic equity a margin is deducted for the settlement of expected claims payments in following years. The difference between the amount then remaining and the required risk-based capital is the additional available equity, which is also necessary for rating and solvency purposes, as well as for profitable growth, but which we strive to keep lean through our active capital management. This is because the additional available equity in the system presented here only earns a risk-free interest rate, as all the risk components of the investment and underwriting are covered with risk-based capital by the internal risk model, and thus assigned return requirements. Even though we take a risk-adjusted return as our target, we aspire to meet the high, but fair expectations of our investors also with regard to the return on total capital placed at our disposal.
At what level should the Our RORAC target is a sustained return on risk-adjusted capital of 15% over RORAC target be set? the whole market cycle. We will not finalise and publish the risk-adjusted capital applicable for 2008 until May, when we have comprehensively assessed our current risk positioning. As things stand, however, our assumption is that the RORAC figure will correspond to an expected consolidated profit of between €3.0bn and €3.4bn, which is equivalent to a return on IFRS equity ranging from 11.5% to 13.0%.
What assumptions is this In both primary insurance and reinsurance, we are proceeding on the basis of target based on? statistically expectable claims experience. Provided there are no significant shifts in the composition of our business portfolio, we reckon with a combined ratio in the order of 98% in property-casualty reinsurance, which includes an amount of 6.5% of net earned premiums as projected claims expenditure for natural catastrophes. In property-casualty primary insurance, we expect a combined ratio of under 95%.
On the investment side, we anticipate a result equivalent to around 4.5% of the average market values of the investments.
Embedded values as additional In life primary insurance and reinsurance and in German health primary performance indicators insurance, European Embedded Value (EEV) is one of the foundations of our value-based management.
We aim to achieve EEV earnings of between 8% and 9% both in primary insurance and reinsurance business in relation to the value of the overall business in force at the beginning of the year. The life and health primary insurance business, managed and measured on an embedded-value basis, will contribute to the IFRS consolidated profit and thus to reaching the RORAC target, even though IFRS consolidated results follow the narrower individual financial -year perspective.
We are convinced that we are on the right track with the key performance indicators of RORAC and embedded value. Taking into account all the relevant factors, we consider that our targets are economically meaningful – ambitious, but attainable nonetheless.
In primary insurance, we write both personal lines and commercial business. This results in a heterogeneous portfolio of risks. We therefore have line- and segment-related guidelines for pricing and underwriting designed to ensure the requisite risk balance in the community of policyholders. In addition, the actuaries responsible (life and health insurance) and the heads of the actuarial departments (property-casualty insurance) make sure that pricing is appropriate and that sufficient reserves are set up to cover the obligations assumed. We regularly check by means of independent audit processes whether these guidelines are appropriate.
Dr. rer. pol. Thomas Blunck Special and Financial Risks Central Procurement (from 1 January 2008) Organisational Design and Development (from 1 March 2007) Information Technology
Dr. jur. Heiner Hasford (until 28 February 2007) Group Investments, Corporate Finance, M&A Legal and Regulatory Affairs, Compliance General Services Organisational Design and Development
Dr. rer. nat. Torsten Jeworrek (Chairman of the Reinsurance Committee) Corporate Underwriting Global Clients (until 31 December 2007, from 1 October 2007 together with Dr. Röder) Reinsurance Investments Accounting, Controlling and Central Reserving for Reinsurance
John Phelan (until 31 December 2007) North America (from 1 October 2007 together with Dr. Röder)
Dr. jur. Jörg Schneider Group Accounting Group Controlling Corporate Finance, M&A (from 1 March 2007) Integrated Risk Management Legal and Regulatory Affairs, Compliance (from 1 March 2007) Taxes Investor and Rating Agency Relations
Human Resources Life and Health (until 28 February 2007) Life (from 1 March 2007) HealthCare (from 1 March 2007)
Wolfgang Mayrhuber Chairman of the Board of Management of Deutsche Lufthansa AG
Prof. Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Former Chairman of the Supervisory Board of Siemens AG
Personnel Committee Dr. Hans-Jürgen Schinzler (Chairman) Herbert Bach Dr. Bernd Pischetsrieder
Dr. rer. pol. Thomas Blunck – Global Aerospace Underwriting Managers Ltd. (GAUM), London New Reinsurance Company, Geneva2 (Chairman)
John Phelan – Munich Re America Corporation, Wilmington, (until 31 December 2007) Delaware2 (Chairman) Munich Reinsurance America Inc., Princeton2 (Chairman) Munich Reinsurance Company of Canada, Toronto2
Dr. oec. publ. Wolfgang Strassl DKV Deutsche Krankenversicherung AG2 – Hamburg-Mannheimer Sachversicherungs-AG2
Mecklenburgische Leben Versicherungs-AG 1 Status: 31 December 2007 (in the case of members who have left the Board of Management, the information shows the status at the date of their departure). 2 Own group company within the meaning of Section 18 of the German Stock Companies Act.
Dr. jur. Hans-Jürgen Schinzler METRO AG UniCredit S. p. A., Genoa Chairman
Ulrich Hartmann Deutsche Bank AG Henkel KGaA Deutsche Lufthansa AG E.ON AG (Chairman) IKB Deutsche Industriebank AG (Chairman)
Prof. Dr. rer. nat. Henning Kagermann Deutsche Bank AG Nokia Corporation, Finland
Dr. jur. Dr. h. c. Albrecht Schmidt Siemens AG Thyssen’sche Handelsgesellschaft m. b. H. Dr. phil. Ron Sommer – Motorola Inc., Schaumburg Sistema, Moscow Tata Consultancy Services Ltd., Mumbai Weather Investments S. p. A., Rome 4 Own group company within the meaning of Section 18 of the German Stock Companies Act.
In addition, the insurance industry’s regulatory environment is being affected by profound changes. The introduction of new rules for state supervision in Europe under the banner of “Solvency II” and new accounting standards have implications for insurers’ capital requirements and income statements; this will also influence the demand for reinsurance cover and trigger changes in its supply. A group like Munich Re, among the leaders in integrated risk management, can take advantage of the changing industry dynamics and exploit the business opportunities they present – in both reinsurance and primary insurance.
In the UK, economic growth was sustained at around the level of the previous year, chiefly due to robust domestic demand.
Rapid development in emerging markets persisted in 2007, the crisis on the international financial markets being concentrated primarily on industrialised nations. The Chinese economy remained very strong, with real growth totalling 11.4%. In India, too, the high current expansion rate remained almost undiminished.
In Latin America, the economy cooled a little in comparison with the previous year, due not least to slightly weaker growth in Mexico. Brazil, on the other hand, made gains in terms of real economic growth.
In view of positive economic expectations, yields on ten-year German government bonds moved up initially from 3.9% at the beginning of the year to just under 4.7% at the start of July, and ten-year US government bond yields improved from 4.7% to 5.2% by mid-June. However, the US subprime mortgage market crisis – and with it the dampening of economic prospects – led to yields falling back to 4.3% at year-end in Germany and even to 4.0% in the USA.
The capital base of the reinsurance industry continued to improve in comparison with 2006 due to good underwriting results and despite a noticeable increase in natural catastrophe losses. Reinsurers have begun to return excess capital to their shareholders in order to ensure the profitability of the capital employed in their business. Altogether, the capitalisation of the industry remains robust, which also influences the intensity of competition.
Development of the US$/€ exchange rate from January to December 2007
The still robust global economy in 2007 supported the development of the insurance markets. This applied especially to those markets in emerging economies. In China and India, for example, the figures up to and including November show that dynamic premium growth continued. European markets also displayed positive growth dynamics; in Spain, for example, total pre miums in the first three quarters were up by nearly 10% year on year.
Various German, European and global initiatives in the field of insurance law are constantly changing insurers’ legal parameters. The German insurance industry is affected by several items of proposed legislation that will impact its business in terms of pricing and product design, client relations, and the overall business processes of companies in the sector.
The Act applies initially only to insurance contracts concluded after 1 January 2008. From 1 January 2009, the new VVG will also become applicable to all existing insurance contracts. The new regulations for private health insurance can be introduced for existing policies as early as 1 January 2008.
For new insurance contracts entered into from 1 January 2009, insureds moving from one private health insurance company to another will be credited with part of their ageing reserves. Those with existing contracts have an option to change insurers in the first half of 2009, taking with them part of their ageing reserves. Private health insurers also consider the new ruling on the portability of ageing reserves for existing policyholders an inadmissible encroachment upon existing contracts.
Another key reform planned in Germany is the Long Term Care Development Act (PfWG), which, according to legislation drafted by the German cabinet on 17 October 2007, is to enter into force on 1 July 2008 with only a few exceptions. Very welcome are the efforts of the PfWG to tackle the inflationary depreciation of the benefits of statutory long term care insurance by expanding the scope of cover for in-patient and outpatient care. In order to finance the ongoing expenditure and increased benefits, the premium rate in statutory long term care insurance is to be increased from the current figure of 1.7% to 1.95% as of 1 July 2008. Those without children are still to pay an additional e_06_Lagebericht_62-68 66e_06_Lagebericht_62-68 66 07.03.2008 16:49:54 Uhr07.03.2008 16:49:54 Uhr
Management report Parameters premium of 0.25 percentage points. The same benefit increases as for statutory cover will also apply to private long term care insurance, where there will thus also be premium adjustments.
On a European level, the Solvency II project continues to progress. On 10 July 2007, the EU Commission published its proposal for a Solvency II framework directive combining and updating the content of 13 EU directives. The new rules will change the supervisory system fundamentally, making it more riskfocused: Solvency II will much better reflect economic realities. In the future, insurance companies will not only need to provide evidence of risk-adequate capital resources but will also have to meet various qualitative risk management requirements.
The European Commission’s proposal represents an important contribution to creating a level playing field and hence to the further development of the European single market. The Solvency II directive is scheduled to be adopted in late 2008 or early 2009.
Munich Re welcomes the opening of the Brazilian reinsurance market, which has functioned as a monopoly until now. The country’s supervisory authority (SUSEP) recently published the implementing provisions for deregulation, which will enter into full force in mid-April 2008. As a result, reinsurance business can be written directly with primary insurance companies from April 2008 onwards. The opening of the market provides us with the opportunity to play an important role in shaping reinsurance through a strong local presence. Our aim is to tap a substantial share of the reinsurance market to generate business. Munich Re has therefore decided to operate a reinsurance sub sidiary in Brazil.
The Munich Re Group’s business performed very successfully in the past year. With an excellent consolidated result of €3.9bn, we easily surpassed our original target corridor of €2.8–3.2bn, which we raised to €3.5–3.8bn at the half-year stage. We thus posted a record profit for the fourth year in a row. Our return on risk-adjusted capital (RORAC) amounted to 20.2% after tax, markedly exceeding our long-term target of 15%. This was achieved through very good underwriting results from our primary insurers and reinsurers and through MEAG’s successful asset management. Also of significance were high gains on the disposal of real estate and shares, and a one-off tax effect from the German Business Tax Reform Act 2008.
Given the new record result, Munich Reinsurance Company’s Board of Management will propose to the Annual General Meeting that the dividend be increased to €5.50 (4.50) per dividend-bearing share. As a consequence we will, as announced, distribute a total of €1.1bn (1.0bn) to our shareholders. This represents 28% of the IFRS consolidated result – well above the minimum 25% envisaged. We continue to pursue our active capital management by buying back shares. In 2007, as part of our Changing Gear growth programme, we repurchased 17.7 million Munich Re shares worth €2.3bn, some €1.6bn of this since the Annual General Meeting on 26 April 2007. We already completed the share buy-back programme of €2bn launched in January 2008 after the 2007 Annual General Meeting. This means that since the start of the share buybacks, we have returned a total of around €3bn to our shareholders in addition to dividend payouts. As previously announced, we intend to repurchase further shares with a volume of around €3bn by the end of 2010, at least €1bn of this by the Annual General Meeting in 2009.
Result before amortisation and impairment losses of goodwill €m 5,089 5,4811 4,150 3,369 1,971 1 Adjusted pursuant to IAS 8.
The investment result included in the primary insurance and reinsurance figures contributed €9.3bn (9.0bn) to the Group result before participation of policyholders and tax, 3.3% more than in the previous year. At 5.2%, the return on investment (based on the average investment portfolio at market values) was well above our long-term target of 4.5%. Key factors in this very gratifying performance were the increase in regular investment income to €8.1bn (7.8bn), owing to higher average returns on our fixed-interest securities, and the rise in net gains on disposals to €2.8bn (2.6bn), which is due in particular to the active management of our real-estate and equities portfolios.
As part of our initiative for profitable growth in reinsurance, we concluded an agreement with US primary insurer Midland in mid-October to acquire 100% of Midland‘s shares for a purchase price of around US$ 1.3bn (€0.9bn). The acquisition still requires the approval of Midland’s shareholders and various authorities, but we expect the transaction to be completed in the second quarter of 2008. Midland is a provider of specialty insurance in such niche segments as the insurance of manufactured housing and motorhomes. With gross premium income of US$ 966m (€832m) and low combined ratios, Midland is one of the leading US specialty insurers. The company is excellently positioned, owing to its various distribution channels and presence in 50 states, and gives us sustained opportunities for selling our specialist products for commercial risks.
The growth engine in 2007 was again health insurance, which expanded its premium volume by a substantial 4.2% to €5.3bn (5.1bn), thanks to further marketing successes with supplementary insurances and in German comprehensive health cover. In the property-casualty segment, premiums rose by 9.6% to €5.7bn (5.1bn), boosted by the integration of the Turkish insurance group İsviçre, which we acquired in the previous year, as well as by positive development in Poland and the Baltic states. But even adjusted to exclude İsviçre, premiums showed growth of 4.2%. Gross premiums written in life insurance were down 2.7% to €6.3bn (6.5bn), mainly because of the termination of a high number of policies in Germany. New business production was lower in the first half-year than in the same period of the previous year, which had benefited from a one-off increase triggered by the third subsidisation stage for Riester policies. However, we were able to almost compensate for this with very pleasing development in the third and fourth quarters. Were it not for the one-off effect from the previous year, new business would have shown a 9.5% increase. The growth in new business was primarily attributable to unit-linked life insurance, but we also made good headway with company pension schemes.
Share of reinsurance and primary insurance – life and health and property-casualty – in Group premium income1
Munich Re has launched a bond programme amounting to US$ 1.5bn with which so-called extreme mortality risks can be placed on the capital market. A first tranche of US$ 100m has now been placed with investors at a price of 1.35% above the three-month LIBOR. This transaction is designed to protect the Munich Re Group against large losses that might result from an exceptional rise in mortality rates after major pandemics or similar events. The programme is such that Munich Re can launch further tranches at short notice, e.g. in response to increased demand for capacity from its reinsurance clients.
– Outstanding result despite high claims costs in property-casualty – Good business development and excellent result in life and health
Until 31 December 2007, our reinsurance business was divided between seven divisions. Life; HealthCare; Europe and Latin America; Germany, Asia Pacific and Africa; North America; Corporate Underwriting/Global Clients; and Special and Financial Risks.
Other major success factors include our risk management and our models for evaluating loss potentials, whose continual refinement has top priority for us.
Gross premiums written: Thereof natural catastrophes Percentage points 5.0 1.3 19.4 5.0 1.8
With this range of tools, we can determine risk-adequate prices and conditions on a sustained basis. Given the still very attractive market conditions in natural catastrophe business, the Munich Re Group’s overall liability for such covers remains at a virtually unchanged level.
Result In the past year, the reinsurance segments life and health and property-casualty accounted for €0.7bn (0.6bn) and €2.6bn (2.1bn) of the consolidated result respectively. The overall profit for reinsurance was thus 23.0% higher than in the previous year. By the end of the year under review, the tax income of €314m projected in our third quarterly report for the reinsurance segment for the whole of 2007 as a result of the German business tax reform had declined to €287m. The main reason for this reduction is that some of the deferred tax liabilities at 30 September 2007 were for investments that were subsequently sold in the fourth quarter. An opposite one-off effect of €99m resulted from the write-down of deferred tax assets involving loss carry-forwards at our subsidiary Munich American Reassurance Company. Our operating result in the property -casualty segment is outstanding, in spite of the higher burden from natural catastrophes. Coupled with a first-rate result in life and health business and an excellent investment result, it meant that our overall operating result for reinsurance showed only a slight reduction of 5.6% to €4.2bn (4.4bn).
Premium At €21.5bn (22.2bn), our premium volume in the financial year declined marginally, mainly due to negative currency translation effects. If exchange rates had remained unchanged, our premium income would have been 1.5% higher. Approximately €15bn, or 70%, of the premium was written in foreign currency, of which 44% was in US dollars and 16% in pounds sterling. We transacted roughly 30% of our premium volume in euros.
– Life: Excellent result despite decline in premium volume – Health: Slight increase in premium income with good potential for continued growth
As in prior years, the trend towards pension insurance was maintained in Germany in 2007. Riester and Rürup pension products proved increasingly popular. The sale of endowment insurance, by contrast, has been stagnating since the tax advantage granted on these policies was abolished at the end of 2004.
The slight reduction of €176m in our premium volume to €1.1bn (1.3bn) resulted exclusively from the scheduled reduction of a quota share treaty which, whilst large in volume, was not a high earner owing to the low risk exposure involved. For the next few years, we expect business to grow again. New business in 2007 remained at around the same level as in the previous year, although the number of disability risks increased in relation to the volume of mortality business. As the market leader, Munich Re has been continually expanding this growth segment thanks to its competence and suitable products.
Our branch in Canada, Munich Reinsurance Company Canada Branch (Life), continues to lead the life reinsurance market, with a strong presence not only in individual and group life but also in disability, critical illness and long term care business. It remains one of our largest life reinsurance units and was able to post a very satisfying result in 2007. Premium income in 2007 fell to €1.2bn (1.5bn) on account of the strength of the euro over the course of the year and the scheduled reduction (to be concluded in 2008) of a large-volume reinsurance treaty. For 2008, we expect our Canadian operations’ result to grow even further.
With a gross premium volume of €1.0bn (1.0bn), our branch in the United Kingdom kept its premium income and market share stable compared with the previous year. Despite continuing pressure on the prices of pure mortality covers, we succeeded in writing similar new business volumes to the previous year, whilst maintaining acceptable margins. Since we are adopting an even more client-centric approach and being innovative in our risk selection, we have retained our competitive edge. In autumn 2007, we paid €49m to acquire a 100% stake in Allfinanz, a software company specialised in generating life primary insurance policies. The combination between our underwriting ex pertise and Allfinanz’s strength in new business policy processing will enable our clients to optimise their handling of new business and reduce their marketing costs. Our expectation of this investment is that it will not only generate attractive returns on our shareholding but also allow us to significantly expand our profitable new business.
With its sustained robust economic growth, Asia is of ever-increasing importance. This fact is also reflected in the development of our reinsurance business, which grew by 4.4% in 2007. As we expect more positive impulses from this region in future, Munich Re expanded its local presence in 2007. A newly established regional centre of competence and management in Singapore will enable us to respond to the requirements and business opportunities of the individual markets even more flexibly and quickly.
Besides traditional reinsurance, our Retakaful Branch in Kuala Lumpur, Malaysia, has been offering Family Retakaful contracts compliant with Shari’ah principles (as an alternative to life reinsurance) since 2007. We are thus one of the first major reinsurers in this market segment.
All in all, we are proceeding on the assumption that our initiatives in Asia will generate growth that is well above average, which we are ideally positioned to manage in view of our greater regional presence.
With the acquisition of Cairnstone, a leading provider of employer stop-loss products, we have created the strategic and operational conditions required for covering even more elements of the value chain and thus quickly returning to adequate margins (for details on the acquisition of Cairnstone, please see page 176 f.).
By acquiring the US health insurer Sterling Life Insurance Company (“Sterling”) in Bellingham, Washington, we are securing effective access to the US growth market for seniors. The transaction is expected to be completed in the first quarter of 2008. Sterling is one of the leading health insurance providers for the 65+ and 50+ age groups. The company fits in perfectly with our US strategy and strengthens our competence as a global provider of integrated health management solutions.
Premium volume in the year under review increased moderately to €250m (243m) due to the organic growth of a large-volume treaty.
The 2007 hurricane season in the North Atlantic was mercifully mild. Only Hurricane Dean caused insured market losses of around €700m in August in the Caribbean – most notably Jamaica – and Mexico. Our share of the loss totalled €20m.
At €667m (677m), man-made major losses were above the long-term average. The three largest individual claims were registered in space business as a result of the loss of three satellites. Our expenditure for these claims came to €105.4m.
The combined ratios recorded by the individual divisions largely remained at the same satisfying level as in the previous year.
In the Germany, Asia Pacific and Africa Division, the combined ratio deteriorated to 106.0% (94.2%), owing to a sharp increase in natural catastrophe losses in this division. Adjusted for the effects of major losses, however, it was almost unchanged at 91.6% compared with the previous year (90.1%). Natural catas trophe losses accounted for €303m, equivalent to 10.5% of net earned premiums.
Premium The renewal negotiations in 2007 showed the reinsurance markets to be stable, although gross premiums written reduced to €14.2bn (14.6bn). The structure of the portfolio experienced a further shift towards non-proportional reinsurance. Market players‘ risk awareness was high and led to realistic estimates of potential losses which, when combined with suitably ambitious profit margins, resulted in adequate prices. As in the past, we systematically refrained from writing business that did not meet our requirements for risk-adequate prices, terms and conditions.
The strength of the euro, particularly against the US dollar, impacted premium income with €750m compared with the previous year.
Prices in the main classes of fire and liability largely stayed at a good level and resulted in gross premiums remaining constant. Prices, especially for claimsfree treaties, came under greater pressure. In motor reinsurance, premium volume declined, mainly because of the developments in primary insurance premiums and the reduction of a major proportional quota share treaty.
Trends in selected markets The business of our global clients, which in 2007 was accounted for by our and at our subsidiaries CUGC Division, developed favourably. Although we reduced a high-volume quota share treaty worth several hundred million euros, we succeeded in keeping our premium volume constant at €3,536m by acquiring new business and increasing our shares in existing reinsurances. Our overall claims burden was below average, and we posted a good underwriting result of €151m with a combined ratio of 95.2%.
In Germany, premium income dropped to €2.2bn (2.5bn), the reasons being mergers between our cedants, lower original rates charged by primary insurers and higher retentions among our clients. In isolated cases, we withdrew from business where our requirements with regard to risk-adequate prices, terms and conditions could not be realised.
In 2007, we recorded substantial major-loss expenditure of €171m (59m), an increase due almost entirely to Winter Storm Kyrill (€146m). In motor reinsurance, the class of business with the largest premium volume, pressure on rates persisted on a broad front. Reinsurance premium volume declined throughout the market and the margins narrowed. As a consequence, we further reduced our proportional business for 2007 and put strong emphasis on quality in business renewed for 2008.
Premium volume in Australia and New Zealand grew by 17.4% year on year to €431m (367m), mainly owing to the successful acquisition of new business from strategically important partners.
The Australian market continued to consolidate in 2007. What is more, the capitalisation and retentions of the Australian primary insurance companies’ remained at a high level, limiting the potential for further expansion of our re insurance business. After the excellent results achieved by insurers and reinsurers in the years 2002 to 2006, price erosion and an accumulation of natural catastrophes – including the storm in New South Wales – had a strong impact on the 2007 result.
The premium income of our subsidiary in Italy, which operates in propertycasualty, health and life business, was down 5% to €608m, primarily because we lowered our participation in a large-volume proportional non-life treaty. In contrast to the gross loss ratio, which improved from 70.9% in 2006 to 68.6% in 2007, the net loss ratio shown deteriorated from 66.8% in 2006 to 71.2% in 2007. This is mainly due to the structure of retrocessions to Munich Re, where the higher a loss is, the greater the percentage that is ceded.
By reducing our administration expenses, we were able to partially offset the increase in the loss ratio, which was mainly due to some major losses in property lines. The annual result showed another improvement.
The underwriting result was negatively influenced on the property-casualty side only by Winter Storm Kyrill. Benefiting from the consistently profitfocused underwriting and releases of provisions from prior years, the combined ratio amounted to a very good 85.8% (96.8%).
An internal analysis of the loss reserves indicates that shifts between the individual classes and accident years ultimately had a moderately positive effect on the result.
In 2007, Munich Reinsurance Canada Non-Life Group – Munich Reinsurance Company of Canada (MROC) and Temple Insurance Company – continued its pattern of producing very good results, despite slightly reduced premium income.
Investments US$ m 14,983 15,118 e_09_Lagebericht_80-86 84e_09_Lagebericht_80-86 84 12.03.2008 10:24:20 Uhr12.03.2008 10:24:20 Uhr
In agricultural reinsurance, we extended our leading position further. The business we wrote mainly comprised state-supported crop insurance programmes, a large portion stemming from the USA. Apart from this, we work closely with selected cedants in applying our global experience and competence to individual segments and regions with high growth potential. In the year under review, we achieved a good result.
Premium income in the volatile class of aviation and space business fell to €489m (711m). The combined ratio deteriorated to 100.4% (63.6%), of which 22.8 percentage points were due to the loss of three satellites. Adjusted to eliminate the effects of major losses, the combined ratio was nevertheless satisfactory. In aviation, the rate and premium reductions we experienced were drastic, as expected, reflecting the increased competition among a growing number of market players. We are adhering to our strategy of consistently rejecting under-rated risks. In space business, where we remain the global market leader, the major losses were also responsible for planned launches being delayed – and consequently for premium income for these being deferred – until 2008. In 2007, prices for insuring the launch and operation of satellites continued to soften but nevertheless remained at a riskadequate level.
In credit and bonding business, we reinsure default risks that are related to the sale of goods and services worldwide or accepted via bonds. We again re corded an excellent underwriting profit of €97m in credit and bonding reinsurance in 2007, although gross premiums written in the year under review rose only slightly to €710m (688m). The main reason for the decrease was the lower demand for reinsurance among our European clients, which have merged to form large groups in recent years. In contrast, premiums in Asia grew on account of business expansion in China. There continued to be positive development in the growth segment “financial institutions”, where we offer companies in the financial sector cover mainly for operational risks.
Our Risk Trading Unit places risks on the capital and retrocession markets. Besides employing the unit in our own risk management, we can use it to take advantage of further business opportunities arising from the tradeability of risk packages, especially insurance risks. In addition, we can support our clients in transferring insurance risks to the capital market. Business with structured finance products also performed well. For instance, we transferred earthquake risks in Japan to the capital market by way of securitisation: the catastrophe bond with a volume of US$ 260m issued has a spread of 2.75 per-
Investments Can$ m 1,554 1,631 e_09_Lagebericht_80-86 85e_09_Lagebericht_80-86 85 07.03.2008 16:49:20 Uhr07.03.2008 16:49:20 Uhr
Management report Business performance centage points above the three-month LIBOR and was placed with international institutional investors.
Overall, MARP’s income was around the same level as in previous years.
On 8 May, Munich Reinsurance Company acquired the Bell & Clements Group, which operates primarily as a successful and highly regarded underwriting manager in the USA and the UK. Founded in 1983, the group has written and managed a profitable and growing book of primary insurance business in both countries for many years via an exclusive network of intermediaries. The business that Bell & Clements currently manages for companies of the Munich Re Group and for other insurers amounts to around US$ 300m, mainly comprising property business and clearly defined commercial business with low sums insured.
In September 2007, Munich Re opened a branch in Kuala Lumpur entirely devoted to writing Retakaful business, the Islamic form of reinsurance based on the principles of Shari’ah law. Munich Re’s Retakaful branch in Kuala Lumpur offers Shari’ah-compliant General Retakaful (as an alternative to non-life reinsurance) and Family Retakaful (as an alternative to life reinsurance). We see large growth potential in this area.
The acquisition of MSP Underwriting, also in October 2007, enables Munich Re to broaden its business written via Lloyd’s in lines not covered by the Watkins Syndicate. MSP Underwriting writes highly profitable short-tail property business and complements our existing portfolio perfectly.
The Caribbean Catastrophe Risk Insurance Facility (CCRIF) is an innovative transaction that we realised in cooperation with the World Bank (see page 22 ff.). The governments of the Caribbean island states can take out insurance with the CCRIF against windstorm and earthquake. To ensure claims are settled as quickly and efficiently as possible, the CCRIF offers the Caribbean states policies with parametric triggers, which guarantee a defined monetary amount if certain criteria are met in terms of meteorological data recorded, e.g. a specified wind speed and track in the case of windstorm. Munich Re partnered and supported the project from the start and has become the CCRIF’s leading reinsurer.
– At €984m, consolidated result 9.3% above target – Growth in gross premium volume of 3.2% – Good combined ratio of 93.4%, despite heavy burden from Winter Storm Kyrill
Together, they are active in virtually all branches of life, health and propertycasualty insurance. Approximately 77% of their premium income derives from Germany, the remaining 23% stemming from international business, in particular from Europe. The bulk of business is therefore transacted in euros.
Marketing In primary insurance, we gain access to clients through multiple sales channels. ERGO has 21,000 self-employed insurance agents representing its brands and additionally works with brokers and strong business partners. For ERGO’s tied agents – who generate half of new business – the brands of their operative insurance companies are of great significance. KarstadtQuelle Versicherungen, also a member of the ERGO Group, is Germany’s most popular direct insurer. In 2007, ERGO’s exclusive cooperation with Hypo Vereinsbank – a member of the UniCredit Group – generated new business worth €342m (342m) and produced over a quarter of the new German business in life.
Europäische Reiseversicherung works with more than 17,000 partners in the tourist industry, making it a leading provider in its sector. Travel agents and the European railways have been its main sales partners for some 100 years, although nowadays its sales channels also include major tour operators, airlines, internet platforms and hotels. Europäische Reiseversicherung is represented in all the main European countries through its international network of subsidiaries and affiliated enterprises. In recent years, it has additionally established selected partnerships on all continents.
Consolidated result life and health €m 358 319 594 25 – 960
Consolidated result property-casualty €m 626 726 585 292 –131 1 Adjusted pursuant to IAS 8.
Combined ratio property-casualty, including legal expenses insurance % 93.4 90.8 93.1 93.0 96.4
Our primary insurers posted a very good operating result of €1,253m in the past financial year, although compared with the excellent previous year’s figure of €1,261m, this is equivalent to a decrease of 0.6%.
In primary insurance, premium income in 2007 totalled €17.3bn (16.7bn) – a rise of 3.2%. Growth was especially apparent in international business, which received additional momentum from the Turkish İsviçre Group acquired in 2006. Gross premiums written outside Germany climbed 14.6% to €4.0bn (3.5bn), notably in property-casualty insurance and the health insurance segment. Adjusted to eliminate the effect of changes in the consolidated group, gross premiums written abroad still increased by 6.6%. This positive development is largely linked to satisfactory growth in Poland and Belgium. At €13.3bn (13.3bn), German business remained at the same level as in the previous year.
For life insurance business and German health insurance, European Em bedded Value – which is determined on the basis of market-consistent criteria – rose to €5,406m (4,154m) as at the end of 2007. This figure was favourably influenced by capital-market performance, the German business tax reform and strong new business. Total European Embedded Value earnings came to €1,206m (1,447m), with the value of new business rising to €164m (125m).
In the financial year, our life insurers recorded total premium income of €7.3bn (7.4bn). The reduction of 0.5% was mainly attributable to the still high number of German life insurance policies concluded in the 1990s that terminated as scheduled. The more pronounced decline of 2.7% to €6.3bn (6.5bn) in gross premiums written was due to the fact that these do not include the savings premiums of unit-linked life insurance and Riester pension products – business that is of growing importance to our life insurers.
New business in Germany rose by 5%, with single-premium business performing more favourably than regular-premium business. In 2006, German regular-premium business had been positively influenced by the introduction of the third subsidisation stage for Riester policies. We anticipate a similar impact from the fourth subsidisation stage at the beginning of 2008. Adjusted to eliminate this underlying “Riester” effect, our total German new business increased by 9.5%, mainly because of unit-linked life insurance and good growth in company pension business.
In health insurance, the rise in premium volume of 4.2% to €5.3bn (5.1bn) was especially strong, a key contribution to this being the good performance of international business, which was up 9.4%. Premium growth in Spain and Belgium was particularly robust. In our home market, premium volume also experienced a satisfying increase which, at 3.4%, exceeded the market average, above all in supplementary health insurance (5.0%). In comprehensive health cover, premium income grew by 2.9%. The disproportionate rise in supplementary health insurance was attributable to very good new business in the previous year, which fully impacted premiums in the year under review, and to highly satisfactory growth of 17.9% in new business in the fourth quarter of 2007.
The investment result in life and health improved to €4.8bn (4.4bn) – an increase of 9.8% – reflecting gains on the disposal of real estate and stocks. Regular income also developed positively, climbing by 4.3% to €4.4bn (4.2bn). Over the year, the performance of the bond markets positively affected the value of the derivative financial instruments we use in the context of our asset-liability management to hedge the reinvestment risk against falling interest rates. As a consequence, the balance of write-ups and write-downs of these derivatives in life primary insurance improved by €162m compared with the previous year.
The administrative expense ratio was impacted by a major IT conversion in health insurance in 2007 involving high one-off expenditure and totalled 3.2% (3.4%). The IT integration was successful in all segments and now provides the basis for appreciable efficiency gains and cost reductions.
For the period January to December, premium income climbed by 9.6% to €5.6bn (5.1bn). This growth was chiefly due to ERGO’s international business, which expanded by a sizeable 27.0% as a result of the acquisition of the İsviçre Group in 2006. Without the effect of this change in the consolidated group, gross premiums written abroad still increased by 10.9%. This rise is largely based on gratifying growth in Poland and the Baltic states. ERGO’s German business remained at around the same level as in the previous year, totalling €2.6bn (2.6bn). In German motor insurance, premium volume dropped by 5.8%, above all as a consequence of our profit-oriented underwriting policy and the number of policyholders reassigned to higher no-claims bonus classes. By contrast, we achieved growth in our target lines of commercial property and liability business, where we posted increases of 19.1% and 4.5% respectively, and in personal accident insurance, which grew by 0.9% compared with 2006. Gross premium income in legal expenses insurance was up 4.4% to €908m (870m), owing to expansion in Germany (+1.1%) and especially to international business, where growth was an appreciable 7.6%, particularly in the United Kingdom and the Netherlands.
At 93.4% (90.8%), the combined ratio for property-casualty business including legal expenses insurance was again at a good level. The deterioration compared with the previous year is primarily due to Winter Storm Kyrill, which swept across large parts of Europe in mid-January 2007 and led to a net claims burden of approximately €52m. For this reason, our loss ratio of 58.6% (55.8%) was also higher than in 2006.
Costs developed favourably. In absolute figures, administration and operating expenses were both higher than in 2006, but a look at the expense ratio shows a different picture: with premium income experiencing a more significant rise than our operating expenses for own account, we were able to reduce the operating expense ratio to 34.8% (35.0%).
The investment result in property-casualty business was a good €733m (685m). We achieved an improvement in both regular income and the balance of disposals, write-ups and write-downs.
Expansion of international activities At the beginning of May 2007, an agreement was signed between Munich Re, the ERGO Insurance Group and the Italian UniCredit Group to expand their successful partnership in Germany, Austria and Poland to include other growth markets in central and eastern Europe. This cooperation aims at extending bancassurance sales of ERGO’s insurance products in life and non-life to Romania, the Slovak Republic, Slovenia, Hungary and Russia via UniCredit’s subsidiaries in these countries. There are also plans to include Serbia, Bosnia, Ukraine and the Baltic States in the medium term. The business will be managed by a centre of competence that is currently being set up in Vienna.
These transactions are part of our strategy to advance the expansion of our international activities in primary insurance and to increase the share of business outside Germany. The interplay of our high reputation, our excellent market knowledge from being present for decades in many of the world’s markets, and our primary insurance know-how in the ERGO Insurance Group mean that we are a much sought-after partner in our target markets.
Our investment strategy is committed to the principle of sustainability. We aim to ensure that at least 80% of the market value of our investments is invested in assets which are included in a sustainability index or satisfy generally recognised sustainability criteria. Since mid-2007, we have used the services of oekom research, an independent rating agency for sustainability, to advise us in this area. Our sustainability criteria for corporate and bank bonds have been considerably tightened as a result.
Our investments in loans grew by €6.0bn, or 20.2%, as – particularly in primary insurance – we are increasingly posting long-term fixed-interest securities as loans at the time of acquisition, and thus recognising these at amortised cost. Conversely, our portfolio of fixed-interest securities available for sale shrank by €2.3bn. For the additional investment in loans, we used cash flows from insurance business as well as liquid funds from the disposal of securities available for sale and real estate.
Our portfolio of bonds guaranteed by US bond insurers (monoliners) amounted to around €320m as at 31 December 2007. However, we do not see a downgrading of the monoliners’ credit rating with corresponding consequences for the insured bonds as resulting in any overall material risks for the Munich Re Group.
Distribution of investments by type e_11_Lagebericht_92-99 93e_11_Lagebericht_92-99 93 07.03.2008 16:48:42 Uhr07.03.2008 16:48:42 Uhr
Reinsurance Primary insurance Asset Total Life and health Property-casualty Life and health Property-casualty management €m1 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 2007 year 2007 year 2007 year 2007 year 2007 year 2007 year
Investments in affi liated companies 39 24 57 28 34 43 73 75 12 8 215 178
Other securities available for sale 11,146 10,932 48,009 48,339 53,655 57,383 6,197 6,227 27 34 119,034 122,915
Other securities held for trading 104 117 494 595 380 344 302 287 – – 1,280 1,343
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 2,178 1,820 – – – – 2,178 1,820 e_11_Lagebericht_92-99 94e_11_Lagebericht_92-99 94 07.03.2008 16:48:42 Uhr07.03.2008 16:48:42 Uhr
Fixed-interest securities and loans Our investment portfolio is chiefly made up of fixed-interest securities and loans, which amounted to €131bn at 31 December 2007, making up around 74.4% of our total investments at carrying amounts.
In the first half of 2007, the balance sheet valuation reserves of our fixedinterest securities available for sale that are accounted for at fair value sank noticeably due to increasing interest rates, which led to net unrealised losses as at the end of June. Following realised losses in the second half-year and a further slight decrease in the interest-rate level in Germany and the USA in the third and fourth quarter of 2007, we recorded increases in the reserves again at the end of the year. Net unrealised gains on our fixed-interest securities available for sale totalled €0.0bn (0.8bn) at the end of the financial year.
Maturities of fi xed-interest securities and loans in primary insurance e_11_Lagebericht_92-99 96e_11_Lagebericht_92-99 96 07.03.2008 16:48:43 Uhr07.03.2008 16:48:43 Uhr
Equities and shareholdings In the year under review, the Munich Re Group reduced its portfolio of equities and shareholdings from €25.8bn to €24.1bn, the bulk of which comprises shares in European companies. The corrections on the stock markets after the mid-year reporting date were offset again by the end of the year. Due to the favourable overall stock market performance in the financial year, we continued our strategy of diversifying our equity investments. In 2007, we further reduced our historically evolved shareholdings in the insurance and finance sector.
As at 31 December 2007, net unrealised gains on non-fixed-interest securities available for sale totalled €6.7bn (8.5bn), 21.3% less than in the previous year. This decrease resulted primarily from the realisation of profits in the course of reducing our equity portfolios.
Furthermore, apart from recording planned depreciation of €99m on our investment property, we had to recognise unscheduled portfolio impairments of €75m.
Virtually all of the Munich Re Group‘s assets are managed by MEAG.
MEAG also offers its expertise in asset management to partners outside the Group, thus tapping additional sources of earnings. As at 31 December 2007, MEAG had investments of €9.2bn (11.2bn) under management for non-Group investors.
Investment result by type of investment 2007 Previous year Change €m €m %
With our offerings for institutional investors, we mainly meet the needs of insurance companies and pension funds. A key role in institutional business is also being played by consultancy for asset management, which has established itself as an independent service in MEAG‘s asset management operations. Besides portfolio management, MEAG also undertakes risk management for its clients and considers their liabilities when steering their investments. MEAG supplies its institutional clients with global real-estate expertise in the form of customised investment products. To further this line of business, a subsidiary was founded in Luxembourg in the year under review.
As at 31 December 2007, MEAG had assets totalling €6.7bn (8.5bn) under management for institutional investors. This figure was down year on year in 2007 because MEAG realised gains it had generated for its institutional clients on the global real estate markets.
In 2006, MEAG acquired a 19% stake in PICC Asset Management Company Ltd. (PAMC), Shanghai. PAMC is the asset management subsidiary of PICC Holding, which owns the largest property-casualty insurance company in China. Besides MEAG, PICC Group companies are also shareholders in PAMC. This is the first participation in an insurance asset manager outside Germany for MEAG, allowing it to benefit from the dynamic growth of the Chinese economy. After the first year of the partnership, PAMC had already increased its assets under management by around 50% to over €6.5bn.
Reinsurance business accounts for approximately 36% of technical provisions, and primary insurance business for about 64%. In contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. This is especially true of reinsurance. Whilst in property insurance a major portion of the provisions is generally paid out after one year, in life insurance or liability insurance substantial amounts are still due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar and pound sterling. We ensure that our business is sufficiently capitalised at all times by monitoring the situation continuously and taking suitable measures, which are dealt with in the section on capital management.
Owing to the large volume of capital returned, equity decreased by €862m in 2007, despite the positive performance of our business and the price gains in our equities portfolio. Also, equity’s share of total capital fell marginally compared with the previous year.
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal, which affected investments with a volume of €12.1bn (12.1bn) at the reporting date. Supervisory authorities in some countries, for example, require foreign reinsurers to establish premium and reserve deposits with primary insurers.
To configure our asset management as effectively as possible, we also use derivative financial instruments, which are described on page 199 ff. of the notes to the financial statements.
– subtracting goodwill and other intangible assets, with the exception of the amortised book values from acquired insurance portfolios already recognised in the embedded value calculation; and
– eliminating the deferred tax assets relating to loss carry-forwards. We also take the subordinated liabilities into account.
Our active capital management includes returning surplus capital to equity holders through attractive dividends and share buy-backs, within the scope permitted by Munich Reinsurance Company’s revenue reserves, as determined under German commercial law. In the period May 2007 to the end of 2010, we aim to return at least €8bn to our shareholders. By 26 February 2008, we had already repurchased 15.1 million Munich Re shares with a value of €2.0bn. Further shares with a volume of at least €3bn are set to follow by the end of 2010. Reducing the number of shares issued and improving our profit will enable us to boost our earnings per share by an average of 10% annually from 2007 to 2010, proceeding from a normalised basis. In addition, we intend to pay our shareholders an annual dividend of at least €1bn for the financial years 2007 to 2009, a target we are markedly exceeding for 2007 with a dividend payout of €1.1bn.
Essentially, we see efficient and transparent capital management – always geared to what is feasible – as an appropriate means of achieving our goal of being recognised as a reliable partner in the capital markets. This should guarantee our ability to raise capital quickly and easily on the capital markets, especially for large potential growth opportunities (even if currently unlikely) and the optimisation of our capital structure. In June 2007, to reduce our cost of capital, we placed a subordinated bond with a total volume of €1.5bn in a favourable market environment.
Not only must the available capital be adequate, it must also be deployed efficiently. We use our value-based management to set performance targets designed to ensure that every investment achieves a sustainable return commensurate with the risk involved. To limit fluctuations in results owing to major losses, we have also developed guidelines and limit systems within the framework of integrated risk management and corporate underwriting for our reinsurance companies. We protect the results and capital of our primary insurance companies and reinsurance subsidiaries against unacceptable fluctuations by means of suitable reinsurance and retrocession covers. We also use asset-liability management and a system of limits to restrict the risks involved in our investments.
Our internal risk model plays a central role in capital management. We use it to analyse how certain risk scenarios affect segment results and investments. We determine our economic capital on the basis of the internal risk model data so that we are able to absorb two successive annual losses of a size expected only every 100 years. Next, the capital determined is allocated proportionately to the individual divisional units in line with the volatility of their business activities. Our procedure in the primary insurance group also takes account of management factors arising mainly out of supervisory restrictions and policyholders ’ participation in surpluses. We continuously review the assumptions on which the internal risk model is based and adjust them as required.
We compare the capital requirements with the economic capital. See page 50 ff. (Important tools of corporate management – Definition of RORAC) for a description of how we determine additional available equity.
Compared with 2006, our equity decreased by €0.9bn or 3.3% to €25.5bn in the year under review. The most important changes in equity were due to the following: – The consolidated profit attributable to Munich Re equity holders rose by 12.5% to €3.9bn. The previous year’s profit of €3.4bn, net of the dividend payment for 2006 (€988m), was transferred to retained earnings.
The listed registered shares are subject to transfer restrictions in that, pursuant to Article 3 para. 2 of the Articles of Association of Munich Reinsurance Company, they may be transferred to another holder only with the consent of the Company.
Registered shares – unlike bearer shares – are issued in the name of their owner, whose name, address and date of birth are entered in the Company’s register of shareholders together with the number of shares held. This allows Munich Re to communicate directly with the owners. With respect to the Company, the only parties deemed shareholders in accordance with the German Stock Companies Act (Section 67) are those entered in the Company’s register of shareholders. This is one of the preconditions for attendance and exercise of voting rights at the Annual General Meeting. For our shareholders, having registered shares means, above all, that they are informed directly, quickly and comprehensively about our Company and its current activities and that they are also personally invited to take part in our Annual General Meeting.
The issuing of restrictedly transferable registered shares by Munich Re dates back to the Company’s foundation in 1880 and is a very common phenomenon in the insurance industry. Restricted transferability means that these shares may be transferred to another holder only with Munich Re’s consent, which, according to Article 3 para. 2 of Munich Re’s Articles of Association, is granted at the Company’s discretion. Since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. In recent decades, it has been granted without exception.
System of control for employee Like other shareholders, employees exercise control rights directly on shares share scheme where the issued to them, in accordance with statutory provisions and the Articles of control rights are not exercised Association. directly by the employees
Powers of the Board of Management The powers of the members of the Board of Management are defined in to issue or buy back shares Sections 71 and 76 to 94 of the German Stock Companies Act. The Board of
Management has the following powers to issue and buy back shares (the complete wordings of the relevant resolutions and provisions in the Articles of Association can be viewed under the heading “Investor Relations” on our website at www.munichre.com): – The Annual General Meeting of 26 April 2007 authorised the Company, pursuant to Section 71 para. 1 item 8 of the German Stock Companies Act, to buy back shares until 25 October 2008 up to a total amount of 10% of the share capital at the time of the Annual General Meeting resolution (€587,725,396.48). The shares acquired plus other own shares in the possession of the Company or attributable to the Company in accordance with Section 71a ff. of the German Stock Companies Act may at no time amount to more than 10% of the share capital. The shares may, in accordance with the provisions of the authorisation, be acquired via the stock exchange, via a public purchase offer to all shareholders, via a solicitation to all shareholders to submit offers (request to sell) or via a public offer to all shareholders to exchange Munich Re shares for shares in another listed company as defined in Section 3 para. 2 of the German Stock Companies Act. In so doing, it may buy back shares amounting to a maximum of 2% of the share capital using derivatives in the form of put options, call options or a combination of the two. The Board of Management is authorised to use shares thus acquired for all legally admissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights; among other things, the Board of Management is empowered under Article 71 para. 1 item 8 sentence 5 of the German Stock Companies Act to retire the shares without requiring further approval from the Annual General Meeting.
– Under Article 4 para. 2 of the Articles of Association, the Board of Management is authorised, with the consent of the Supervisory Board, to increase the share capital at any time up to 18 April 2011 by an amount of up to €5m by issuing new shares against cash contribution (Authorised Capital Increase 2006). The subscription right of shareholders is excluded insofar as this is necessary to allow the shares to be issued to employees of the Company and its affiliated companies.
The above-mentioned authorisations to issue or buy back shares are within the range of what is customary in the market and allow the Company to engage in active capital management. They enable it to cover any capital needs, even at short notice, for taking swift and flexible advantage of market opportunities in different fields of business. As illustrated by the recent share buy-back, the authorisations also enable Munich Re to buy back shares and thus return to shareholders capital no longer required for an efficient capital structure.
Further information and explanations relating to items 6 to 9 of Article 315 para. 4 of the German Commercial Code may be found in the corporate governance report on page 119 ff.
As part of our active capital management, Munich Reinsurance Company issued subordinated bonds with a volume of €1.5bn in June 2007. It is a perpetual bond, callable by us from ten years after the date of issue. In December 2007, to facilitate administration, Munich Re Finance B. V. was replaced by the previous guarantor, Munich Reinsurance Company, as the issuer of the dated subordinated bonds issued in 2003. The tranches with nominal values of €3.0bn and £300m will mature in 2023 (euro tranche) and 2028 (pound-sterling tranche) and are callable by us for the first time on 21 June 2013 and 21 June 2018 respectively.
Subordinated bonds of Munich Reinsurance Company, Munich (until December 2007, of Munich Re Finance B. V., Amsterdam) 3,385 3,419
Management report Financial position e_12_Lagebericht_100-110 106e_12_Lagebericht_100-110 106 07.03.2008 16:47:27 Uhr07.03.2008 16:47:27 Uhr
Group equity €m 25,458 26,320 1 Adjusted pursuant to IAS 8.
The ratings for our subsidiaries on 26 February 2008 at a glance: Financial strength ratings for the Munich Re Group
Analysis of the consolidated cash flow statement Our primary insurance and reinsurance operations have a significant influence on the cash flow of the Munich Re Group. We generally first collect the premiums for the risks assumed and do not make payments until later, in the event of a loss. The cash flow statements of insurance companies are therefore of limited relevance. The cash flow statement is adjusted to eliminate the effects of fluctuations in exchange rates and changes in entities consolidated.
The strong cash inflows from operating activities are attributable to the highly satisfactory performance of these activities. The excellent consolidated result of €3,937m has been adjusted in the consolidated cash flow statement by €730m to take account of the higher technical provisions. There was an in crease in provisions for future policy benefits at the Group’s primary insurers due to the continuing decline in policy terminations and to portfolio development and strong new business production, particularly at recently established companies abroad. The loss reserves at the reinsurers in the Munich Re Group declined primarily because of the settlement of a large number of claims from prior years in respect of which we had posted reserves, and the reduced need for new reserves. The net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows – are essentially attributable to the disposal of securities available for sale.
Cash flows for the financial year 362 –106 1 Adjusted pursuant to IAS 8.
Munich Reinsurance Company (until December 2007, Munich Re Finance B. V.)
Munich Reinsurance Company (until December 2007, Munich Re Finance B. V.) 7.625%, £300m Subordinated Bonds 2003/2028 a+ A+ A2 A
Munich Reinsurance Company 5.767% until 2010, thereafter floating, €1,500m Subordinated Bonds 2007/perpetual a A+ A3 A
The cash outflows for financing activities stem from the share buy-backs of €2,305m and the dividend payment of €1,002m for 2007. Munich Reinsurance Company’s subordinated bond issue resulted in a cash inflow of €1,500m.
Besides the high quality of our business operations, a number of factors that cannot be measured by financial performance alone are instrumental in securing the Munich Re Group’s sustained economic success. These include: – Open dialogue with our clients – Our firm commitment to new, needs-oriented products and services – Our corporate responsibility towards employees, society and the environment – Efficient business processes for managing our Group and identifying or avoiding risks
Our two scholarship programmes, which offer high-quality advanced training for our clients’ prospective managers, have enabled us over the years to strengthen the partnerships we enjoy with our cedants.
We also pass on our competence to our business partners in printed form: in 2007, we again brought out over 40 technical publications – in German, English, French, Italian, and Spanish. How much our clients appreciate this service is indicated by the total of some 1,400,000 downloads from our publication portal at www.munichre.com last year.
Last but not least, our cedants benefit from our local presence. Branches and subsidiaries around the world ensure that our clients can always find us where and when they need us. We thus combine international know-how with indepth knowledge of local conditions, to offer our clients individual solutions in every case.
Primary insurance In primary insurance, we focus on private clients throughout Europe, who make up the bulk of our clientele, along with small and medium-sized commercial firms. They can choose from the full range of product groups: life and health insurance, property-casualty insurance, legal expenses insurance, fund products offered by MEAG as the asset manager of Munich Re and ERGO, and bank products from our cooperation partner UniCredit Group. With this all-round offering, our companies are well positioned in the market: our clients can cover all their financial-service needs comfortably from one familiar and proven source.
Lastly, our Knowledge Management Centre of Competence provides the methodological and institutional foundations for the constant updating and exchange of knowledge, enabling us to secure, expand and efficiently utilise this, our most important resource. There are now more than 60 topic networks, in which 700 staff from 20 countries are engaged in ensuring a living culture of knowledge.
Facts and figures On 31 December 2007, a total of 38,634 (37,210) staff were employed with the Munich Re Group worldwide, 7,372 (6,928) in reinsurance, 30,460 (29,509) in primary insurance and 802 (773) in asset management. In reinsurance and asset management, staff numbers increased by 444 and 29 respectively. The 6.4% rise in reinsurance is attributable to international acquisitions, with the Bell & Clements Group alone accounting for an additional 123 employees outside Germany. In primary insurance, the number of employees in 2007 increased by 951 to 30,460 compared with the end of 2006, owing to strong growth abroad and in direct insurance, where we are expanding our personnel. To address the consequences that structural changes in Germany have on staff, agreements have been concluded to promote staff mobility within the Group. In the year under review, ERGO introduced job-transfer conditions for desk staff. that regulate such important issues as pensions, binding pay-scales and social benefits for staff transferred for operational reasons from one ERGO company to another. Furthermore, a uniform procedure has been developed according to which desk staff affected by change processes may also be trans ferred to another suitable area of work.
Succession planning We are also firmly committed to giving young people sound professional training and good career perspectives: in 2007, a total of 1,239 trainees were employed in the Munich Re Group. At ERGO, the percentage of trainees in 2007 was 5.7% (5.8%).
Key pillars of our succession planning are graduate trainee programmes and the employment of students. Munich Re and its subsidiaries ERGO AG, Victoria and Hamburg-Mannheimer have joined the Fair Company Initiative, whose declared aim is to help improve university graduates’ chances of finding suitable jobs.
The ERGO Management Academy (EMA) offers a broad range of programmes to support all levels of management, be they experienced managers or employees at home and abroad who are assuming managerial responsibilities for the first time. Special attention is devoted to the international exchange of views and ideas between executives of the ERGO companies.
Online job market The online job markets of Munich Re and the ERGO Insurance Group have been linked since 2005. In 2007, Europäische Reiseversicherung, Mercur Assistance and the reinsurance group’s business units outside Germany were integrated into the platform, which records over 130,000 hits a month. An extensive job market is thus available to staff and external applicants alike.
The Munich Re Group’s business is inextricably linked with ecological aspects. We are directly affected by environmental impacts, such as the growing number and intensity of weather-related natural catastrophes. A particular focus of our commitment is therefore climate protection: for many years Munich Re has been contributing its specialist knowledge to numerous organisations and associations concerned with global climate change, especially UNEP FI, the Finance Initiative of the United Nations Environment Programme, which promotes understanding of climate change in the financial sector.
As a service provider, we place comparatively little burden on the environ ment, but we have to set an example if we want to encourage others to practise sustainable management. We therefore aim to make our activities at our Munich location climate-neutral by 2009. The entire reinsurance group, currently numbering more than 50 locations worldwide, will follow suit by 2012.
Environmental commitment is also a tradition at ERGO, where Victoria was the first insurance company to have had its environmental management system certified to EMAS (EU Eco-Management and Audit Scheme) and to ISO 14001, a standard to which Munich Re’s head office and DAS UK are certified as well. We firmly intend to continue in this direction.
As a globally operating corporation, the Munich Re Group accepts its responsibility towards society and supports various social and cultural projects. Knowledge obligates – that is the conviction that led to our setting up the Munich Re Foundation, whose operations were publicly launched in April 2005, with a capital of €50m. Under the motto “From Knowledge to Action“, the Munich Re Foundation has set itself the aim of helping people in risk situations and improving their situation – especially in countries where the people are too poor to make use of financial services like insurance. The foundation not only provides direct support but also devotes itself to pro moting knowledge, heightening awareness and networking, which facilitates self-help. In its work, it can build on the highly developed risk knowledge of its benefactor. Detailed information on the Munich Re Foundation can be obtained from its report at www.munichre-foundation.org.
Munich Re staff also practise solidarity. Their voluntary work is supported by the Dr. Hans-Jürgen Schinzler Foundation, which provides a platform for private initiatives. The foundation makes it easier to exchange ideas with like-minded individuals and to provide mutual support. As a result, numerous charitable projects in Germany, Latin America, Africa and Asia benefit.
At the top of the security pyramid in the reinsurance group is our Chief Information Security Officer, who is responsible for defining uniform global standards and guidelines, monitoring their implementation at all our companies, and managing critical incidents. He and his staff are supported by a “virtual” team of decentralised Information Security Officers and our Security Centre of Competence in Toronto, whose functions include testing the IT landscape for weaknesses in security.
ERGO’s IT security is part of our cross-corporate IT security management, which embraces four levels: security policy, guidelines, concepts, and technical implementation. Responsibility for the management of information security in the ERGO Group lies with its Chief Information Security Officer, who is supported by the IT Security Management Board, a strategy and controlling body.
Continually improving our good corporate governance is an important principle underlying our business activities.
What rules apply to Munich Re? With its international organisation, the Munich Re Group has to consider corporate governance rules in different national legal systems. Clearly, we observe not only the respective national standards but also internationally recognised best practices. In Germany, where Munich Re has its headquarters, corporate governance rules are laid down above all in the German Stock Companies Act, the German Co-Determination Act and the German Corporate Governance Code. The latter, which entered into force in 2002 and has since been amended several times, contains the main legal rules that must be observed by German listed companies. In addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. Every year, Munich Re’s Board of Management and Supervisory Board publish a declaration stating how far the Code’s recommendations have been complied with. The 2007 declaration of conformity can be found on page 122.
Statutory regulations and provisions The German Stock Companies Act contains general provisions governing in the Articles of Association amendments to the Articles of Association (Sections 124 para. 2 sentence 2, concerning amendments to the and 179–181 of the Act). These state that only the Annual General Meeting Articles can make resolutions on changes to the Articles of Association. In order to be carried, a resolution must receive at least three-quarters of the votes cast by the share capital represented in the vote. The Articles of Association may stipulate a different capital majority (higher or lower) or other requirements, but Munich Re’s Articles of Association do not provide for any such special features.
1 Joint corporate governance report of the Board of Management and Supervisory Board in accordance with item 3.10 of the German Corporate Governance Code.
The German Stock Companies Act contains special regulations on amendments to the Articles of Association where increases and reductions in share capital are concerned (Sections 182–240 of the Act). Under these regulations, all resolutions on capital measures are generally to be made by the Annual General Meeting. Within a self-determined scope, however, the Annual General Meeting can authorise the Board of Management to initiate certain (capital) measures (see page 105 f. for the authorisations relating to Munich Re). In all such cases, a resolution of the Annual General Meeting is required that has been adopted by at least a three-quarter majority of the share capital represented in the vote. Where these resolutions are concerned, Munich Re’s Articles of Association again do not provide for other (i.e. higher) majorities or further requirements.
Board of Management Duties and responsibilities of the Board of Management
The legal parameters for the appointment and dismissal of members of the Board of Management are specified in Sections 30–33 of the German CoDetermination Act and Sections 84 and 85 of the German Stock Companies Act. Munich Re’s Articles of Association do not deviate from this. The Supervisory Board appoints the members of the Board of Management 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. Extensions of up to five years are possible and – in exceptional cases – members of the Board of Management may also be appointed by a court of law.
Furthermore, by resolution of the Annual General Meeting of 26 April 2007, the Board of Management is authorised to buy back and use the Company’s own shares – and to do so to a limited degree by using derivatives. The complete wording of the resolution adopted on agenda items 5 and 6 can be accessed on our website (www.munichre.com) at any time. The Board of Management availed itself of this authorisation in 2007 by resolution of 4 May 2007. By 31 December 2007, a total of nearly 11.7 million shares had been purchased for an overall price of around €1.55bn, equivalent to approximately 5.3% of the relevant share capital at the time of the 2007 authorisation. As part of the 2006/2007 share buy-back programme, around six million own shares were acquired in 2007 up to the 2007 Annual General Meeting for an overall price of approximately €750m, representing around 2.6% of the relevant share capital at the time when the authori sation was granted by the 2006 Annual General Meeting. These shares and the approximately 3.6 million shares from the 2007/2008 share buy-back programme have already been retired.
. In compliance with the law and the Company’s Articles of Association, Munich
Munich Re’s Supervisory Board has set up five committees: the Standing Committee, the Personnel Committee, the Audit Committee, the Conference Committee, and (since the end of 2007) the Nomination Committee, thereby complying with a new recommendation of the German Corporate Governance Code.
Significant agreements which Based on our underwriting guidelines, our reinsurance agreements generally take effect, alter or terminate include a clause that grants both parties to the agreement a right of extraupon a change of control ordinary cancellation in the event that “the other party merges with another following a takeover bid company or its ownership and control undergoes a material change”. Such or similar clauses are typical of the industry. Munich Re’s long-term incentive plans provide for special exercise conditions in the event of a change of control. Beyond this, there are no other significant agreements subject to such conditions.
Corporate governance topics in 2007 At its meeting on 9 November 2007, the Supervisory Board decided to set up a Nomination Committee. This committee is comprised exclusively of representatives of the shareholders and presents a list of candidates suitable as representatives of the shareholders to the Supervisory Board for the latter’s election proposals to the Annual General Meeting.
Munich Re also complies with all the proposals of the German Corporate Governance Code with only one exception. This concerns item 5.4.7 para. 2 sentence 2 of the Code, which suggests that the result-related remuneration of members of the Supervisory Board should include components based on the company’s long-term performance. The Board of Management and Supervisory Board will propose a suitable amendment to the Articles of Association at the 2008 Annual General Meeting.
The structure and amount of the remuneration are determined by the Supervisory Board’s Personnel Committee, whose three members comprise the Chairman of the Supervisory Board, another of the shareholder representatives and one of the employee representatives. The full Supervisory Board discusses the remuneration structure and reviews it regularly.
The fixed annual basic remuneration is paid in the form of a monthly salary.
The targets and scaling for Group, corporate and divisional objectives are geared to particular indicators; individual objectives form the basis for the achievement of personal targets. The key indicator used for the Group objective is “return on risk-adjusted capital – RORAC”, which is comprised of key figures from external accounting, and from other key portfolio and performance data. Information on the definition of RORAC is provided on pages 55. We use the
Basic remuneration, remuneration in kind/ Function Fixed Contractual stipulations Monthly fringe benefits Responsibility Company car, healthcare, security Length of service measures, insurances on the Board
Long-term incentive plan Appreciation in share 0–150% – End of vesting period As from third (stock appreciation rights; price (cap at 150% (two years) year of plan until term: seven years) of share price – 20% share price increase end of plan increase) – MR shares have outperformed EURO STOXX 50 twice at the end of three-month period during the term of the plan
Pension entitlement Basic remuneration Fixed – Retirement – Number of years on – Insured event the Board – Premature termination or non-extension of employment contract under certain circumstances e_14_Lagebericht_119-130 123e_14_Lagebericht_119-130 123 07.03.2008 16:46:58 Uhr07.03.2008 16:46:58 Uhr
Management report Corporate governance report performance measures embodied in value-based management for the corporate and divisional objectives.
The processes defined to specify objectives and assess their achievement also involve the external auditor, who subjects the envisaged financial objectives to a review regarding their consistency, appropriateness and assessability, which includes analysing the calculation of the individual results achieved. The outcome of the review and any potentially controversial aspects are rendered transparent for the Supervisory Board’s Personnel Committee.
Benefi ts drawn under entitlements a) and b) on – reaching the age of 65 – incapacity to work – death of Board member a) Entitlement under the German Employers’ Retirement Benefi ts Act b) Improved entitlement Contract ends owing to non-extension of
– Reaching the age of 60; at the latest, turning 65
– Defi ned benefi t of between 30% and 60% of annual basic remuneration
– Reduced for other income earned from third parties before reaching the age of 65
· Any benefi ts received from previous employers of the widow(er) (in the case of Board members appointed since 2006)
– Orphan’s pension = 20% of defi ned benefi t per orphan
– Doubling of orphan’s pension if no widow(er)’s pension is payable (only in the case of Board members appointed prior to 2006)
The share-priced-based compensation component is accounted for at fair value at the granting date. Details of the fair value are provided in the notes to the consolidated financial statements as from page 242. Whether the variable components will actually be paid out to the Board members, and if so how high the sums will be, is not yet certain and will depend on the degree to which individual objectives are achieved, and on the exercise conditions of the long-term incentive plans. Munich Re shares have been acquired to cover future obligations arising from the long-term incentive plans so that the expenses resulting from a growth in value of the stock appreciation rights are neutralised by an increase in the value of the share portfolio.
Name Financial Basic Remuner- Annual Long-term- Value of stock Total Number year remuner- ation in kind bonus 1, 2, 3 incentive- appreciation of stock ation and fringe plan rights appreciation benefits granted rights 2006 – – – – – –
2006 5,612,253 435,614 9,122,556 947,603 3,399,930 19,517,956 155,250 1 At the balance sheet date, no Board resolution had yet been passed on the amounts to be paid for 2007. The amount shown for the annual bonus is based on estimates and the relevant provisions established. The actual amounts paid out will be shown in the following year. 2 Owing to the good business performance, provisions have been established for the maximum bonus amounts for the consolidated result. 3 In the fi nancial year 2006, a total of €9,355,829 was reserved for the annual bonus, whereas the actual amount paid out totalled €9,122,556. 4 Member of the Board of Management since 1 October 2006. 5 Retired from the Board of Management on 28 February 2007.
10 Decrease in basic remuneration due to low dollar exchange rate compared with previous year. 11 Member of the Board of Management since 1 October 2007.
2 Member of the Board of Management since 1 October 2006. 3 Retired from the Board of Management on 28 February 2007. 4 Retired from the Board of Management on 31 December 2006. 5 Member of the Board of Management since 1 October 2007. 6 Retired from the Board of Management on 31 December 2006.
1 The pension commitments include pension entitlements from former employers which have been transferred to Munich Re.
3 Retired from the Board of Management on 31 December 2006. 4 Pension commitment from Munich Re America and personnel expenses of Munich Re America.
The limitation of the total remuneration of each member of the Supervisory Board to two-and-a-half times the fixed remuneration ensures that the overall remuneration of individual Supervisory Board members remains appropriate even if further committees are set up. There are no pension commitments for former members of the Supervisory Board or their surviving dependants.
The total number of Munich Re shares and financial instruments based on these held by all members of the Board of Management and Supervisory Board amounts to less than 1% of the shares issued by the Company.
1 Plus turnover tax in each case, in accordance with Article 15 para. 6 of the Articles of Association. 2 In the case of members of the Audit Committee, the amount includes attendance fees in accordance with Article 15 para. 4 of the Articles of Association. 3 Highest possible amount in accordance with Article 15 para. 2 of the Articles of Association. 4 After capping in accordance with Article 15 para. 5 of the Articles of Association.
– Adherence to “profit before growth” strategy – Result target of 15% on risk-adjusted capital over the full cycle – Increase in corporate value through profitable growth
There is a growing tendency among some capital market players to pursue legal action against companies in connection with statements they have published on future development, a trend that involves considerable loss po tential for the companies concerned and for their other shareholders. This practice inevitably affects transparency, as many companies tend to be reluctant about the information they give on future business performance and disclose only what is required by law.
In reinsurance, this means in concrete terms that we intend to generate additional profit from our reinsurance activities by 2010 and thus be the most profit able of the big five reinsurers. To this end, we have combined strategic business initiatives and organisational and structural projects in our Changing Gear growth programme, aimed at achieving our three ABC goals: Ambitious growth, Best in class and Capital efficiency. At the heart of this programme is our determination to provide our clients even more rapidly and efficiently with products tailored to their needs.
Primary insurance, especially life and health business, is going through a period of great change. The public’s need for cover in the area of healthcare and personal provision is rising and increasingly needs to be funded privately, as state social security systems in the vast majority of European countries are being scaled back. This opens up major opportunities in the medium and long term for our life, health and personal accident insurers. In property-casualty insurance, we expect premium income to grow, mainly owing to strong growth in international business.
Four record results in a row are proof that we are on the right track with our strictly profit-focused corporate policy. With a profit for the year of over €3.9bn (3.5bn) and a return on risk-adjusted capital of 20.2% (20.2%) (a definition of RORAC is provided on page 55), we clearly surpassed our target for 2007. Major contributory factors were the very good performance of our business and one-off income of around €400m from the German Business Tax Reform Act and the Annual Tax Act 2008. For 2008, and for the foreseeable future, we are adhering to our long-term objective of earning a 15% RORAC independent of the market cycles. We will finalise and publish the riskadjusted capital for 2008 when we have comprehensively assessed and e_15_Lagebericht_131-138 131e_15_Lagebericht_131-138 131 07.03.2008 16:46:43 Uhr07.03.2008 16:46:43 Uhr
Management report Prospects published our risk position in May 2008. However, with the aimed-at consolidated profit of between €3.0bn and €3.4bn, we should achieve our long-term RORAC target in 2008. Our active capital management (see page 101 f.) includes returning surplus capital to our equity holders through dividends and share buy-backs. We therefore resolved to buy back and retire Munich Re shares with a volume of up to €2bn before the Annual General Meeting on 17 April 2008. The share buy-back was successfully concluded in January 2008. In addition, we intend to purchase further Munich Re shares for at least €3bn by the end of 2010. Moreover, the Board of Management and Supervisory Board will propose at the Annual General Meeting that the dividend per share again be increased, by €1.00 to €5.50, thus enabling our shareholders to participate in Munich Re’s outstanding result through a total payout of more than €1.1bn. For the current and coming financial years, we intend to pay our shareholders an annual dividend of at least €1bn, basing the exact amount on the size of our annual profit.
Economy The still comparatively robust global economy should remain resilient in 2008, although we are expecting growth to be reduced. The problems that the US property market has triggered in the international financial markets are likely to continue for a while. Another adverse factor is the high oil price, which is showing no sign of a significant decline in view of the tense political situation in the Middle East and strong demand. There is a high degree of uncertainty regarding the further development of the US economy and the probability of a recovery in the course of the year, since further loan defaults at banks could aggravate the public’s loss of confidence and the associated credit squeeze. Given the reduced growth dynamics, we expect inflation to remain more or less constant compared with the previous year.
In Japan, growth is expected to slacken again somewhat in 2008. As real incomes fail to rise, private consumption is being curbed. Exports, in particular to other parts of Asia, should continue to be a supporting factor, however. The rate of increase in prices is likely to be moderately positive.
In the eurozone, as in Germany, the rate of growth is expected to further reduce slightly. Improved employment figures and solid investment demand are continuing to have a positive effect, but the economy is unlikely to escape the impact of the expected global deceleration in growth. Likewise, the marked increase in the euro against the US dollar will have a dampening effect on the export industry. For the eurozone, we project that inflation will remain constant or rise slightly.
The anticipated gradual cooling of the global economic climate is likely to affect economic development in the emerging economies. There should be a marginal slackening of growth in most regions, notably in Latin America, central and eastern Europe, and Asia.
Capital markets The environment for the most important international stock markets will become more difficult as a consequence of the weaker global economic momentum and the uncertainty on the credit markets. After an intermediate high in interest rates in mid-2007, yields on long-term fixed-interest securities are declining again, already having largely anticipated an economic slowdown. Up to the end of 2008, we are proceeding on the assumption that the yield level will rise moderately.
Risks The economic prospects are subject to uncertainties. Especially the US housing market slump, and the crises in liquidity and confidence it has triggered in the financial markets could become more acute than currently expected. Other risks include geopolitical threats, especially in the Near and Middle East, the risk of major new terrorist attacks, and the possible imposition of protectionist measures. Further major risks are the global economic imbalances, especially the substantial deficit in the US budget and current account, which could further weaken the US dollar. In addition, there is great uncertainty regarding the future trend in energy prices.
The insurance industry must cope not only with macroeconomic uncertainties but also with political risks, including state influence on private health insurance and other adverse measures in the field of social, economic and fiscal policy.
Reinsurance Reinsurance continues to hold considerable promise for the future, with a variety of earnings opportunities. We expect the global reinsurance market to carry on growing in the next ten years. We intend to participate in this de velopment and aim to be the most profitable of the big five reinsurers. The basis for achieving this goal is our Changing Gear growth programme.
The development of property-casualty business is likely to be surpassed by the dynamic growth of life and health reinsurance. We predict that the highest percentage growth rates will come from the emerging markets of Asia and Latin America. Given their higher starting level, Europe and North America should nevertheless provide significantly greater absolute growth. With our worldwide presence, we are excellently positioned to tap the opportunities in all regions of the world and fields of business. This applies to business opportunities arising from differences in regional and line-specific market cycles, and to strategic initiatives, e.g. the expansion of Retakaful business written by our newly established branch in Kuala Lumpur (see page 78).
There are a host of avenues for growth with various business models in the field of health business. By strongly integrating insurance and reinsurance and providing a broad range of services, we cover more than the insurance industry’s typical value chain, which allows us to offer our clients services that extend beyond insurance itself. We will further intensify the close cooperation between Munich Re and DKV in selected foreign markets. Our commitment in the American health market will enhance our competitive position. In December 2007, we concluded an agreement with Aon Corporation to acquire a 100% stake in Sterling Life Insurance Company in the US state of Washington via our subsidiary, Munich-American Holding Corporation. We will complete the transaction on 1 April 2008, after all the requisite approvals have been ob tained. With premium income of US$ 833m in 2007 and over 160,000 clients, Sterling Life Insurance Company is one of the leading health insurance providers for the 50+ and 65+ age groups in the US market.
In life insurance, our total premium income should be somewhat higher than last year. Growth promises to be good abroad. We are confident of achieving a turnaround in Germany in the current year. Our German new business should gain further momentum in 2008, especially as a result of the fourth subsidisation stage for Riester policies. We should do well particularly in our unit-linked life insurance, Riester policies and classic annuity covers, not least through our innovations in products with capital-market features. However, the increase in new life insurance business is set to be curbed by the fact that on 1 January 2009 Germany is introducing a flat tax rate for most types of investment income (including realised gains on shares and investment funds), which will result in people favouring these forms of investment this year in order to take advantage of the tax exemption for capital gains on investments purchased before 2009.
We are proceeding on the assumption that premium development in the health segment in 2008 will exceed that of last year. Growth in Germany should be above the market average, while in international business we expect to record a double-digit increase in premium income. Especially in supplementary health insurance, the growing awareness among clients of the need to bridge the gaps in state health insurance coverage by taking out private insurance should result in a good amount of new business. In German comprehensive health insurance, on the other hand, a slight decline cannot be ruled out.
In property-casualty insurance, we expect premium income to increase appreciably, mainly owing to strong growth in foreign business. But our German business should also expand in 2008, whilst the market as a whole is likely to stagnate. In motor insurance, the price erosion should slow down. We aim to keep the combined ratio for property-casualty business including legal expenses insurance at the good level of under 95%.
The gross premiums written by our primary insurers, which in addition to the ERGO Insurance Group include Europäische Reiseversicherung and the Watkins Syndicate, should reach between €17.5bn and €18.0bn for 2008, and thus exceed last year’s figure of €17.3bn.
We are aiming at a consolidated result of €600–800m. The fact that this figure is lower than the results of the last two years is because in 2006 and 2007 we benefited from one-off tax effects and exceptionally positive investment returns above the sustainable levels that we use for our planning. In view of the turbulence experienced on the capital markets in January, it is particularly difficult to forecast the current year’s investment results. To take account of this uncertainty, we have decided to opt for a somewhat greater range in the result target than in a calmer investment market environment. We expect that we will be able to maintain our successful course of the past few years and deliver a positive operating result again in 2008.
For 2008, we anticipate that inflation rates will remain high, partly due to rising commodity prices, and will result in volatility in the bond markets. From an economic point of view, we address this potential risk with our asset-liability management, which matches the maturities of our fixed-interest securities with those of our liabilities.
For the full year of 2008, we project only moderate income from equities in the order of the dividend yields, with greater volatility especially in the first half of the year. In view of the increased risks described, we will, if necessary, reduce the proportion of our investments in equities. On 31 December 2007, our equity-backing ratio stood at 10.8% of total investments on a market-value basis, after taking account of hedging transactions and equity derivatives.
By achieving a 5.2% return on investment in the past financial year, we again exceeded our target of 4.5%. We are sceptical with regard to the stock markets. If prices move sideways or down from their current level, the result will be appreciably affected by write-downs. We have again based our planning for the current year on a return of around 4.5% on our investments at market value.
MEAG will expand its business in China on the basis of its stake in and partnership with PICC Asset Management Company Ltd. (PAMC) in Shanghai, for which it aims to take on the consultancy and portfolio management for some of the monies invested by the PAMC abroad. In addition, MEAG and PAMC intend to selectively expand business for private and institutional investors as soon as the requisite approvals have been obtained from the competent supervisory authorities.
MEAG will also continue its successful business strategy for institutional investors outside the Munich Re Group. Its focus is on institutions which, like us, are subject to the German Insurance Control Act, and on assuming their asset management – from the pure management of their portfolios to the complete outsourcing of their whole value chain, including their back office and risk controlling. German insurance companies are under increasing pressure to consolidate in view of ever stricter supervisory regulations and more and more demanding information technology requirements. As the Group’s asset manager, MEAG sees good opportunities for actively shaping the anti cipated reorganisation and reaping sustained benefits from it.
Marketing of retail funds for private clients is likely to be affected by the German flat-rate tax on investment income that comes into force on 1 January 2009. Only new investments made before the end of 2008 will still benefit from tax emption on realised gains, provided the investments are not sold within the “speculation period”, a fact particularly relevant for equity funds. Many investors are likely to take advantage of this last chance. As from 1 January 2009, even the shifting of investments to maintain a portfolio’s asset structure will come under the new tax. Umbrella funds offer the opportunity to make these shifts at fund level and thus avoid tax liability for the investor. Such umbrella funds, as well as funds oriented towards capital gains, will be at the centre of our marketing campaigns in 2008. In addition, MEAG will be launching a climate fund, in which it will draw on the Munich Re Group’s expertise in researching and utilising climate change for investors.
The risk report and the relevant chapters in the notes to the financial statements are based on the requirements of IFRS 7 regarding the disclosure of risks from financial instruments, and is supplemented by additional disclosures on the uncertainties of future cash flows from insurance contracts, as required by IFRS 4. It also complies with the requirements of the German Accounting Standard DRS 5-20.
Risk management plays a major role in the steering of the Munich Re Group’s operations. The Group deploys a mixture of decentralised and centralised risk management functions, tools and processes for its diverse global business. The central activities come within the responsibility of the Group Chief Risk Officer (Group CRO). For the decentralised risk management activities, which are integrated in the framework of the Group Chief Risk Officer’s duties, we draw on qualified staff in all significant units at the reinsurers and primary insurers in the Group and at MEAG. With our effective integrated risk management we aim to
In day-to-day business, our executives in the business units are also responsible for systematically handling individual risks in insurance and reinsurance. They identify, analyse, manage and monitor the risks on an ongoing basis with support from the decentralised risk management units.
The basis for accepting risks is determined by the Board of Management’s requirements and decisions on risk appetite. These are defined by the Group’s risk strategy, adopted in the annual planning, and consider the impact on capitalisation, liquidity and earnings volatility. They include “whole portfolio criteria” as well as “supplementary” criteria designed to limit and steer peak exposures, concentrations, accumulations and systematic risks across the Group.
Risk management tools and processes are embedded in our business steering concepts, being closely interlinked with the value-based management system applied in the Group. Our business managers are given earnings targets measured on the basis of an added value component and the cost of the capital required for operating the business. The capital required is determined using our internal risk model that takes regulatory requirements into account. In this way, there is an explicit linkage of the results from the Munich Re Capital Model to the remuneration of our business executives. The value-based management framework we deploy is geared to ensuring that the individual business unit’s pricing takes risk-adequate capital costs into account. The technically risk-adequate price is defined as the price which reflects the sum of expected losses, acquisition and non-acquisition costs plus the cost of allocated risk capital.
Risk measurement As a global risk carrier, we can diversify our portfolio through the broadest possible mix and spread of individual risks. In this way we significantly reduce the volatility of total claims payments and substantially increase the value added by all divisional units, since the total risk capital required is lower than the sum of the individual requirements. In relation to the risk-adjusted capital, the return is therefore higher.
For the holistic assessment of the risk situation, risk surveys coordinated by Integrated Risk Management are conducted throughout the Group.
As part of the early-warning system, “emerging risks“ have to be considered. These are risks that may have unidentified effects on our risk portfolio due to changes in risk factors (e.g. legal, socio-political, scientific and technological), where the degree of uncertainty as regards the extent of damage and occurrence probability is very high. Trends and faint signals are identified internally in many different ways: this includes systematic trend research in Group Development, utilising Munich Re’s knowledge management, and risk assessment. Various forms of cooperation with external partners complement our internal early-warning system. One example is our collaboration with the US RAND Institute for Civil Justice on the issue of class actions. Our investments are continually monitored on the basis of various key risk and earnings figures as part of a Group-wide early-warning system. This is designed to ensure the achievement of result targets, the fulfilment of solvency requirements and sufficient equity capital protection at individual company as well as at Group level.
For a quantitative assessment of the overall risk situation, we use our internal model, whose design follows a bottom-up approach. We have selected the financial year as the period for evaluating risk capital requirements at Group level. Risks within this period are covered by risk-based capital derived from our risk tolerance. All risks beyond the annual timeline are accounted for by the costs of holding risk-based capital over time. In so doing, we follow the “cost of capital“ approach.
When determining risk-based capital, we distinguish between market, credit, insurance and operational risks. Within insurance risks, we distinguish between property-casualty and life and health risks. Further subcategories are applied to these risk types – for example, for the property-casualty reinsurance segment, we distinguish between natural catastrophe risks, other accumulation losses (such as terrorism or “liability catastrophes”), large losses and basic losses. Those risks are first modelled separately. In a further step, the risks are aggregated using a combination of empirical and judgemental techniques that allow for the risks of so-called “tail dependencies” (e.g. the risk that extreme events happen at the same time in different lines of business, geo graphies, and risk types) and the overall risk is thereby quantified.
In the Munich Re Group we are guided by the following asset-liability management principles. In a first step, we structure our investments so that they match the characteristics of our provisions as closely as possible. We allow in this step for the economic structure of the provisions as well as any regulatory restrictions on their determination. The result of this “replication” of the provisions is a virtual investment portfolio, which we call the “neutral position”. The neutral position is constructed in such a way that changes in prices and rates on the capital markets and developments in insurance are, as far as possible, reflected in the value of this “drawing-board” investment portfolio in the same direction and to the same extent as in a market valuation of the provisions.
Our asset-liability management, and thus also our taking of asset-liability mismatch risks, is based primarily on the behaviour of the economic value of the assets and liabilities. Effects based on our accounting must be treated with caution, as the financial statements prepared in accordance with the applicable accounting rules do not always fully reflect the economic situation. Besides these aspects, our investment strategy naturally also considers requirements relating to supervisory regulations, accounting and tax purposes.
Within this VaR, all important sources of the market risks of assets are considered, i.e. equity, interest rate, credit spread, and currency, inflation and realestate risks. As far as equity investments are concerned, we model diversified equities using appropriate indices, whereas concentrated equity investments are modelled by name. When modelling these risks, state-of-the-art models are used which allow, for example, for so-called “fat tails” in equity market risk distributions or, within the interest-rate modelling, for the “deformation” of the entire interest-rate curve, and this in a variety of currency regions. Our stochastic modelling is supplemented by applying stress tests, sensitivity and duration analyses. Nevertheless, severe losses cannot be ruled out if reality differs seriously from the model assumptions or stress scenarios.
We only run currency risks to a small extent, since we practise a policy of currency matching, i.e. we match the currencies of our liabilities with assets in the same or similar currencies. Mismatches are strictly limited from an accounting as well as an economic aspect. We use derivative financial instruments to achieve a better match for our liabilities, to hedge parts of the asset portfolio against market-price fluctuations, and to prepare planned purchases and sales. We also hold these instruments for trading purposes in order to enhance earnings, albeit only to a limited degree. As part of our asset-liability management, we have hedged financial options and guarantees embedded in our life insurance liabilities using derivative financial instruments. Credit derivatives are only employed in our investment portfolio to a limited extent.
In our real estate investments, we are constantly optimising the return and risk profile by rejuvenating our portfolio on an ongoing basis, diversifying internationally and investing in top-class commercial real estate primarily located in major European cities.
The market value of our fixed-interest securities as at 31 December 2007 totalled €95.5bn, representing 54.2% of the market value of the Munich Re Group’s overall investments. These securities thus make up the largest portion of our investments available for sale and our investments held to maturity in accordance with asset-liability-management criteria.
The market value of our equity investments, including participating interests, amounted to €24.4bn on 31 December 2007. As at year-end, on a market-value basis and taking hedging transactions into account, the ratio of equities to total investments amounted to approximately 10.8% (31 December 2006: 14.1%).
In reinsurance, the interest-rate risk on investments in units of modified duration is around 5.0 years, whereas the modified duration of liabilities is approximately 5.7 years. Consequently we are, economically speaking, largely immune to the effects of interest-rate increases and falls. In life primary insurance, interest-rate increases are positive for us from an economic point of view when it comes to guaranteed interest rates, since we have higher investment returns with which to meet the guarantees given to policyholders – the guarantees get further “out of the money”. In the case of substantial falls in market-interest rates, the extensive interest-rate hedging programme that we implemented with high option premiums in 2005, and have since expanded, largely secures a level of interest earnings with which we can fulfil the guarantees made to policyholders. If interest rates rise, however, our life insurers and their clients benefit fully from the opportunities for reinvestment. Detailed information and sensitivity calculations relating to the effects of capital market events on the market risks of the Munich Re Group’s investment portfolio are provided in the notes to the financial statements (see page 240 f.).
We have invested 3.1% of our portfolio in so-called structured products, which we regard as meaningful components in our portfolio mix from both a risk and return point of view. Return expectations are, as a rule, correlated with risk expectation, i.e. investments with potentially higher returns entail a potentially higher risk of loss. The fact that structured products can be a very risky form of investment was illustrated by the credit crisis in 2007. It became particularly evident that structured products are exposed not only to the credit risk inherent in the product but also to other risks, such as market risk (see further details of the subprime loan crisis below).
The exposure of the capital market placements, such as the cat bonds Aiolos II (covering windstorm losses in Europe) and Carillon (covering hurricane losses in the USA), was collateralised with financial instruments of best quality, so that the credit risk involved is negligible.
The asset-related and credit-insurance-related credit risks contain accumulation potential in their counterparty default risks. These are therefore monitored in detail. The average credit-equivalent exposure from investments and credit reinsurance to our top ten non-state counterparties is €1,098m.
Management report Risk report €249.1m of all our receivables on underwriting business at the balance sheet date were outstanding for more than 90 days. The average defaults of the last three years amount to €150.1m.
Insurance risks We define technical insurance risk as the risk of insurance losses exceeding our expectations. We supplement our quantitative risk management of these risks with qualitative considerations. For example, our Corporate Underwriting units develop standards for how to assess the “risk of change“ in the business environment, and our claims management departments complement this by monitoring trends in types of claims, such as bodily injury claims under various liability regimes.
Accumulation risks pursuant to individual natural perils are strictly limited at Group level as part of the Board of Management’s strategic risk management framework. Unused capacities are reallocated between business units according to need.
Within the Munich Re Capital Model, risks from natural catastrophes are represented in their entire stochasticity, i.e. by aggregating the full distributions. With this method, it is assured that the tails of the nat cat loss distributions – and the associated possible losses, are captured when determining the capital requirements needed to back nat cat business.
For Munich Re, terrorism does not constitute an insurable peril like earthquake, storm or flood. Unlike natural hazards, terrorism does not occur randomly, and its probabilities and consequences cannot be modelled and quantified with scientific data and methods. The assessment of terrorism risk is therefore based on a mixture of qualitative and quantitative data (e.g. for estimating property damage consequent to an attack of a predefined magnitude), with information on terrorism being inconsistent and not available to all parties in the same detail. This means that accumulation scenarios are extremely difficult to gauge. Munich Re consequently writes terrorism risks with great caution, but we do take advantage of business opportunities where we can constrain the risk sufficiently and obtain risk-adequate prices. We are committed to controlling our risk accumulation and have therefore adopted various measures to control, limit and manage our aggregate terrorism exposure. Accu mulation risks arising from terrorism are monitored centrally, based on a selection of markets, terrorism accumulation zones and scenarios. Within the Munich Re Capital Model, risks from terrorism are represented so that a determination and allocation of risk capital is ensured. Stress testing is also used, given the difficulties associated with quantifying the risk exposure.
Management report Risk report applied. In underwriting reviews, we check compliance with the underwriting guidelines and analyse to what extent actual underwriting conforms to best practice. This also involves specific recommendations on how the quality of the underwriting should be improved in the unit reviewed.
The notes to the financial statements on page 230 ff. include a differentiated analysis of the factors influencing the technical provisions in property-casualty insurance, such as estimating claims expenditure. This presentation is in compliance with IFRS 4 accounting requirements.
Combined ratio for the last ten years 1 Thereof World Trade Center and reserve strengthening at Munich Re America: 24.3%. 2 Thereof World Trade Center and reserve strengthening at Munich Re America: 17.1%.
In life insurance and reinsurance, biometric, lapse and interest-guarantee risks are especially relevant. The calculation of technical provisions is based on “biometric” actuarial assumptions, i.e. on assumptions with regard to mortality and disablement, which also take future trends into account and are regularly adjusted to reflect new knowledge. In primary insurance, the assumptions are determined by the requirements of the supervisory authorities or institutes of actuaries, depending on the specific national regulations, and include appropriate safety margins determined by our actuaries.
As far as the interest-guarantee risk in primary insurance is concerned, the guaranteed actuarial interest rate applicable at the time a policy is effected is used in calculating the actuarial reserve for that policy. Should capital market interest rates fall to a very low level for a prolonged period, our primary life and health insurers might not be able to earn the required guaranteed interest rate. This would adversely impact the profit of business in force and the generation of new business.
In reinsurance, we exclude the interest-guarantee risk in many cases through suitable treaty design.
We attach particular importance to precautionary measures that ensure continuity of our operations in an emergency or crisis situation. Business processes critical to value creation can be maintained or resumed as quickly as possible in such cases. Responsibility for establishing and monitoring this business continuity process in the Munich Re Group has been entrusted to a separate unit, which is guided by internationally recognised business continuity management standards.
These risks are identified and limited by decentralised security organisations that liaise closely.
We counter risks from changes in legislation and court decisions by constantly monitoring current developments and by actively participating in relevant bodies and associations in order to contribute our views.
– The majority of the severe hurricane losses that occurred in 2005, especially from Katrina, have now been settled. Nevertheless, numerous lawsuits against diverse insurers are still pending. The main point of contention is the extent to which flood losses are indemnifiable, the damage along the coast having been caused mainly by the storm surge accompanying Katrina rather than as a direct result of the wind. In New Orleans, it was primarily levees bursting that led to the highest losses. To date, the courts of the US states affected have passed judgements both in favour of and against the insurance industry. Although insurers are frequently attempting to settle claims by compromise, many suits are likely to go all the way to the court of last instance, so that in some cases a final judgement is only to be expected in a few years. As things stand at present, this uncertainty should be covered by our overall reserve for the 2005 hurricanes.
– As a result of our global activities, we are subject to a large number of supervisory regulations in different countries. These may give rise to legal and regulatory risks. In late 2004, the US Securities and Exchange Commission (SEC) and the Office of the New York State Attorney General initiated inquiries of Munich Re with respect to “certain loss mitigation insurance products”. Subsequently, a number of other authorities in the USA and elsewhere made both formal and informal requests for similar information from Munich Re and some of its subsidiaries. We are fully cooperating with these inquiries.
A current example of an overarching accumulation risk is the subprime loan crisis, emanating from the US markets that provided mortgage loans to borrowers with low credit ratings. The crisis has had overarching effects because it impacts both the insurance and the capital market side of our activities.
On the investment side, the subprime loan crisis gave rise to impairment losses and losses on disposal totalling around €166m in 2007. It is mainly market risks that have so far led to the industry-wide losses. The credit risks inherently typical of the products concerned have manifested themselves to a much smaller extent to date, although their increase was the real trigger of the losses in value.
A further example of an overarching accumulation risk is a major pandemic. Like other companies in the insurance industry, Munich Re is exposed in this case to risks from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk with a detailed analysis of our overall exposure (scenario analysis) and the optimisation of our risk structure by transferring the risk, e.g. through the launch of a bond programme for extreme mortality.
As a matter of general principle, our economists constantly study and monitor the economic and political situation of our main markets and inform the Board of Management without delay about relevant trends so that, if necessary, suitable risk mitigation or management measures can be taken. Conceivable scenarios are also discussed and coordinated with our asset management company MEAG to enable us to react promptly and appropriately in respect of our investments held.
Strategic risks arise if the strategy at overall Group level or business-segment level is not compatible with existing and future client requirements, market conditions or other parameters (e.g. economic or regulatory). If these disparities were not recognised, our objectives and initiatives would not take sufficient account of developments. In our strategic planning, we therefore carefully analyse the strategic risks, which are evaluated in individual projects (e.g. investment or market-entry projects) using scenarios and at an aggregate level on the basis of “wild cards”. These wild cards describe events with a very low occurrence probability but a potentially strong impact on our business operations. In addition, we systematically perform SWOT analyses (strengths, weak nesses, opportunities, threats) and, building on these, specify what action is to be taken. Our Group Development Division works closely with our Integrated Risk Management Division and other units involved to ensure that our stress tests adequately reflect the risks underlying the Munich Re Capital Model and our management of cross-line, cross-segment and cross-balancesheet potential accumulation of risks.
We continually review such other risks throughout the Munich Re Group to make balance-sheet provision in good time if necessary.
Current situation In accordance with the prescribed process, Munich Re’s Board Committees explicitly defined the risk appetite for significant risk categories in the year under review and quantified it by means of specific figures. Broken down across the Group hierarchy, the risk appetite was documented and communicated throughout the Group. Risk exposures were regularly quantified in the year under review and compared with the risk tolerance. Since risk exposure was always within the risk tolerance, we assess the Munich Re Group’s risk situation as manageable and under control.
As a result of the progress made in the European Union’s Solvency II project, particularly the publication of the draft Solvency II directive in mid-year, the future regulatory requirements for risk management have become increasingly transparent in the last year. The Munich Re Group supports these developments, which accord with our internal risk management approaches in all the main elements.
F in a n ci a l st a te m e n ts
Consolidated financial statements Consolidated balance sheet 158 Consolidated income statement 160 Statement of recognised income and expense 161 Group statement of changes in equity 162 Consolidated cash flow statement 163 Segment reporting – Segment assets 164 – Segment equity and liabilities 166 – Segment income statement 168 – Investments 170 – Gross premiums written 170 e_17_Abschluss_157-162.indd 157e_17_Abschluss_157-162.indd 157 07.03.2008 18:41:03 Uhr07.03.2008 18:41:03 Uhr
Consolidated financial statements Consolidated balance sheet 1 Adjusted pursuant to IAS 8. For details, please see notes on recognition and measurement and reports on the previous quarters of 2007.
Assets Notes Prev. year1 Change €m €m €m €m €m %
I. Land and buildings, including buildings on third-party land (3) 3,753 4,720 –967 –20.5
Thereof: Investment property held for sale (16) 78 1,164 – 1,086 – 93.3
C. Investments for the benefi t of life insurance policyholders who bear the investment risk 2,178 1,820 358 19.7
Equity and liabilities Notes Prev. year1 Change €m €m €m €m %
II. Provision for future policy benefi ts (20) 94,935 94,660 275 0.3
Thereof: Provision for deferred premium refunds relating to disposal groups (16) –172 –169 – 3 –1.8
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (23) 2,308 1,930 378 19.6
Total equity and liabilities 214,253 215,845 –1,592 – 0.7 e_17_Abschluss_157-162.indd 159e_17_Abschluss_157-162.indd 159 07.03.2008 18:41:04 Uhr07.03.2008 18:41:04 Uhr
Ceded share 843 1,035 –192 –18.6 7. Result before impairment losses of goodwill 5,089 5,481 – 392 –7.2
Issued Capital Retained earnings Other reserves Consoli- capital reserve dated result
Allocation to retained earnings – – 1,972 – – – – –1,972 – –
Total recognised income and expenses – – –67 – 185 – 592 8 3,425 45 3,004
Thereof: Adjustments pursuant to IAS 8 – – –45 – – 4 3 – –15 – – 61
Share buy-backs – – – – 259 – – – – – – 259
Allocation to retained earnings – – 2,437 – – – – – 2,437 – –
Total recognised income and expenses – – 249 – –1,146 – 535 –14 3,854 37 2,445
Thereof: Adjustments pursuant to IAS 8 – – – 31 – – 1 – –7 – – 37
Our reporting on the Group cash flow is based on IAS 7 and the principles of German Accounting Standard No. 2 (DRS 2) issued by the German Standards Board (DSR) for the presentation of cash flow statements. This has been supplemented by the requirements of DRS 2–20, which applies specifically to insurance companies. In accordance with the recommendations of the DSR for insurance companies, we have applied the indirect presentation method. The “cash fund” within the meaning of the German Accounting Standard is limited to cash and cash equivalents shown under balance sheet item F “cash at bank, cheques and cash in hand”. Further information on the consolidated cash flow statement can be found in the management report on page 109.
Gains and losses on the disposal of investments –2,803 – 2,559
Change from the acquisition and sale of investments for unit-linked life insurance – 353 – 289
II. Cash fl ows from investing activities – 5,355 – 4,496
Interest paid 784 715 e_18_Abschluss_163-170.indd 163e_18_Abschluss_163-170.indd 163 07.03.2008 18:41:15 Uhr07.03.2008 18:41:15 Uhr
In accordance with the recommendations of the DSR, we have made the primary segmentation between the fields of reinsurance, primary insurance (each broken down into life and health and property-casualty) and asset management.
The individual fields of business are shown after consolidation of internal transactions within the individual field but before consolidation across segments. This is shown separately in the “consolidation column”.
Life and health Property-casualty €m 31.12.2007 Prev. year1 31.12.2007 Prev. year1
Thereof: Other segment assets relating to disposal groups – 4 – 8 e_18_Abschluss_163-170.indd 164e_18_Abschluss_163-170.indd 164 07.03.2008 18:41:15 Uhr07.03.2008 18:41:15 Uhr
Life and health Property-casualty 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 e_18_Abschluss_163-170.indd 165e_18_Abschluss_163-170.indd 165 07.03.2008 18:41:16 Uhr07.03.2008 18:41:16 Uhr
Thereof: Other segment liabilities relating to disposal groups – 15 – 19 e_18_Abschluss_163-170.indd 166e_18_Abschluss_163-170.indd 166 07.03.2008 18:41:16 Uhr07.03.2008 18:41:16 Uhr
Total equity and liabilities 214,253 215,845 e_18_Abschluss_163-170.indd 167e_18_Abschluss_163-170.indd 167 07.03.2008 18:41:16 Uhr07.03.2008 18:41:16 Uhr
Thereof: Attributable to Munich Re equity holders 725 561 2,589 2,134 Attributable to minority interests – – – –
Life and health Property-casualty 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 31.12.2007 Prev. year1 e_18_Abschluss_163-170.indd 169e_18_Abschluss_163-170.indd 169 07.03.2008 18:41:17 Uhr07.03.2008 18:41:17 Uhr
Reinsurers Primary insurers Asset management Total €m 31.12.2007 Prev. year 31.12.2007 Prev. year 31.12.2007 Prev. year 31.12.2007 Prev. year
Reinsurers Primary insurers Total €m 2007 Prev. year 2007 Prev. year 2007 Prev. year
Munich Re Group Annual Report 2007 171 e_19_AnhangI_171-181.indd 171e_19_AnhangI_171-181.indd 171 07.03.2008 18:41:28 Uhr07.03.2008 18:41:28 Uhr
Notes to the consolidated financial statements Application of International Financial Reporting Standards (IFRSs) 174 Declaration of conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Companies Act 174 Figures for previous years 174 Consolidation 174 Recognition and measurement 178 Changes in accounting policies 178 Standards or changes in standards not yet entered into force 181
Liabilities (A) Equity 187 (B) Subordinated liabilities 187 (C) Gross technical provisions 187 (D) Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 190 (E) Other accrued liabilities 190 (F) Liabilities 191 (G) Deferred tax liabilities 191
(2) Other intangible assets 194 (3) Land and buildings, including buildings on third-party land 195 (4) Investments in affiliated companies and associates 196
Disclosures on the extent and type of risks from insurance contracts and financial instruments (37) Risks from insurance contracts in the life and health segment 230 (38) Risks from insurance contracts in the property-casualty segment 235 (39) Credit risks from assumed and ceded reinsurance business 239 (40) Market risks from financing instruments – Sensitivity analysis 240
(42) Related parties 242 (43) Personnel expenses 242 (44) Long-term incentive plans 242 (45) Remuneration report 245 (46) Employee share-ownership programmes 245 (47) Number of staff 245 (48) Auditor’s fees 246 (49) Contingent liabilities, other financial commitments 246
Auditor’s report 252 e_19_AnhangI_171-181.indd 173e_19_AnhangI_171-181.indd 173 07.03.2008 18:41:28 Uhr07.03.2008 18:41:28 Uhr
Application of International Financial Munich Re’s consolidated financial statements have been prepared on the Reporting Standards (IFRSs) basis of Section 315 a para. 1 of the German Commercial Code in conjunction with Article 4 of Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with Articles 2, 3 and 6 of the aforementioned Regulation and with the Commercial Code rules designated in Section 315 a para. 1 of the German Commercial Code. The consolidated financial statements thus also meet all the requirements of IFRSs. Our presentation currency is the euro (€).
Since 2002, the standards adopted by the International Accounting Standards Board (IASB) have been referred to as International Financial Reporting Standards (IFRSs); the standards from previous years continue to bear the name International Accounting Standards (IASs). Insofar as we do not explicitly refer to a particular standard, we use the two terms synonymously. In accordance with the rules of IFRS 4, underwriting items are recognised and measured on the basis of US GAAP (United States Generally Accepted Accounting Principles). We have also observed the German accounting standards (DRSs) adopted by the German Standardisation Council (DSR) provided they do not contradict the applicable IFRSs.
The group’s income and expenses for the months of November and December have been recognised in the consolidated income statement. Altogether, MSP and Beaufort contributed a break-even result to the 2007 consolidated result; for the whole year, their result totalled €3.6m. MSP earned commissions of €9.3m in the financial year, of which €0.6m is recognised in the 2007 consolidated financial statements.
The opening balance sheets of the two companies at the time of acquisition included the following IFRS figures (amounts directly prior to the business combination): intangible assets of €92.2m (–), other receivables of €1.1m (1.1m), other assets of €14.2m (14.2m), other liabilities of €5.7m (5.7m), other liabilities items of €6.1m (6.1m) and deferred taxes of €21.6m (–). In connection with the acquisition of the shareholding in MSP, goodwill of €3.0m and other intangible assets of €89.2m have been recognised. The amounts capitalised are derived from our expectations regarding earnings strength and growth potential, particularly through access to Syndicate 318’s business and through the commission and service fees for controlling the syndicate.
The opening balance sheets of the two companies at the time of acquisition included the following IFRS figures (amounts directly prior to the business combination): intangible assets of €47.3m (0.3m), investments of €9.9m (9.9m), a ceded share of technical provisions of €15.9m (15.9m), other assets of €89.1m (89.1m), gross technical provisions of €25.9m (25.9m), deferred taxes of €4.8m (0.0m) and other liabilities items of €82.1m (82.1m). Intangible assets and deferred tax liabilities were finally determined in the fourth quarter. The value of the first-time recognition was increased by €4.8m in each case.
In connection with the acquisition of the shareholding in the Bell & Clements Group, other intangible assets of €22.7m and goodwill of €24.3m have been recognised. The amount of the intangible assets is based in particular on the additional future business potential to be derived from utilising the group’s distribution network and know-how, whilst the goodwill is based on the synergies and additional marketing opportunities resulting from integration into the Munich Re Group.
Owing to the fact that the acquisition did not take place until mid-November 2007, Allfinanz’s profit contribution to the consolidated result is of subordinate importance. Consequently, no income and expenses from the business combination have been recognised in the income statement in the year under review.
On 21 September 2007, the Munich Re Group acquired all outstanding shares in Cairnstone, Inc. via its subsidiary Munich Reinsurance America, Inc. With this transaction, our stake in one of the leading providers of stop-loss covers for US employers that finance their employees’ healthcare expenditure was increased from 25% to 100%. The purchase price for the share increase was €18.3m and includes incidental acquisition expenses, other costs such as consulting services, and taxes incurred. Combined with the purchase price of €2.6m for the original stake of 25%, this gives a book value of €20.9m for the shareholding.
For the financial year as a whole, it earned premium income of €7.0m and achieved a nearly break-even result.
No other business combinations as per IFRS 3 are material, either individually or in the aggregate. The İsviçre Insurance Group, acquired in the previous year, contributed an IFRS result of €4.5m.
An overview of the group of consolidated companies and other important shareholdings is provided on page 249 f. The list of all our shareholdings is filed with the Company Registry in Munich under registration number
We generally consolidate subsidiaries and special funds as soon as the Group holds the majority of the voting shares or has the factual ability to exercise control. Acquisitions are accounted for by the purchase method. In order to determine the equity capital at the time of acquisition, we measure the assets and liabilities of the subsidiary or special fund at fair value. The acquisition costs of the shares are netted against the equity capital apportionable to the Group at the time of acquisition. Any residual positive amount is capitalised as goodwill.
Pursuant to IAS 28, associates are generally all entities which are not subsidiaries but on whose financial and operating policies the investors can exercise a significant influence.
Germany Other countries Total 31 Dec. fi nancial year 22 16 38
Changes in accounting policies Application of the recognition, measurement and disclosure methods follows the principle of consistency. Changes have become necessary as a result of new or revised IFRSs. We have complied with all new and revised IFRSs whose application is compulsory for the first time for periods beginning on 1 January 2007. The following standards are of significance in this context: As a result of changes to IAS 1 (rev. 2005), Presentation of Financial Statements, the disclosure of aims, methods and processes used in capital management has been expanded.
First-time application of other new or amended IFRSs or IFRIC interpretations have had no material impact.
c) Owing to an adjustment of deferred taxes posted in the past, retained earnings have been adjusted by €13m for 2005 and by €2m for 2006.
C. IV. Other technical provisions 10,534 – 83 – – 10,617
G Deferred tax liabilities 8,156 –14 – – – 8,142 179Munich Re Group Annual Report 2007
4. Gross expenses for claims and benefi ts 30,798 17 30,815 7. Result before impairment losses of goodwill 5,498 –17 5,481
Thereof: Attributable to Munich Re equity holders 3,440 –15 3,425 Attributable to minority interests 96 –2 94
b) An extension in the scope of pension commitments necessitated an increase of €3m in pension provisions.
d) The recalculation of deferred taxes gave rise to a change of €4m in deferred tax liabilities.
f) Adjustments to uniform Group accounting methods, and corrections in the deferred tax rate after the first-time consolidation of a subsidiary in the 2006 financial statements, led to a rise of €3m in retained earnings.
The adjustments have the following effects on the consolidated balance sheet for the financial year 2007: Consolidated balance sheet €m a) b) c) d) e) f) Total
D. Ceded share of technical provisions – – – – –1 10 9
G. Deferred acquisition costs – Ceded share – – – – – – 4 – 4
A. IV. Consolidated result attributable to Munich Re equity holders – – – – – 1 1
A. V. Minority interests – – – – – 2 2
C. II. Provisions for future policy benefi ts – – – – –3 – – 3
A revaluation of acquired insurance portfolios resulted in a write-up of the initial value and in further write-downs of €8m.
The system for breaking down deposits retained on assumed reinsurance business between the reinsurance segments has been modified – thanks to enhanced IT functionalities – to achieve a more direct allocation. This also results in a shift in “other securities”. The change has no effect on equity.
Standards or changes in standards IFRS 8, Operating Segments, provides new rules for segment reporting and is not yet entered into force applicable for accounting periods beginning on or after 1 January 2009. It is not yet possible to give a conclusive assessment of the effects of first-time application on the Munich Re Group’s segment reporting.
IAS 1 (rev. 2007), Presentation of Financial Statements, contains new rules for presenting the Group statement of changes in equity and the consolidated balance sheet if retrospective adjustments have been made in accordance with IAS 8. The revised standard is applicable for accounting periods beginning on or after 1 January 2009.
The following have not yet entered into force: IAS 23 (rev. 2007), Borrowing Costs, and the interpretations IFRIC 11, IFRS 2 – Group and Treasury Share Transactions, IFRIC 12, Service Concession Arrangements, IFRIC 13, Customer Loyalty Programmes and IFRIC 14, IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. The application of these new rules will not have any major impact.
In February 2008, changes to IAS 32, Financial Instruments: Presentation, and IAS 1, Financial Statements Presentation, were published regarding puttable financial instruments and obligations arising on liquidation. The revised version of IAS 32 enables puttable instruments to be classified as equity in future under certain conditions. The change to IAS 1 concerns new disclosure requirements relating to puttable instruments and obligations in the case of liquidation. The changes to these two standards are compulsory for accounting periods beginning on or after 1 January 2009.
Investments in associates are valued by the equity method at the Group’s proportionate share of their net assets. The associate’s earnings attributable to the Group are included in the investment result. As a rule, the most recent individual or consolidated financial statements of the associate are used; exceptional transactions of material importance for a true and fair picture of the associate’s financial position are recognised in the same financial year. Investments in associates that are assessed as not being material for assessing the Group’s financial position are accounted for at fair value insofar as this can be reliably measured. To determine the fair value, we use the share prices at the balance sheet date if the investments are quoted on a stock exchange; for other investments, the fair value is measured using the discounted earnings or net asset value method.
Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at cost in accordance with the effective interest method. Write-downs for impairments are made in cases where the repayment of a loan can no longer be expected.
Stock options traded on the Listed price − − stock exchange
Total return swaps Theoretical price Market values of the funds Present-value method (hedge-fund certifi cates) Interest-rate curve
Currency options Theoretical price Volatility Garman-Kohlhagen Currency spot rates Money-market interest-rate curve
Currency forwards Theoretical price Currency spot rates Present-value method Money-market interest-rate curve
Insurance derivatives Theoretical price Market values of the cat bonds Present-value method Interest-rate curve
Credit default swaps Theoretical price Credit spreads Present-value method Recovery rates Interest-rate curve
Deposits retained on assumed reinsurance are receivables from our cedants for cash deposits that have been retained under the terms of reinsurance agreements; they are accounted for at face value.
Financial assets in our direct portfolio are generally accounted for at the settlement date. Investments held in special funds are accounted for at the trade date.
Securities that we lend by way of securities lending continue to be recognised in our balance sheet, as the main risks and rewards remain with Munich Re; securities that we have borrowed are accounted for by the lender. Fees from securities lending are shown in the investment result.
The net investment result comprises regular income, income from write-ups, gains and losses on the disposal of investments, other income, write-downs of investments, management expenses, interest charges and other expenses. Regular income and expenses from investments measured at fair value without impact on profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are deducted from or added to the acquisition costs, with impact on profit or loss, until maturity.
We determine acquisition costs on the basis of the average purchase price. In the case of an impairment, a write-down is made to the fair value at the balance sheet date, i.e. generally the publicly quoted market price. If there is a further fall in the fair value of equity investments that have already been written down once, a further write-down recognised in the income statement is made again immediately, even if the impairment is only temporary. Impairments recognised in profit or loss may not be reversed through profit or loss.
In the impairment test for financial assets carried at amortised cost, we first asses whether objective evidence of impairment exists for items that are individually significant. If this is not the case, and also in the case of individually insignificant items, the impairment test is carried out collectively on the basis of groups of similar financial assets. Assets that are individually assessed for impairment are not included in the collective assessment. The amount of the probable loss is measured as the difference between the carrying amount of the asset or group of assets and the present value of estimated future cash flows. The carrying amount is reduced by this amount, which is recognised as an expense. We generally deduct impairments directly from the items concerned on the assets side, without using a value adjustment account. If, in a subsequent period, the reasons for the impairment cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
C Investments for the benefit of life insurance policyholders who bear the investment risk
Current tax receivables and other receivables are accounted for at face value. Adjustments of value are made if there is objective evidence of impairment, cf. assets item B (Impairment).
Under IAS 12, deferred tax assets must be recognised in cases where asset items have to be valued lower, or liability items higher, in the consolidated balance sheet than in the tax accounts of the Group company concerned and these differences will be eliminated at a later date with a corresponding effect on taxable income (temporary differences). Also included are tax assets deriving from tax loss carry-forwards. We take into account the tax rates of the countries concerned and the company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries. Where unrealised losses on securities available for sale are recognised in equity (see notes on asset item B. Investments – Other securities available for sale), the resulting deferred tax assets are recorded but not recognised in income. Deferred tax assets are reversed if a realisation of the corresponding receivable is not probable.
The provision for future policy benefits in long-term underwriting business is posted for the actuarially calculated value of obligations arising from policyholders ’ guaranteed entitlements. As well as life insurance, this concerns portions of health and personal accident insurance, insofar as the business is conducted like life insurance. Measurement is usually based on the pros pective method, by determining the difference between the present values of future benefits and future premiums. The actuarial assumptions used for their calculation include, in particular, assumptions relating to mortality, disablement and morbidity, as well as assumptions regarding interest-rate development, lapses and costs. These are estimated on a realistic basis at the time the insurance contracts are concluded and they include adequate provision for adverse deviation to make allowance for the risks of change, error and random fluctuations. The actuarial assumptions are adjusted if this is shown to be necessary by a liability adequacy test in accordance with IFRS 4.
Other technical provisions mainly include the provision for premium refunds in primary insurance and the provision for profit commission in reinsurance. Provisions for premium refunds are 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. Where these provisions are posted on the basis of national regulations, a retrospective approach is usually taken based on supervisory or individual contract regulations. Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the valuation differences between IFRS and local GAAP on the basis of the expected future participation quotas. For unrealised gains and losses on investments available for sale, which are recognised directly in equity (see assets item B), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in the provision for deferred premium refunds are recognised in the income statement.
All technical provisions are regularly subjected to a liability adequacy test in accordance with IFRS 4. If current experience shows that the provisions posted on the basis of the original assumptions – less the related deferred acquisition costs and the present value of the related premiums – are inadequate to cover the expected future benefits, we adjust the relevant technical provisions with recognition in profit or loss and disclose this under impairment losses/unscheduled changes in the notes to the consolidated balance sheet (see Note 13, Deferred acquisition costs, and Note 20, Provision for future policy benefits). The appropriateness of unearned premiums and of the provision for outstanding claims is assessed in relation to the realistically estimated future amount to be paid. The appropriateness of the provision for future policy benefits is assessed on the basis of realistic estimates of the actuarial assumptions, the proportional investment result and, for contracts with participation in surplus, the future profit sharing.