Valuation reserves not recognised in balance sheet** €bn 1.9 2.6 3.2 1.8 1.1 ***Adjusted owing to first-time application of IAS 19 (rev. 2004). ***Including amounts attributable to minority interests and policyholders. ***Previous years’ figures adjusted owing to change in measurement basis.
Large and very large losses (net) €m 854 3,293 1,201 1,054 1,844 *Before elimination of intra-Group transactions across segments.
**Before elimination of intra-Group transactions across segments. **Adjusted owing to first-time application of IAS 19 (rev. 2004).
Munich Re’s market capitalisation at 31 December €bn 29.9 26.3 20.8 22.1 20.4 **Adjusted owing to first-time application of IAS 19 (rev. 2004). **Taking into account the capital increase in November 2003.
Asia: Beijing, Hong Kong, Kolkata, Kuala Lumpur, Mumbai, Shanghai, Seoul, Singapore, Taipei, Tokyo
North America: Atlanta, Boston, Chicago, Columbus, Dallas, Hamilton, Kansas City, Los Angeles, Montreal, New York, Philadelphia, Princeton, San Francisco, Seattle, Toronto, Vancouver, Waltham
Tireless and persistent, flexible and creative. We track down risks, wherever they are, devising unique and intelligent solutions that add value.
Munich Re Group in 2006 Notable events in 2006 26 Letter to shareholders 29 Members of the Board of Management 32 Report of the Supervisory Board 34 Munich Re shares 38 Strategy 43
Kent Nagano has just finished an orchestra rehearsal for an Academy concert. He has a few brief words with an orchestra musician about the final touches for the performance in a couple of days. A few moments later, he meets Nikolaus von Bomhard on the “Bridge of Sighs” between the opera and the rehearsal building. Artist and businessman are soon engaged in lively conversation. The fact that they already know each other from the Premium Circle of the Opera, in which Munich Re is a long-standing sponsor, makes it easy for them to get talking. They speak about perseverance, a topic of great relevance to both of them. What significance does this quality have for them as conductor and chief executive?
Nikolaus von Bomhard_ A company with a history like ours gives us the strength to be more persevering than others because we have deeper roots. As you mention, the time-horizon today is unfortunately a shorter one in some respects, but I think it is longer than some people think. Trying to manage expectations of what can be delivered in a reasonable time – that is the challenge for us today.
Pressure is put on us to deliver on our strategies each and every quarter. But if you are really interested in our enduring results, this is misleading. Our business model has a much longer perspective and is a more sustainable one. That’s why we made the issue of climate change and its risks public back in the seventies, as we felt that it was something of outstanding future importance. Climate risks were and are emerging in unprecedented dimensions. We are risk-scouts – that’s where perseverance and innovation are needed in equal measure. Back then, we were a voice crying in the wilderness. Climate change wasn’t fashionable at all. Now, 25, 30 years later, climate change is a topic high on the agenda everywhere. This is just one example of the type of situation in which I, in my leadership position, feel regularly challenged. People devote a great deal of attention to fashions, even to hype, whereas we at Munich Re are long- or at least medium-term-oriented: we may not have the same “sex appeal” as, for instance, competitors who are interested in action only for action’s sake. Employees may get nervous and say: “Others may overtake us; they follow the trend and we look boring by comparison.”
Kent Nagano_ “Fashionable” is by definition something that does not last. One should say that conviction and will touch humans as a kind of life force that can sometimes be completely uncoordinated with the natural rhythm of fashionable cycles and may take some dramatic forms. Think of Ludwig van Beethoven’s great ninth symphony. When it was premiered, the audience was bewildered that the great and cherished master could write something so seemingly incoherent. The critics were unable to understand the depth of Beethoven’s achievement. Because after the long period between the eighth symphony and the ninth symphony, people were expecting and waiting for something tremendous and enlightening to come. What did arrive was so visionary that it was apparently incomprehensible. Beethoven died before the ninth symphony was accepted as a universal statement. It is such an inspiration to us all that it managed to become a recognised masterpiece and has remained so over time. Beethoven had a very profoundly rooted conviction. If you look at it from the perspective of several hundred years, you can see that it broadened people’s concepts of what music is and can be. But in Beethoven’s lifetime the symphony was never “fashionable”.
Nikolaus von Bomhard_ My experience is that if you lead or run an organisation and you have a long-term vision, one thing is indispensable: you must communicate, explain – and convince. Only if as many people as possible share your view, will this build the momentum that you need to remove obstacles. In addition, your vision must of course be based on some sort of hard experience and know-how. From that, you derive the power of conviction.
I think to succeed in today’s fast-moving and competitive business environment, you have to be incredibly creative, spontaneous and flexible. Flexibility presupposes being able to think in abstract terms. This enables one to come up with alternatives that are not immediately apparent in a completely linear way of thinking. This being said, there are a lot of parallels between the business and the arts world. That is one reason why arts education, and specifically musical education, is so important. The point would not be to try to generate thousands and thousands of new concert pianists and solo violinists. These are always rare and exceptional cases. But scientifically it has been proven that by being introduced to artistic concepts at an early age, a child learns to deal with problem-solving and to engage in his or her environment in abstract terms, to really approach things in a multidimensional, multi-level way, which of course encourages the flexibility that is also essential for successful chief executives and for successful companies.
Nikolaus von Bomhard_ That’s why I actually want everyone to be free to challenge my ideas. The two of us are also in danger of becoming stubborn about certain ideas if we are so convinced of them. Of course, if you say “This is what we do, this is how we do it”, you save a lot of time, but you run the risk of getting it badly wrong. The art is to provoke criticism, check out its core message, and then decide whether this has implications for you. That’s why I think it’s very helpful to create space around you for other opinions.
Nikolaus von Bomhard_ Every individual has a right to expect something different. There are many expectations relating to our company. The important thing is not to be arrogant but to offer an alternative perspective. It is the
When I took over my position, I had one main goal: to make our business profitable by increasing our portfolio quality. This took time and much effort, and it was and is often hard to be consistent and let the unprofitable business go. But now we are starting to harvest the fruits.
Kent Nagano_ In the end, defining a leadership profile requires strong personality. And it’s only through perseverance that you can develop a depth of conviction and therefore a depth of character. The strength of that conviction and what you are prepared to fight for are the elements from which we extract personality, character and refine and focus a sense of will. Personality, character and sense of will are integral parts of leader functions. If one is to assume the responsibility of leadership, it almost implies that you must have the skills which are only brought about through vision and perseverance.
Nikolaus von Bomhard_ One might say that all the really important achievements in human history have been accomplished thanks to people who persevered. Of course,
At the end of October 2006, Sir Nicholas Stern presented the results of a study commissioned by the British government on the economic impact of climate change. The Stern Review Report predicts annual costs equivalent to at least 5% of global GDP unless action is taken quickly to mitigate the effects. Compared with these cost burdens, it says, expenses for climate protection are only moderate and would promote long-term growth. Heike Trilovszky explains how Munich Re is responding to the prospect of a further increase in natural catastrophe losses.
Ms. Trilovszky, the insurance industry can look back on a quiet year for natural catastrophes. Has climate change been over-dramatised?
Heike Trilovszky_ One quiet hurricane season cannot be taken as evidence that the climate is not changing. We have been pointing to the rising trend in natural catastrophes for a long time. That doesn’t mean events have to become more frequent and stronger every year, of course – there is a great deal of volatility. But if these fluctuations are factored out, we are left with a definite upward trend which has a lot to do with climate change.
Page 12 Hohenpeißenberg is one of 22 global observing stations around the world monitoring negative impacts on the atmosphere as part of the Global Atmosphere Watch Programme.
Are you saying that the Stern Review’s findings match Munich Re’s?
Heike Trilovszky_ It is undoubtedly affected by this development and will play its part in tackling the problem. But if higher losses are to be expected, premiums have to keep pace. In other words, the community of policyholders ultimately has to pay for the increased risk. It’s also clear that the insurance industry can help shoulder only the financial consequences – let’s not forget that one of the main threats posed by natural catastrophes is to human life. In addition, a large portion of the loss and damage is not insured. Of course, preventing losses and adjusting to the new challenges also cost money. But as the Stern Review shows, it would be a price worth paying: from the economic point of view, it would be sensible to act now.
Heike Trilovszky_ Naturally we will have to reckon with higher losses – but despite its drastic long-term effects, climate change doesn’t come as a surprise. This means we can manage natural hazard risks in such a way that we can continue to cover them. We still see them as part of our core business and have a great interest in making the best possible use of the opportunities in this market segment. And if the private insurance industry’s coverage of natural hazard risks complements effective action against climate change, this is a winwin situation for everybody.
In 2005, Hurricanes Katrina and Wilma clearly showed that natural catastrophes are getting more frequent and more intense. How is Munich Re reacting?
Heike Trilovszky_ Firstly, we have become more critical with regard to information on exposures and attach more importance to data quality. Secondly, we have adjusted our models to take account of aspects that had not previously been given sufficient consideration. But even the best models are not perfect, which is why we constantly update and refine them: like research, natural-hazard modelling is a job which is never finished. We do this for all scenarios. That’s our business: that’s risk – it’s what we live with.
In the process, we not only learn something about the individual events, of course, but also add to our general understanding of causes and effects. So after the experiences in the USA, it was logical in autumn 2005 to examine how good our models were for storm surge or business interruption on the European and Asian coasts as well. You see, we also consistently implement new experience without delay in underwriting and risk management.
What in your view is the key to Munich Re continuing to fulfil its economic function and turning these risks into value?
Interview Bernd Ottemann is Chief Financial Officer and member of the Board of Apollo DKV Insurance Company; Chandra Sekhar Chivukula is member of the Board and Chief Marketing Officer.
Two years ago, we reported on the success of Paramount, our service company in the Indian market. In the meantime, DKV Deutsche Krankenversicherung has launched a joint venture with the Indian Apollo Hospitals Group to develop one of India’s first health insurers, Apollo DKV Insurance Company, thus intensifying the Munich Re Group’s activities and involvement in the Indian market. With 38 hospitals and numerous pharmacies and diagnostic centres, the Apollo Group is the largest healthcare provider in Asia and hence an ideal partner for DKV in this dynamic environment. Bernd Ottemann and Chandra Sekhar Chivukula report on their pioneer work and the special features of the Indian health market.
Mr. Chivukula, Mr. Ottemann, since October 2006 you have been jointly developing one of the first private Indian health insurance companies. What is so attractive about the Indian market?
Chandra S. Chivukula_ A great opportunity in the Indian market is the large uninsured population. Currently only about 3% of the population have private health insurance cover. 80% of healthcare expenditures are out-ofpocket. In addition to this, we have what is probably the world’s fastest growing middle-class segment which can actually afford health insurance of a good quality and a good price. We also have a substantial young population, which is of course a good risk for health insurance. So it is not only the growth potential, but also the chance to grow exceedingly profitably.
Chandra S. Chivukula_ Currently there are several health insurance products which are sold by general insurers or non-life insurers, so we would like to initially come up with products which are comparable to these, but with enhanced features and improved customer-service focus.
What is the make-up of the team with which you are developing business and how do you profit from one another in the joint venture?
Chandra S. Chivukula_ Both jointventure partners are adequately represented. We have specifically identified the respective home-grown competences and we are going to staff the company suitably with the core competences of each party. In the case of the Apollo Group, that means extensive market knowledge and the know-how of the largest health provider in Asia.
Bernd Ottemann_ It definitely was helpful, yes. We arranged a visit to Abu Dhabi by a core team in December, during which we had a detailed discussion about the major requirements and challenges. We benefited significantly from their experience, for example with the core IT systems or with setting up the necessary processes. With respect to China, some of our team members also participated in establishing the Chinese PICC Health Company, so we are able to incorporate their expertise into our product and in our project team as well.
In what direction are you planning to expand your range of products in the coming years? What share of the overall market are you aiming at in the medium term?
Bernd Ottemann_ This is a product so far totally unknown in the Indian market. Healthcare costs in India are increasing at a very high level, so to come out with products with features like ageing reserves, we have to gain a lot of experience and to investigate the market very thoroughly. This is definitely one of the long-term targets for the company.
Chandra S. Chivukula_ In terms of market share, our target is 7% by the end of year 5, and 10% to 12% by the end of year 10. However, the purpose of this organisation is not only to be number one but to be a profitable and self-sustaining company with an excellent reputation for quality and good practices.
Bernd Ottemann_ We don’t want to be the biggest company, but the most profitable one. The Indian health insurance market is developing from a cross-subsidised market, where health cover was more or less only a supplement, to a market where health insurance products will have a much higher exposure and will have to compete. We need to be able to prevail and still grow.
Chandra S. Chivukula_ And we have to build up a brand which is synonymous with good quality and consumer trust. On a long-term basis, a lot of perseverance will be required because of the high degree of competition and price pressure we anticipate in the coming years.
Bernd Ottemann_ As we said, in this competitive environment, we not only have to survive but also have to be profitable. Therefore, profitability will be one of our most crucial targets, which will certainly demand a great deal of sustained effort.
Page 14 Nurses at the Apollo Hospitals Campus in Hyderabad, where nearly 100,000 patients are treated annually.
The H5N1 bird flu virus received extensive media attention in 2005 and the first half of 2006. Since then, the pandemic issue has virtually disappeared off the public radar. Nevertheless, the alert level on the WHO’s sixpoint scale remains at three. In an interview with Dr. Manuela Zweimüller, we talked about the actual risk situation and how the Munich Re Group is responding to it.
Dr. Zweimüller, we haven’t been hearing much about pandemics lately. Were the concerns mostly media hype?
Manuela Zweimüller_ The media play a critical role in how people perceive risk. But experts around the world agree that we will have a pandemic. They just don’t know when and how severe it will be. The bird flu virus called H5N1 that we are dealing with at the moment is currently transmitted to humans only rarely through very close contact with infected birds. Around 270 human infections have been officially reported in a period of slightly more than three years, but with a very high rate of mortality. Only a few exceptional cases have been found to involve human-to-human transmission. For the avian virus to be transmitted from one person to another, it first has to adapt to the human host, i.e. undergo a genetic
modification. This, of course, also applies to other viruses carried by animals, because H5N1 is not the only possible cause of a pandemic. In order to assess the risk involved, we put our analyses on a technical and scientific basis whenever possible.
What scenarios are used by Munich Re? Manuela Zweimüller_ We are using a number of scenarios which differ in key parameters such as the duration and spread of the pandemic, and infection and mortality rates. The WHO scenario with the highest occurrence probability is comparable to the Asian flu of 1957/58 and the Hong Kong flu of 1968, which were both fairly mild. This scenario did not produce any pronounced changes to original mortality rates when we applied it to selected industrialised countries. Of course, we have also looked at a worst-case scenario, although we do not consider it realistic. And we are investigating scenarios which are in between the two extremes. This has been the basis for analysing our portfolios. It is important to bear in mind that a pandemic would affect a large number of countries and regions around the world within a short period of time. This means that geographical risk diversification is no longer an option.
Manuela Zweimüller_ First of all, like any other company, we must ensure that business can go on when a pandemic occurs. This is part of our overall business continuity planning. The WHO strongly advises all companies and public authorities to identify possible shortcomings in this respect, for example by means of checklists.
Manuela Zweimüller_ Higher mortalities and an increased number of visits to the doctor, hospital admissions and absences from work as a result of mass infections would, of course, primarily affect our life and health portfolio. Property and casualty lines (e.g. business closure insurance), would not be hit nearly as hard, but of course also contribute to our overall exposure. We can monitor the pandemic risk by using the scenarios to regularly check our portfolios and take appropriate action if required. And of course, we closely monitor how the threat develops by continuously analysing the official data gathered by the WHO around the world. Therefore, the underwriting risk can be assessed quite accurately. Our overall insurance exposure from a potential pandemic does not exceed that from a major natural catastrophe. What is most difficult to evaluate, however, is the impact on the global economy and, consequently, on the investments of the Munich Re Group. On the basis of the WHO scenario which we consider the most likely, we predict that the global economy will only be temporarily disrupted and that the ensuing shock to the capital markets will be short term and non-persistent.
Page 21 The Spanish flu epidemic of 1918 was also started by an avian flu virus.
The European Commission’s objective in introducing Solvency II is to harmonise and modernise the European insurance market. The project is built on the “three-pillar approach” also found in Basle II: minimum capital requirements, internal and external supervisory methods, and market transparency. The requirements of Solvency II present small and highly specialised insurers in particular with major problems. Philippe Marie-Jeanne and Hubert Rodarie of insurer SMABTP, the French market leader in coverage for the building sector with a premium volume of nearly €1.2bn in propertycasualty insurance, talked to Claus
Brinkmann of Munich Re about the implications of Solvency II and the special situation of small and specialist insurers.
Interview Hubert Rodarie and Philipp Marie-Jeanne are members of the Board of SMABTP. Hubert Rodarie is responsible for finance and insurances of the person. Philippe Marie-Jeanne’s responsibilities include marketing and reinsurance. Claus Brinkmann heads Munich Re’s Solvency Consulting Project Group, which develops reinsurance and service concepts for primary insurers in connection with Solvency II.
liners. And I hope that reinsurers and the solvency model will still recognise our capabilities. So if we have the support of our preferred reinsurers and also a fair model, I think that we still have a real position in the market and a bright future of our own.
Claus Brinkmann_ I agree completely with what you said. A basic principle of our business model is to support small and medium-sized companies in reducing their size-driven disadvantages. To have only a few huge clients left in the world is not what we are aiming for, of course. I think one of the most crucial points will be the definition of the standard model. Do you think the standard model adequately reflects your risk situation, which is strongly geared to long-tail risks?
Philippe Marie-Jeanne_ No, definitely not. Under the current solvency regime, recognition of the positive effect of reinsurance is insufficient because it only involves the ceded premium. Particularly for the reserve risk, the effect of non-proportional reinsurance is not adequately acknowledged under Solvency II. In order to identify the real impact on risk mitigation, it would be necessary to distinguish the effect of the mean ceded exposure and the reduction of volatility due to reinsurance.
Hubert Rodarie_ Solvency II could clearly lead to a better and more commonly accepted view of risks. But as far as long-tail insurers in France are concerned, we gave up the Solvency I standards as a measure of our risk. So Solvency II, if it is implemented properly, will not have a great effect on our pricing.
Hubert Rodarie_ Certainly, though it’s difficult to say in what proportion, as long as we don’t know the final design of Solvency II and how the supervisors will act in this landscape.
Page 25 Daniel Buren’s column installation in the Cour d’Honneur of the Palais Royal is not far from Munich Re’s offices in Paris.
Another record result Thanks to excellent results in reinsurance and primary insurance business, Munich Re achieves another record profit of €3.5bn. The dividend proposal of the Board of Management and Supervisory Board at the Annual General Meeting on 26 April 2007 will therefore be payment of an increased dividend of €4.50 (3.10) per share (45% higher than last year). Pages 66, 142
New IT platform successfully introduced In September 2006, Gloria (Global Reinsurance Application ) replaces 17 legacy systems in Munich and in many directly connected business units in the international organisation, thereby accelerating processes and the handling of reinsurance transactions. Page 109
. sviçre Group, thus attaining a leading position in the dynamic Turkish insurance market. Pages 43, 90
D.A.S. expands business in Germany and abroad ERGO subsidiary D.A.S., Europe’s largest legal expenses insurer, sets up a subsidiary in Estonia and introduces the class of legal expenses business there, with initial focus on cover for car drivers. In the German market, D.A.S. continues its strategic development from a reimburser of costs to a legal services provider with a new product generation. Page 90
Scaled-down Munich Re Board of Management Christian Kluge and Karl Wittmann retire as members of the Board of Management on 31 December 2006; Dr. Heiner Hasford retires on 28 February 2007. Dr. Ludger Arnoldussen, hitherto Chairman of the Board of Management of Swiss Re Germany AG, Munich, is appointed to the Board of Management to take over the Germany, Asia Pacific and Africa Division and also General Services. Pages 32, 36
Catastrophe bond for earthquake risks in California By transferring earthquake risks in California to the capital markets for subsidiaries of the Zurich Financial Services Group (Zurich), Munich Re again provides a capital market solution for peak risks. In the event of earthquakes in California leading to large losses, US$ 190m will be available either fully or in part as cover for reinsurance. Page 85
Notable events in 2006 / Letter to shareholders / Members of the Board of Management / Report of the Supervisory Board / Munich Re shares / Strategy
Risk, in all its facets, remains our core business. Through active diversification and excellent management, we systematically transform it into value.
The financial year 2006 was another excellent one for the Munich Re Group. We succeeded in posting a record result for the third year in a row: €3.5bn, after €2.7bn in the previous year and €1.9bn in 2004. Thus we markedly exceeded our original expectation of €2.6–2.8bn for 2006. The same applies to RORAC, our return on risk-adjusted capital, where we had set ourselves a target of 15%. What we actually achieved was 20.3%.
On the basis of this result, we will propose to the Annual General Meeting that the dividend be increased by 45% to €4.50 (3.10), which would mean a payout of €988m (707m) to shareholders. Together with the successfully concluded share buy-back of €1bn, we are consequently giving the capital markets nearly €2bn, or 58% of the consolidated profit for the year, by the end of April.
The result for the past financial year, with our outstanding component results in both primary insurance and reinsurance, vindicates our strategy. The profit increase at ERGO from €786m to €906m is a notable achievement. The excellent combined ratio of 90.7% (92.3%) in property-casualty insurance underscores once again the high quality of ERGO’s business.
The reinsurance result – with a profit of €2.7bn (1.4bn) and a combined ratio of 92.6% (111.7%) – was also very positive. Admittedly, we were largely spared major natural catastrophes in 2006, unlike in 2005 with its severe hurricanes. But it is still apparent that we are reaping the rewards of our very selective and risk-commensurate underwriting, where we consistently give priority to profitability over growth in volume.
In practice, this means that we still have to be prepared to give up business that is no longer profitable. As I see it, there is no alternative. In the renewals of the majority of our reinsurance treaties at 1 January 2007, we therefore consciously accepted some reductions in business volume necessitated by the current state of the market cycle – in contrast to some competitors. I consider this approach to be absolutely right: it is acting in the interests of profitability and thus in your interests as Munich Re’s shareholders.
But we intend to achieve growth in other areas to compensate – indeed, more than compensate – for business we have given up in segments that are no longer profitable. This is our aim, for example, with our overarching integrated health market strategy, from which I expect a great deal in the long term. The synergy potentials here between primary insurance and reinsurance are undeniable. As part of this strategy, we are also diversifying into areas of activity that complement our core insurance and reinsurance business. In primary insurance, we find opportunities for profitable growth in Germany, of course, but especially in selected markets abroad. And we develop reinsurance business in all areas where there is attractive potential, as we did last year in US agricultural insurance. In saying this, I wish to emphasise that reinsurance is also a promising field for “intelligent growth” in the medium and long term, but it requires staying power, since this business cannot be grown steadily across the board from year to year – experience indicates that expansion will take place in stages.
What about external opportunities for growth through the acquisition of companies, parts of companies or individual portfolios? We are basically very open to such options but will not be rushed into making rash decisions. There is certainly no lack of offers: on the contrary, we regularly consider a great many. However, in our opinion, the prices demanded are currently not acceptable in relation to our return requirements. As in our underwriting, we remain disciplined and will not compromise our position.
Ladies and gentlemen, we have frequently highlighted the Munich Re Group’s guiding principles for a sustained profitable future: our mission statement headed “Turning risk into value”, our three “cardinal virtues” – the professional handling of risk, integrated management as a means of optimum diversification, and the objective of excellence in management and operational processes. Lastly, there is the principle of “profit before growth”. We want to preserve the values we have developed over many years in our Group
The result targets we have set ourselves in the current year are again ambitious. We aim for an increase of around 10% on the result originally expected for 2006. Specifically, our target is an attractive return of at least 15% on our risk-adjusted capital. As far as the Group profit is concerned, we are looking to achieve a result of between €2.8bn and €3.2bn. Of course, I would prefer it to be in the upper part of this range and be able to report a “3” before the decimal point to you again this time next year. The growing demand for top-class primary insurance and reinsurance cover worldwide certainly provides a very promising business environment for the Munich Re Group, whose outstanding expertise and market presence in its core field of “risk” puts us in an excellent position.
(until 28 February 2007) * 1947, lawyer, with Munich Re since 1978 Group Investments, Corporate Finance, M&A; Legal and Regulatory Affairs, Compliance; General Services; Organisational Design and Development
(Chairman of the Reinsurance Committee) * 1961, mathematician, with Munich Re since 1990 Corporate Underwriting/Global Clients; Reinsurance Investments; Accounting, Controlling and Central Reserving for Reinsurance
John Phelan * 1947, underwriter, with Munich Re since 1973 North America
(Board member responsible for personnel and welfare matters, within the meaning of Section 33 of the German Co-Determination Act) * 1956, graduate in economics, with Munich Re since 1988 Life and Health; Human Resources
Focal points of the meetings of the full Supervisory Board were the individual quarterly reports and the outlook for the annual result 2006, on which the Board of Management reported in depth. We gave detailed consideration to the development of the Munich Re Group’s results and compared them with those of its competitors. We reviewed and discussed the Company’s strategic orientation and talked about its further development with the Board of Management. We dealt intensively with the Group’s planning for 2007 and 2008, focusing especially on the result target. The Board of Management informed us on a regular basis about the Company’s risk situation and profitability. We satisfied ourselves of the fact that integrated risk management and risk governance have been consistently refined. For example, the Board of Management presented to us a method for modelling natural hazards, the consequences of which we discussed at considerable length. We received routine reports on the business situation of Munich Re America. Likewise, we were briefed by the Board of Management on major losses affecting the Group. We were also provided with an insight into the Munich Re Group’s integrated core management system (major IT project Gloria), which was successfully implemented in Munich in the year under review. Prior to the 2006 Annual General Meeting, we looked into the proposal to cancel the existing authorisation for increasing the share capital under “Authorised Capital Increase 2001”
Munich Re Group in 2006_Report of the Supervisory Board and to create an Authorised Capital Increase 2006 for issuing employee shares. Furthermore, we thoroughly discussed on several occasions the Board’s decision to launch a share buy-back programme. Our consultations also focused on the Company financial statements and Group financial statements for the financial year 2005.
Other important subjects on the agendas of the Supervisory Board meetings included the investment report, the Board of Management’s human resources report and the effects of the German health reform on health insurance, with particular reference to DKV Deutsche Krankenversicherung AG.
Work of the committees The composition of the four committees of the Supervisory Board (Standing Committee, Personnel Committee, Audit Committee and Conference Committee) is shown in the overview on page 58.
Corporate governance and declaration of conformity As in previous years, Munich Re’s Supervisory Board worked intensively on issues of corporate governance. It reviewed the structure of the Board of Management’s remuneration system on the basis of a proposal by the Personnel Committee and analysed the efficiency of the Supervisory Board’s work based on the Standing Committee ’s suggestions. Moreover, the Standing Committee recommended the full Supervisory Board to adhere to the
same trading restrictions and exercise windows as the Board of Management with regard to transactions involving Munich Re’s listed securities. Further information on corporate governance is available in the joint corporate governance report of the Board of Management and Supervisory Board on page 111.
Dr. Ludger Arnoldussen was appointed to Munich Re’s Board of Management with effect from 1 October 2006. He previously served as Chairman of the Board of Management of Swiss Re Germany AG and is now responsible for Munich Re’s Germany, Asia Pacific and Africa Division. To streamline the Board of Management’s work, the divisions of which Dr. Hasford, Mr. Kluge and Mr. Wittmann were previously in charge have been restructured. The responsibilities not assumed by Dr. Arnoldussen have been reassigned to the other members of the Board.
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. In accordance with Article 3 para. 2 of Munich Re’s Articles of Association, it is at the Company’s own discretion whether to give its consent. Since the share-trading processes have been made very efficient, consent does not lead to any delays in entry in the register. In recent decades, it has been granted without exception.
The authorisations granted to the Board of Management to issue or buy back shares are listed in the management report. They are within the range of what is customary in the market and allow Munich Re to engage in active capital management. They enable the Company 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 buyback, authorisations also enable Munich Re to buy back shares and thus return to shareholders capital no longer required for an efficient capital structure.
Munich Re’s Articles of Association do not include any special features regarding the appointment and dismissal of members of the Board of Management. Sections 84 and 85 of the German Stock Companies Act and Sections 30–33 of the German Co-Determination Act apply. The Articles of Association do not contain any provisions regarding amendments to the Articles of Association deviating from the legal principles stipulated in Sections 124 paragraph 2 sentence 2, and 179–240 of the German Stock Companies Act.
After the Audit Committee, the Supervisory Board also examined the Company financial statements, the Group financial statements, Munich Reinsurance Company’s management report, the Group management report (including the report on the Company’s profitability) and the proposal of the Board of Management for appropriation of the net retained profits. The Supervisory Board agrees with the outcome of the external audit. After conducting its own concluding examination, the Supervisory Board has no objections to the Company financial statements and Group financial statements. 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 19 March 2007. The Supervisory Board also unconditionally supports the Board of Management’s proposal for appropriation of the net retained profits.
Munich Re shares DAX 30 Morgan-Stanley insurance index (MSCI) in €
Munich Re Group Annual Report 2006 Munich Re Group in 2006_Munich Re shares
Long-term performance of Munich Re shares On 1 July 1988, the date on which the German share price index DAX was launched, a shareholder buying a portfolio of 100 Munich Re registered shares with a par value of DM 100 each (= €51.13) at a share price of DM 1,450.00 (= €741.37) would have had to invest a total of €74,137.32 (excluding transaction costs). After the two stock splits in August 1997 and January 1999, this investment would today comprise a portfolio of 2,000 no-par-value shares.
Another dividend increase Given the record result in 2006, the dividend proposal of the Board of Management and Supervisory Board at the Annual General Meeting on 26 April 2007 will be the payment of an increased dividend of €4.50 (3.10) per share (45% higher than last year). Altogether, we will thus distribute a record amount of €988m (707m) to shareholders.
Since 2004, Munich Re has been pursuing a 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.
Share buy-back as an additional yield If a company buys back shares and then retires them, the number of shares issued consequently falls. Future profits are divided between fewer shares – the earnings per share increase. Besides the dividend, shareholders will thus receive an additional yield in 2006; altogether, the payout ratio to shareholders will amount to 58% of the profit for the year.
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 (98.3%) takes place on the electronic platform Xetra.
Strong weighting in many indices Munich Re shares have been represented for many years in important national and international share price indices like the DAX and the EURO STOXX 50. In the sector indices for insurance companies, they have traditionally had a high weighting.
We publish all important investor relations information on our website where, besides annual and quarterly reports and investor presentations, we provide details about our shares, our current shareholder structure, analysts’ opinions, important dates in the financial calendar, and much more. The service pages of our shareholder portal (www.munichre.com/register) offer our shareholders vari-
Higher proportion of shares represented at the Annual General Meeting The 119th Annual General Meeting of shareholders on 19 April 2006 was attended by over 4,000 at the International Congress Center Munich. The proposals of the Board of Management and Supervisory Board on the individual agenda items were adopted by the shareholders with very clear majorities in each case.
Intelligent solutions for profitable growth us with many options, enabling us to channel our growth initiatives flexibly into those segments and regions that promise the largest value increase.
We intend to exploit the global potential for profitable growth in primary insurance mainly by selectively and systematically extending our regional activities. Currently, we are focusing on selected countries in eastern and southeastern Europe (hence the purchase of I
Our paramount strategic objective continues to be a sustained increase in the Munich Re Group’s value, with a positive share price performance in relation to the market and our peers. Through a combination of strategic initiatives, we are equipping ourselves to meet these goals on a longterm basis.
Geared to profitable growth Our efforts are geared to strategies that can generate longterm profitable growth. For us, premium growth is not an end in itself: it must also offer sufficiently good earnings prospects. Naturally, we have to reckon with and be able to absorb result fluctuations, given the volatile nature of reinsurance business (which offers exceptional profit opportunities as well as undisputed risks) and the capital markets. We do not dismiss any options for expansion out of hand, whether they be initiatives for organic growth or growth through acquisitions, where we can exploit the financial scope that is available to us as a result of our strong capital base and our high earnings level. But we will proceed very selectively and not allow ourselves to be put under pressure – for example, by competitors growing as a result of measures that are not suitable for us.
All the initiatives mentioned here are based on our “cardinal virtues”: excellent operative management at all executive levels and outstanding administration processes at both Group and business-field level. These virtues require persistent striving to optimise and improve our systems.
Clear management responsibility At the beginning of 2006, we systematically divided responsibilities on the parent company’s Board of Management between Group issues and reinsurance business. This has proved its worth: the “virtual holding company” that we created in this way enables us to clearly distinguish between the tasks of the Group Committee and responsibility for the individual fields of business and to focus resources on the respective core issues.
Knowledge counts Even more important for our success than excellent processes is outstanding knowledge and its practical application in competing for business. Maintaining and constantly expanding our staff’s knowledge is the crucial challenge for the future. This applies not only to the knowhow available in our organisation with regard to risks, underwriting and clients, but also to leadership skills and management expertise. We therefore devote great attention to promoting, consolidating and expanding knowledge both in our staff development activities and through the design of our organisational structures. We ensure that expertise is suitably pooled and concentrated at those places in the Group where it can best be deployed to create value.
With a view to maintaining clearly defined strategic management of the equal-ranking business segments of primary insurance and reinsurance – and to providing for a clear assignment of responsibility – the structure of Munich Re’s Board of Management was altered with effect from 1 January 2006. The Parent Board of Management, which for legal purposes continues to represent Munich Reinsurance Company externally, has divided its responsibilities between two Board committees: the Group Committee and the Reinsurance Committee.
Since 1 January 2007, our reinsurance business has been organised into six operative divisions. Until 31 December 2006, there were seven: six servicing our propertycasualty business and special lines, and one dealing with life and health reinsurance. Responsibility for the respective client accounts continues to lie in one pair of hands. The operative divisions are also responsible for our business units abroad, including our subsidiaries.
Special and Financial Risks (SFR) is in charge of the special classes of credit, aviation and space, enterprise risks and contingency risks, and for alternative markets business. Besides this, it develops and implements divisionspecific innovation projects and coordinates the overarching work of the innovation teams in the non-life divisions. Risk transfer to the capital markets is handled by our new Risk Trading Unit, into which Munich American Capital Markets (MACM) – an entity that structures insurance risks for risk transfer – has been integrated. In addition, SFR also attends to our own reinsurance (retrocession).
Subsidiaries/Branches: New Reinsurance Company Great Lakes Reinsurance (UK) Munich American Capital Markets
Beijing, Hong Kong, Kolkata, Kuala Lumpur, Mumbai, Shanghai, Seoul, Singapore, Taipei, Tokyo
Munich Reinsurance Company of Africa Munich Reinsurance Company Australian Branch Munich Reinsurance Company New Zealand Branch Munich Reinsurance Company China Branch Munich Reinsurance Company Singapore Branch Munich Reinsurance Company Hong Kong Branch Munich Reinsurance Company Malaysia Branch Munich Reinsurance Company Korea Branch
Atlanta, Brisbane, Chicago, London, Melbourne, Moscow, Mumbai, Perth, Santiago de Chile, Sydney, Toronto, Waltham, Warsaw
Subsidiaries/Branches: Munich Reinsurance Company of Australasia Munich American Reassurance Company Munich Reinsurance Company Canada Branch (Life) Munich Reinsurance Company UK Life Branch Munich Reinsurance Company Life Reinsurance Eastern Europe/ Central Asia
Munich Re primary insurance group *Only ERGO companies with a premium volume of more than €50m are listed by name.
The ERGO Insurance Group is made up of the longestablished German companies Victoria, Hamburg-Mannheimer, DKV and D. A. S., as well as 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 Ísviçre Group (acquired in 2006). Segment responsibility within ERGO is centralised at holding level, while keeping the strong individual brand identities and sales forces intact.
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, has been part of the Munich Re Group since 1997. It specialises in marine insurance business and has taken advantage of the favourable conditions over the last few years to significantly strengthen its market position and broaden its risk profile. 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, is responsible for the cross-segment management of our health primary insurance activities outside Germany and our global reinsurance operations in that line of business.
Asset management MEAG MUNICH ERGO AssetManagement GmbH combines Munich Re’s and ERGO’s investment activities. Virtually the entire asset management of the Munich Re Group is concentrated in MEAG, which at the end of 2006 had a total of around €172.4bn in Group assets under management. The subsidiary MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH is one of the major investment fund companies in Germany, managing around €38bn in special and retail funds.
– With clearly defined value-based performance indicators, we ensure the necessary comparability of alternative measures and initiatives as the basis for setting priorities.
Our value-based management system takes into account the individual characteristics of the business segments In our non-life business, which is mainly of a short-term nature, we employ the following simple formula for measuring the value added annually by our insurance business and for managing and monitoring our business activities: Munich Re Group Annual Report 2006
The adjusted result serves as the basis for determining the value added. It consists of the underwriting result (derived from the income statement), the investment result, and the remaining non-technical result. In each case, value-based adjustments are made, including the smoothing of expenditure for major losses, the normalisation of investment income, and the recognition of future claims expenses at present value.
We compare the correspondingly adjusted result with the requisite cost of equity. A significant factor in the calculation of the cost of equity is the risk-based capital, which we determine using our internal model. In the propertycasualty business and health reinsurance measured on a single-period basis, value is added to the extent that the adjusted result exceeds the cost of equity.
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 “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. Further information on asset-liability management is provided on page 98. The target return, i.e. the expected income from the neutral position, is compared with the return from the actual portfolio, bearing in mind the risk capital required for deviating from the neutral position. Finally, a comparison with the returns of relevant stock market indices provides important insights into the performance of our own investments.
In addition to these purely financial performance factors, non-financial performance measures like market share, speed of processes, staff-training level and client satisfaction play a major part. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors as well.
We closely link strategy and operative planning by defining our objectives in structured overviews or “scorecards ”, from which we derive initiatives, performance measures and responsibilities within a framework of four perspectives: “financial”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among staff through the clear allocation of responsibility and accountability, recognising how much the individual, unit or field of business contributes to increasing value. The consistent integration of the financial and non-financial objectives into Board, executive and staff incentive systems supports the clear orientation towards value creation.
In order to give more emphasis in external communication to the Munich Re Group’s value orientation – as widely implemented through our internal management tools – we have geared our Group return target to riskadjusted performance indicators, which are explained in more detail below.
ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Net expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses. The portion of other underwriting expenses not considered includes, for example, German fire brigade tax. Net operating expenses chiefly comprise the costs arising in the acquisition of new business (e.g. commission) and for the ongoing administration of insurance contracts.
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 metrics of value added and European Embedded Value (see page 52 f.), both of which are more meaningful and better tailored to the characteristics of the relevant business segments. Their common feature is that they measure value creation not only on the basis of current and forecast profits but also taking into account the size of the risks taken. 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.
Munich Re Group Annual Report 2006 Management report_Munich Re Group using our internal risk model and publish once a year. We thus take into account the economic standards currently underlying (at least to some extent) the requirements of supervisory authorities and rating agencies – standards that are set to play a decisive role in future.
RORAC is defined as follows: 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 RORAC target be set? Our RORAC target is a sustained return on risk-adjusted capital of 15% over the whole cycle. We will not finalise and publish the risk-adjusted capital applicable for 2007 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 €2.8bn and €3.2bn, which is equivalent to a return on equity ranging from nearly 11% to 12%.
On the investment side, we anticipate a result equivalent to 4.5% of the average market values of the investments.
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-
Net income – Interest rate (1 – tax rate) x Additional available equity
In reinsurance, CUGC is not only responsible for business with our global clients but also develops guidelines and best-practice principles for the underwriting of our reinsurance business. Corporate Underwriting defines standards for the underwriting, pricing and claims management of the reinsurance group. Besides this, regular reviews are conducted to make sure that these standards are complied with. In this way, we ensure that the quality of our business is consistently high throughout our reinsurance operations and that we respond swiftly to changes and new developments. Since Corporate Underwriting is closely linked to our operative business, we can generate needs-oriented products and services for our clients there as well.
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. phil. Ron Sommer Former Chairman of the Board of Management of Deutsche Telekom AG
Dr. jur. Nikolaus von Bomhard ERGO Versicherungsgruppe AG* (Chairman) UniCredit S. p. A., Genoa Chairman
Dr. rer. pol. Ludger Arnoldussen – – (from 1 October 2006)
Dr. rer. pol. Thomas Blunck – Global Aerospace Underwriting Managers Ltd. (GAUM), London
Dr. jur. Heiner Hasford Commerzbank AG Munich Re America Corporation, Wilmington, (until 28 February 2007) D.A.S. Deutscher Automobil Schutz Delaware*
Dr. jur. Jörg Schneider MEAG MUNICH ERGO Munich Re America Corporation, Wilmington, Kapitalanlagegesellschaft mbH* Delaware*
Karl Wittmann – Jordan Ins. Co. p. l. c., Amman (until 31 December 2006) Saudi National Insurance Company E.C., Jeddah 1 Status: 31 December 2006/1 January 2007 (in the case of members who have left the Board of Management, the information shows the status at the date of their departure).
*Own group company within the meaning of Section 18 of the German Stock Companies Act.
Management report_Munich Re Group 2 Status: 31 December 2006. *Own group company within the meaning of Section 18 of the German Stock Companies Act.
Ulrich Hartmann Deutsche Bank AG Henkel KGaA Deutsche Lufthansa AG E.ON AG (Chairman) Hochtief AG IKB Deutsche Industriebank AG (Chairman)
Wolfgang Mayrhuber Bayerische Motoren Werke AG Heico Corporation, Miami Eurowings Luftverkehrs AG Swiss International AG, Basle Fraport AG Thomas Cook AG
Dr. jur. Dr. h. c. Albrecht Schmidt Siemens AG Thyssen’sche Handelsgesellschaft m. b. H.
Dr. phil. Ron Sommer Celanese AG Motorola Inc., Schaumburg Sistema, Moscow Tata Consultancy Services Ltd., Mumbai Weather Investments S. p. A., Rome
The general global economic environment for the insurance industry remained largely favourable in 2006. In spite of continued strong rises in oil prices until August, the global economy expanded further, even achieving a slightly higher growth rate than in the previous year. The stock markets in Europe and the USA showed respectable price gains, whereas the upward trend in Japan was somewhat less pronounced. Yields on the bond markets rose appreciably in the first half of the year before receding again until early December, when interest rates reversed again, rising considerably more steeply in Europe than in the USA. Overall, the difference between the transatlantic yields for long-term bonds narrowed over the course of the year.
Economy Global economic growth gathered pace slightly in 2006, sustaining its momentum. China and the USA are still the most important engines driving the world economy, even if the trend in the second half of the year saw economic dynamics shifting from the USA to the eurozone.
The economy in the eurozone performed significantly better in 2006 than in the previous year. In particular, domestic demand (investments and consumption) gave rise to real growth, which totalled 2.7% for the year as a whole. There were marked regional differences: economic growth in Ireland and Finland, for example, was well above average, whereas in Italy and Portugal it remained comparatively subdued.
In 2006, growth in the emerging markets accelerated. China expanded strongly again with 10.7% in real terms. The Indian economy also continued to develop at a high level.
In Latin America, Brazil and Mexico in particular ensured that the region grew more strongly than the previous year.
Starting from a level of 3.3% at the beginning of the year, yields on ten-year German government bonds initially rose to around 4.1% by July against the background of positive economic expectations and comparatively high inflation. In view of declining rates of inflation and a cooling of the US economy, however, yields subsequently fell to almost 3.6% at the beginning of December, before renewed economic optimism caused them to rise again to nearly 4.0% at the end of the year. Having started the year at just under 4.4%, yields on ten-year US government bonds climbed to a good 5.2% by the end of June, only to recede to about 4.7% at year-end.
The euro gained considerable ground against the US dollar in the course of the year, its price rising from US$ 1.18 to US$ 1.32. It also climbed against the Japanese yen, moving up from ¥139.22 at the start of the year to ¥157.12 at the end of 2006.
Munich Re Group Annual Report 2006 Management report_Parameters growth again lagged behind overall economic growth, owing to a cyclically related fall in rates. A notable exception is business exposed to hurricane risks.
Although the macroeconomic parameters in Germany improved, they had no great stimulating effect on the German insurance industry, significant curbing factors being the stagnation of real incomes, the concerns of many citizens regarding the future, and the advanced level of market penetration already reached. According to preliminary estimates, gross premiums written by the German insurance industry rose by around 2.2% in 2006 (2005: 3.7%). With an estimated growth rate of approximately 4.2% in each case, premiums in private health insurance and life insurance were the fastest growing, although in health insurance a significant role was played by premium increases to take account of rising claims expenses. In property-casualty insurance, premium income fell by around 1.1%, for which sustained price competition was partially responsible.
Insurance industry Writing business at risk-adequate prices was again the central issue in the insurance markets in 2006. In the reinsurance renewals at the beginning of the year and at 1 April and 1 July, it was again apparent that most market players were giving priority to selective and profit-oriented underwriting.
Important insurance markets Premium growth in the insurance industry, particularly in property-casualty insurance, is strongly influenced by overall economic development. In life and health insurance, market dynamics are also impacted by changes in the legal and tax environment. The still relatively robust global economy was helpful for most insurance markets.
Development of the US$/€ exchange rate from January to December 2006
Management report_Parameters retirement provision) amounted to only 1.2%. Premium volume in Poland’s life insurance market recorded very strong growth of 41.4% in the first three quarters, whilst growth in non-life insurance was considerably more modest at 4.8%.
Against a backdrop of high overall economic growth, the emerging markets recorded the largest increases in premium income. In China, premium growth totalled around 23% in property-casualty insurance and 12% in life business. Premiums also climbed strongly in the Indian market, with non-life premium rising by around 24% in the first three quarters of the fiscal year 2006/2007.
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. Various European and global initiatives in the field of supervisory law have altered the parameters and will continue to provide for a restructuring of the regulatory landscape in future
In our home market of Germany, the German Federal Government intends to extensively reform German insurance contract law (”Versicherungsvertragsgesetz” – VVG) to bring it into line with supreme court decisions and the requirements of what is considered modern consumer protection. The proposed reform emphasises, for example, the obligations of insurance companies to provide information and consultancy prior to and on concluding contracts. By contrast, the insured’s duties of disclosure prior to the conclusion of a contract are to be relaxed and sanctions eliminated, even in the case of gross negligence. Furthermore, the maximum term of policies in the property -casualty lines is to be reduced from five to three years and injured parties are to be granted direct recourse to insurers under compulsory insurances. Finally, the bill also proposes to abolish the so-called “policy model” whereby the policyholder receives the statutory consumer information together with the policy. In future, clients are to receive all information concerning policies prior to confirming their agreement with the terms.
In life insurance, the VVG reform is intended to ensure the implementation of requirements with which the German Federal Constitutional Court charged the legislators in its judgements of 26 July 2005. These concerned policyholder bonuses in endowment insurance and portfolio transfers between insurance companies. The Federal Constitutional Court called for hidden reserves to be taken into account in policyholders’ bonuses, and demanded greater transparency and competition amongst life insurers.
The Act is due to come into force on 1 January 2008 and is to be applicable to all existing insurance contracts effective 1 January 2009. The new regulations for private health insurance can be introduced for existing policies as early as 1 January 2008.
The German private health insurance industry will be impacted directly and intensively by the “Act to promote competition among statutory health insurance institutions ” (health reform). In particular, private health insurers will be required to offer a basic policy providing benefits equivalent in type, scope and amount to the compulsory provision under statutory health insurance. There will be an obligation to contract, and benefit exclusions and risk loadings will not be possible. The premium for this basic cover is not to exceed the maximum statutory health insurance premium. It is envisaged that insureds moving from one private health insurance company to another will be
Moreover, the introduction on 2 February 2007 of a three-year waiting period for switching to private insurance will have an impact on new business. Employees will only be exempt from compulsory insurance when they have exceeded the earnings ceiling for compulsory public health insurance – currently €47,700 – for three consecutive calendar years.
The German General Equal Treatment Act has been in force since 18 August 2006 and is based partially on four EU discrimination-prevention directives adopted between 2000 and 2004. It aims to prevent or eliminate unfair discrimination on grounds of race, ethnic origin, sex, religion, ideology, disability, age or sexual identity. The Act affects the insurance industry as an employer in particular, but also as an insurer and risk carrier. Employers have new obligations that can result in liability risks and potential claims for indemnity.
The new provisions of the General Equal Treatment Act that are of importance for the insurance industry are valid from 22 December 2007. After that date, premiums and benefits for men and women may vary only when gender is a risk-determining factor and the risk evaluation is based on relevant and exact actuarial statistical data. Under no circumstances are costs connected with pregnancy and maternity to lead to variations in premiums or benefits. Differences in insurance companies’ handling of individuals on the basis of religion, ideology, disability, age or sexual identity are only admissible when founded on recognised principles for calculating prices commensurate with risk.
Result Compared with the previous year, the consolidated result improved by €785m to an outstanding €3.5bn (2.8bn).
The largest contribution of €2.1bn (0.4bn) came from the reinsurance property-casualty segment, where we benefited from our excellent basic business and the near absence of serious natural catastrophes in 2006.
Compared with the previous year, reinsurance experienced significantly fewer large losses in 2006. With an attractive environment in many areas, we were able to maintain and – where necessary – even improve the terms and conditions of our basic business. This helped us to achieve a combined ratio that was well within our target of 97%. At 92.6%, it is the most satisfactory of recent years. In the property-casualty segment, business experience was thus very positive. The life and health segment achieved a good result, albeit not as high as the previous years’ figure, which had benefited from special factors. Thanks partly to the contribution from investments, we achieved an excellent overall operating result in reinsurance, where total premium volume remained more or less steady as a consequence of our strictly risk-adequate underwriting policy.
In primary insurance, too, our annual result of €1,062m was well above our target, which we had set at €600–700m. Gross premiums written fell, but still exceeded our expectations of €16.5–17bn. The reduction is solely due to our sale of the Karlsruher Insurance Group and the Dutch
Combined ratio *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Munich Re Group Annual Report 2006 Management report_Overview and key figures
Primary insurance again contributed substantially to the Munich Re Group’s success as well, achieving an aboveplan consolidated result of €1,062m.
The operating result was influenced in particular by the following factors: – In reinsurance, we were largely spared large claims burdens from natural catastrophes. Only 1.3 (19.4) percentage points of the property-casualty combined ratio were attributable to natural catastrophe losses.
– Provisions for prior-year losses from our US reinsurance business, in particular for claims for asbestos-related diseases, were further increased using appropriate reserves for which general provision had previously been made at Group level.
The tax expenditure totalling €1,648m (equivalent to 32% of the pre-tax profit) was influenced by two countervailing one-off factors: – Under new legislation on German corporate tax which entered into force in December 2006, corporate tax credits from the former imputation system will be paid out in equal annual amounts over a ten-year period, commencing in 2008. This gives rise to total tax income of €379m (see page 199).
The share buy-back launched in November 2006 was concluded at the end of February 2007. A total of just over eight million shares were acquired at an average price of €124.36, which will be retired prior to the Annual General Meeting.
Consolidated result life and health €m 561 977* 432 262 1,548
Consolidated result property-casualty €m 2,134 420* 1,234 1,370 788 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Until 31 December 2006, our reinsurance business was divided between seven divisions (see page 48 f.): Life and Health; Europe 1; Europe 2 and Latin America; Asia, Australasia, Africa; North America; Corporate Underwriting/ Global Clients; and Special and Financial Risks.
Marketing As reinsurers, we write our business predominantly in direct collaboration with the primary insurers, but also via brokers. This includes business offered to us by industrial clients through their captives or risk retention groups (alternative market business), which we accept via MunichAmerican RiskPartners (MARP).
A comparison of the major-loss burden from natural catastrophes with that of the last two financial years (€177m in 2006 and €2,629m in 2005) indicates the extent to which insurance business – and particularly reinsurance business – is subject to random fluctuations in certain segments. A better understanding essentially requires a longer-term view of our business. We see the situation as endorsing our strategy of systematically optimising our risk management in the Group and refining the models with which we evaluate loss potentials. With this range of tools, we can determine risk-adequate prices, terms and conditions, despite the volatilities in our business. The Munich Re Group has maintained its overall liability for natural catastrophe covers at a virtually unchanged level, reflecting our firm conviction that this insurance segment is still very attractive in the long term.
In the year under review, we continued to gear our underwriting policy closely to the principle of profit before growth. Despite the increased reinsurance capacities in the market, we obtained attractive terms and conditions for both new business and treaty renewals. Losses of premium volume from treaties which did not meet our requirements were compensated for by new business elsewhere. The substantially improved prices, terms and conditions that we had achieved in the previous years proved necessary and therefore sustainable. In loss-affected sectors of property business, we were able to increase prices. Above all, premiums for natural hazards covers in the regions concerned again rose appreciably. Where treaties had remained claims-free, pressure on prices grew. Altogether, however, we succeeded in further optimising the profitability of our portfolio at appropriate terms and conditions.
The operating result in property-casualty reflects the reduction of €2,439m in the burden from major losses, due above all to the lower frequency of severe natural catastrophe losses.
This was paralleled by the good business performance in life and health which, together with a solid investment result, enabled the operating result for reinsurance to climb overall by 84.5% to €4.4bn (2.4bn).
The result improvements extended across all divisions and are generally reflected in substantially lower combined ratios.
Combined ratio by division *Figures for health reinsurance only, excluding health insurance conducted like life insurance; previous years’ figures adjusted.
Premium Premium income remained steady in 2006 at €22.2bn (22.3bn). With the euro rising on average against the most important foreign currencies for our business, we also recorded a decline in premium income due to changes in exchange rates (without these currency translation effects, our premium income would have been 0.1% higher). Approximately €16bn or 71.9% of premium was written in foreign currency, of which 48.9% was in US dollars and 15.3% in pounds sterling. 28.1% of our premium volume was transacted in euros.
The main reason for the decline in premium income was the continuation of our strictly risk-adequate underwriting policy. Where prices or conditions were not commensurate with the risks, we refrained from renewing treaties or writing new business.
Health *Excluding health insurance conducted like life insurance; previous years’ figures adjusted.
Life With a gross premium volume of €6,356m (6,491m), premium revenue in life reinsurance decreased slightly compared with the previous year (–2.1%). This was mainly due to adjustments of our portfolio aimed at optimising our cost of capital. We expect fundamental growth impulses for our new business in future from such developments as the restructuring of the European solvency regime (Solvency II), the continuing privatisation trend in old-age and disability provision, and the dynamic expansion of the insurance markets in Asia and eastern Europe.
In Germany, our premium income totalled €1.3bn (1.5bn), the decline being primarily linked to the reduction – begun in 2005 – of a reinsurance treaty with a large premium volume. Demand in the life primary insurance market stagnated, with new business remaining at around the level of 2005. Following the change in German fiscal parameters with effect from 1 January 2005, the trend away from endowment insurance towards private and company pension products continued in 2006. The low amount of new business with endowment insurance products, together with the fact that old-age pension products have, so far, not normally been reinsured in Germany, also had an impact on premium income in reinsurance. Besides the still high demand for disability insurance policies – for which we are the market leader in providing reinsurance – the increasing product innovations are positive factors. Our competence as an international reinsurer is especially in demand for the many new products developed for term insurance (where preferred lives products are on the advance) and long term care annuity insurance. Particularly with our outstanding expertise in biometrics, we are well positioned to take advantage of the good business opportunities we expect to come our way.
Our branch in Canada, Munich Reinsurance Company Canada Branch (Life), continues to lead the life reinsurance market by a wide margin, with a strong presence not only in individual and group life but also in disability and long term care business. Its gross premium income of €1.50bn (1.48bn) also makes it one of our largest life reinsurance units. Claims experience across the whole portfolio was again distinctly better than expected, and we thus look forward to very satisfactory results in the future as well. We recently launched a web-based manual on the Canadian market with the latest medical knowledge for underwriting and rating life insurance policies, which will support the development of our business.
Munich Re Group Annual Report 2006 Management report_Reinsurance opportunities emanating from the run-up to Solvency II in the next few years.
In China and India, we expanded our presence further, deploying our specialists to advise primary insurers in important areas such as product development and underwriting and to make new types of risk more transparent through market studies. Given this close proximity to clients, we have grown our reinsurance portfolio strongly as planned, albeit from a modest base. In the medium term, we expect these markets to have a similar business significance to that of well-developed European markets. With the specialised consultancy we offer, we are excellently positioned. Using the same approach, we have been able to greatly improve our standing in the promising Korean market, and see further potential in this field.
Our life reinsurance business in Australia and New Zealand, which we write via our subsidiary Munich Reinsurance Company of Australasia (MRA), again performed well. With premium income of €152m (143m), we achieved another slight increase, whilst also ensuring the requisite profit margins. On the basis of our acknowledged competence in disability and group insurance, the segment with the highest growth rates in the primary insurance sector, we will steadily and profitably expand our business in these markets.
In the USA – with 45% of total premiums, our most important and strongest-earning health insurance market – premium income was 17.5% up on the previous year.
Owing to the reduction in premium from a high-volume treaty, premium income fell somewhat to €243m (258m).
Also in other Asian countries, the health insurance market offers many companies growth opportunities. However, these insurers often do not have the specialist know-how to actively manage health risks. Here we have positioned ourselves as a partner and risk carrier with our new business model Consultative Reinsurance (CRI) and support our clients holistically in their business development. Premium income in these countries totalled €91m in 2006.
Result In the previous year’s figures, the improvements in our basic business had been masked by the unusually high number of severe natural catastrophes. In 2006, we incurred no comparable burdens in property-casualty business. With the support of a solid investment result, we thus achieved an outstanding operating result of €3,486m (1,284m) and a consolidated result of €2,134m (420m). Expenditure for taxes on income in the financial year rose to €1,191m (652m). The exceptionally positive result is also reflected in
In fire and marine business, we achieved further appreciable price increases, especially for property and offshore energy risks with natural catastrophe exposure (particularly oil rigs) in the USA and Latin America.
In motor insurance, the class of business with the largest premium volume, pressure on rates persisted on a wide scale. This reduced premium volume market-wide and had a negative influence on margins. We consequently further decreased our proportional business for 2007, placing central emphasis on the profitability of renewed business.
Costs for major losses were down in property business, but up in liability, accident and motor business.
Germany, Austria, Switzerland, eastern Europe, Greece, Turkey 2006 2005 2004 2003 2002
In facultative business, pressure on original rates is reflected in all lines of business. Given our traditionally high market penetration, opportunities for new shares in business are limited.
We therefore anticipate that premium income will inevitably be lower in 2007, a decrease which we will only be able to partially offset with new growth. We see the prospect of medium-term business opportunities from innovative solutions (e.g. capital market securitisation or transactions resulting from the implementation of Solvency II).
More than 85% of natural hazards business in Switzerland is handled in insurance pools. Given the very high loss expenditure in 2005, we were able to considerably increase our prices for catastrophe covers.
Northern, western and southern Europe; Latin America 2006 2005 2004 2003 2002
With premium income of €399m, we maintained our leading market position in Spain, and for the future we see promising openings for innovative reinsurance solutions in the Spanish market. Claims expenditure matched our expectations, and the result was very positive.
In Portugal, premium income fell to €21m. This was mainly because of our decision not to renew proportional treaties covering the earthquake risk, which we now reinsure under non-proportional treaties only, where the margins for this business are significantly more attractive. The result was favourable.
In Japan, changes in exchange rates were partly responsible for a premium decline to €234m (269m), but we were able to record a stable positive result. In Korea, we expanded our business, partly through covers for direct insurers selling motor insurance, and increased our premium volume by 11% to €278m (250m).
Compared with the previous year, premium income in Austraila and New Zealand grew slightly by 4%. Thanks to strategic partnerships with selected cedants and to the constant optimisation of our portfolio in recent years, we achieved a positive result for the year in spite of Typhoon Larry, which cost us a double-digit million amount in March 2006.
Result for the year 8.5 10.3 *Financial statements in accordance with national accounting law.
In the Greater China region, we continued to participate fully in the economy’s dynamic growth, as planned. While satisfying the primary insurers’ rising demand for reinsurance and related services, we paid close attention to riskadequate prices, terms and conditions.
Our premium reduction in Taiwan derived mainly from property business, where the original rate level weakened and we pursued a consistently result-oriented underwriting policy. In Hong Kong, the result was again very solid. Altogether, we are the leading foreign reinsurer in this dynamic region in terms of both result and premium income. Our premium volume in the Greater China region totalled €496m (499m).
In Southeast Asia, we succeeded in slightly growing our premium income to €88m (81m) and achieved a good result. We are observing a further stabilisation of the
Our subsidiary in Africa, Munich Reinsurance Company of Africa, remains the leader in its main market of South Africa and in the other 44 African countries south of the Sahara.
Premium income here reduced by a total of 2.6% to R 2,508m (2,574m), mainly because of increased retentions and our disciplined underwriting policy. All in all, our result for the year declined by 12.7% to R 241.9m.
Munich Reinsurance America, Munich Reinsurance Canada Non-Life Group 2006 2005 2004 2003 2002
Gross premiums written by the North America division decreased by 5.0% to €2.5bn (2.7bn) in 2006. This was mainly due to our continued adherence to a strictly profitoriented underwriting policy but also to higher net retentions by clients in the USA. The combined ratio improved from 134.0% to 96.9%. In 2005, it had been heavily affected by the reserve strengthening and the hurricane losses at Munich Re America.
Gross premiums written in 2006 were essentially equal to 2005. During the course of the year, catastrophe model recalibration, together with rating-agency capital requirements, created a demand for capacity that in many cases exceeded supply. This resulted in substantial rate increases for property risks in hurricane-prone areas of the USA. Munich Re America developed and implemented a strategy to optimise the return on its highly valued catastrophe capacity and, in doing so, actively diversified its portfolio.
Munich Re Group Annual Report 2006 Management report_Reinsurance of around €465m for asbestos-related claims in 2006 (after corporate retrocessions) did not affect the Group underwriting result. In addition to this, there were contrasting changes in the claims reserves, with increases in the liability lines of business and reductions in property reinsurance.
Munich Reinsurance Canada Non-Life Group again exceeded its targets. The treaty renewal season was successful, despite an increasingly difficult market environment.
Munich Re America’s positive underwriting results for the underwriting year 2006 reflect its adherence to disciplined underwriting and careful business development as well as lower-than-expected natural catastrophe losses. Importantly, the development of the most recent underwriting years (2003–2005) continues to be very positive.
As a result of the company’s internal reserve analysis, loss reserves for asbestos-related claims were strengthened by approximately US$ 600m (465m) after consideration of corporate retrocessions, because reported claims activity for this liability complex accelerated again. In consequence, the reserves held for this at Group level were released, so that the measures had no impact on the Munich Re Group’s underwriting result.
Otherwise, there were reserve changes at Munich Re America between lines of business and accident years which, overall, more or less cancelled each other out: – Owing to a higher level of reported activity than anticipated, the loss reserves for workers’ compensation business were strengthened by US$ 275m (discounted) for years 2001 and prior. The actuarial indications for claims in the lines of general liability, auto liability, professional liability and property remained relatively stable for the years prior to 2001.
Investments US$ m 15,118 14,544 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
MROC improved its client relationship management by using multidisciplinary teams to holistically manage overall relationships with its key clients. It also supports the global clients of the Munich Re Group at local level.
Premium income increased by 5.9% Result markedly improved Leading position in agricultural insurance extended
Global Clients, Lloyd’s, US business, special lines 2006 2005 2004 2003 2002
The underwriting field comprises a defined number of international cedants, the Lloyd’s insurance market, agricultural business worldwide, and US business written in Munich. We devise comprehensive reinsurance concepts, write major industrial risks and, where possible, partici-
Investments Can$ m 1,631 1,592 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Munich Re Group Annual Report 2006 Management report_Reinsurance pate in mass business. Rounding off our range of activities are the special segments workers’ compensation and customised portfolio solutions.
The high-volume treaties in the portfolio can give rise to significant fluctuations in the portfolio’s size, which had a substantial influence on premium level in previous years. The premium growth in 2006 was attributable to a variety of factors and involved virtually all lines of business. First and foremost, capacity shortages in sectors exposed to natural catastrophes caused premiums to rise in both original and reinsured business. Then there was additional revenue from previously agreed reinstatement premiums under treaties that had been affected by the hurricanes in 2005. Lastly, we expanded our agricultural business in the USA. Premium volume thus climbed by 5.9% to €3.6bn (3.4bn), even though currency translation had an unfavourable effect.
In liability business, the ongoing concentration of our global clients’ reinsurance is resulting in a growing share of highly exposed and more volatile industrial business and of specific segments like professional indemnity and D&O. This reflects our clients’ needs, to which we have responded with our specialist know-how and with our analysis and service tools. As there is only a limited amount of capacity available, particularly for large international programmes, the market environment in this segment is largely stable.
In marine reinsurance, the lion’s share of the premium volume is generated by our Watkins Syndicate at Lloyd’s in London (see page 51), which also writes policies for oil platforms (offshore energy insurances).
The result we achieved in the year under review was also good. A notable example of our cooperation with clients is a product we developed with Royal & SunAlliance in the area of aquaculture, which was nominated International Initiative of the Year at the 2006 British Insurance Awards.
Aviation and space, credit and bonding, enterprise and contingency risks, retrocession, Munich-American RiskPartners, New Re Geneva, Great Lakes UK, Munich American Capital Markets 2006 2005 2004 2003 2002
Although premium showed a downturn in our major segment, aviation reinsurance, we maintained our overall premium volume by expanding specific growth areas and launching new products. Gross premiums written show a reduction merely because the previous year’s figure benefited from a one-off effect.
Some 1.4 (–1.6) percentage points of this were attributable to retrocession cover for the whole reinsurance group – business which is fully accounted for in the Special and Financial Risks Division.
Premium income in aviation and space experienced a decline to €672m. Whilst rates in aviation fell further as a result of additional capacity in the market, premium in space business rose, owing to the greater number of insured satellite launches. There were more losses in aviation in 2006 than in the previous year, but as we have further refined our risk assessment and consistently declined under-rated risks, we still achieved a very good combined ratio. In space reinsurance, we continue to be the greatest risk carrier in the global market. Prices for insuring the launch and operation of satellites softened, but remained at a risk-adequate level. Our result was again very positive.
European clients increased their retentions due to the good results of the previous years, reinsurance premium volume was slightly down in this segment. By contrast, premium in Asia and South America showed growth, so that overall we earned premium income of €545m in credit reinsurance in 2006. The segment of financial institutions, which we also account for under credit business, is one of our defined growth markets. The cover we offer companies in the financial sector here is mainly for operational risks. Our premium income in this segment increased by more than 50%, and the business is very profitable.
We further expanded our business in the field of enterprise, contingency and political risks. Premium in traditional cancellation-of-events business rose significantly, and we generated substantial new business thanks to various innovative products (such as guarantees for the disposal of waste electrical and electronic equipment and residual value insurance).
With our new Risk Trading Unit, fully integrating our unit Munich American Capital Markets, we have enhanced our scope for activity in the capital markets. Besides employing the unit in our own risk management, we aim to take advantage of further business opportunities arising from the tradeability of risk packages, especially insurance risks, and to support our clients in transferring insurance risks to the capital market.
Business with structured finance products also developed well. In addition to trading in weather derivatives ourselves, we broadened the range of structured weather products we offer to our clients.
To protect ourselves against very large losses from natural catastrophes, we increasingly make use of capital market products as well as traditional reinsurance solutions. We have acquired additional protection against loss events from hurricanes in the USA by securitising the
Our clients in the alternative markets segment are large international corporations that offer us their business either direct or via captives. The business is handled by our subsidiary Munich-American RiskPartners (MARP), which has offices in Munich and London.
Europäische Reiseversicherung, with more than 17,000 partners in the tourist industry, is the leading provider in its field. For almost 100 years, travel agents have been its main sales partners, although nowadays its sales avenues include major tour operators, cooperation agreements with travel offices, internet platforms and hotels as well. With its international network of subsidiaries and affiliated enterprises, Europäische Reiseversicherung is represented in all major European countries. In the year under review, it also entered into partnerships in selected Asian markets.
Combined ratio legal expenses insurance % 95.3 99.8 98.9 99.2 101.8
Consolidated result life and health €m 336 594* 25 –960 –591
– The third factor is a positive one-off tax effect in 2006. As a result of new German corporate tax legislation, tax credits for prior years will become payable in the years 2008 to 2017 and had to be recognised in the balance sheet in 2006 as accounts receivable at their present value of €224m, resulting in a one-time positive entry of €202m in the income statement (see page 199).
Consolidated result €m 906 786* 236 –1,431 –1,212 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Our primary insurers posted a total premium income of €16.7bn (17.6bn) for 2006, around 45% (46%) of the Munich Re Group’s overall premium volume. Without consolidation effects, their premium volume thus remained stable.
Gross premiums written in life insurance were down 12.6% to €6.5bn (7.4bn), largely owing to the sale of the
New business in Germany was up slightly by 0.7%. As in the previous year, single-premium business developed more favourably than regular-premium business. There was a positive trend in annuity insurance, in particular among Riester products, which grew by 150%, largely owing to the commencement of the third subsidisation stage on 1 January 2006. The fourth and last stage will begin on 1 January 2008. We were also satisfied with new business in the field of unit-linked products, where the positive growth trend continued. New business in other countries, by contrast, was down 1.5%, mainly because of lower revenue from single premiums in Italy.
Property-casualty In property-casualty we again achieved a very good consolidated result of €726m (585m).
Premium income totalled €5.1bn (5.3bn). Adjusted for the changes in the consolidated group, premium grew by 2.8% to €5.1bn (4.9bn).
Administrative expenses, which play a pivotal role in our cost management, were reduced appreciably. The fact that this reduction did not result in better expense ratios is mainly attributable to acquisition costs and the altered portfolio mix. Motor insurance shows particularly favourable expense ratios but is exposed to fierce competition, which had a negative influence on profitability. Premium income in Germany was down, reflecting adherence to our strictly profit-oriented approach. There was growth in personal accident business, but this is a class involving small sums insured and higher expense ratios. This development, which is very desirable for business policy reasons, raised the expense ratio but lowered the combined ratio, thus enhancing the profitability of the overall portfolio.
In November 2006, a new D.A.S. company commenced operations in Estonia. This is the 16th European country in which we are active in legal expenses insurance – and we are the market leader in 11 of them.
Overview and key figures We have consolidated the investment management of the Munich Re Group in MEAG MUNICH ERGO AssetManagement GmbH, a wholly owned subsidiary of Munich Re and ERGO, in order to exploit the efficiency gains that can be made with central, overarching asset management.
MEAG manages the Group’s assets, which totalled €172.4bn (168.6bn) as at 31 December 2006. The other Group investments are mostly deposits retained on assumed reinsurance business, and are handled by the insurance companies of the Munich Re Group themselves.
MEAG also offers its expertise in asset management to private and institutional clients outside the Group, thus tapping additional sources of earnings. As at 31 December 2006, MEAG had investments of €11.2bn (10.5bn) under management for investors not belonging to the Group.
Group investment result at a high level Pleasing stock market performance brings price gains MEAG acquires stake in Chinese asset manager PAMC
In April 2006, Munich Re became the first German company to sign the UN Principles for Responsible Investment (PRI), which it had played a prominent role in helping establish. The PRI offer institutional investors with guidelines for incorporating social and ecological criteria in their investments. This includes observing such criteria in investment decisions, promoting sustainable investment approaches in the financial sector, and reporting regularly on the implementation of the criteria.
We use derivatives (see notes to the consolidated financial statements on page 171 ff.) to hedge our share portfolios against possible price losses. In addition, the life insurers in the ERGO Insurance Group use interest-rate derivatives to cover their guaranteed interest-rate liabilities, thus hedging their reinvestment risk against falling interest rates in the long term.
Distribution of investments by type Status 31 December 2006 (prev. year)
Land and buildings, including buildings on third-party land 585 663 766 759 3,188 4,169 114 179 67 28 4,720 5,798
Since the market conditions are attractive, this transaction will allow us to influence our investment result with capital gains of more than €500m, of which only a small portion was realised in the past financial year. We are constantly on the look-out for interesting property investments, the size and liquidity of the market being important criteria. Besides this, the international diversification of our portfolio is a key element of our real estate strategy. The new investments focus on commercial properties in prime locations of major European cities, including project developments that round off our portfolio. Together with local partners we are also active in the Asian and American real estate markets.
Bearing in mind the interests of their policyholders, the primary insurance companies in the Munich Re Group concentrate on achieving a competitive net return. In order to earn sufficient regular income for this, they have invested in fixed-interest securities with longer terms to maturity and correspondingly higher coupon rates. The duration – i.e. the average capital commitment – of our bond portfolios was 6.7 years in the Munich Re Group at the balance sheet date.
In the first half of 2006, the valuation reserves of our fixed-interest securities accounted for at fair value sank due to increasing interest rates. Owing to declines in yields on long-term securities after a mid-year peak, we recorded increases in the valuation reserves of our fixed-interest securities and loans again in the second half of the year. On 31 December 2006, the German bond markets closed with a yield of 3.95% for ten-year government bonds, 65 basis points above the level at the beginning of the year and 19 basis points below the year high. The yield on ten-year US government bonds climbed by 31 basis points to 4.7% in the course of 2006, with a year high of a good 5.2%.
Equities and shareholdings The Munich Re Group reduced its equity portfolio slightly in the year under review, taking advantage of the favourable stock market situation to sell off several share packages. Furthermore, we continued our strategy of diversifying our equity investments more strongly and further reducing historically evolved shareholdings in the German banking and insurance sector. Our stake in Allianz, which amounted to just under 5% at the start of the year, was again reduced in the year under review, allowing us to realise a gain on disposal of €330m. The bulk of our equity portfolio comprises shares in European companies. The relevant index for this market, the EURO STOXX 50, climbed 15.1% in the course of the year to 4,120 points. The representative US stock market index, the S&P 500, also moved up 13.6%, closing the year at 1,418, whilst the Japanese Nikkei was up 6.9% and closed at 17,226.
On the balance sheet date, our equity-backing ratio, i.e. the proportion of investments in equities, equity funds and shareholdings on total investments at market values, was 14.6%, only slightly above last year’s level of 14.0%. After taking account of hedging transactions and equity derivatives, it amounted to 14.1% at the end of the year.
The Karlsruher Insurance Group, which was deconsolidated with effect from 1 October 2005, contributed more than €400m to the Munich Re Group’s investment result in 2005. Adjusted to eliminate this effect, the year-on-year reduction was 14.5%.
At 5.0%, the return on investment (based on the average investment portfolio at market values) again outperformed our target of 4.5% in 2006.
Write-downs increased in the year under review, particularly because of a downward adjustment of €1,049m in the value of our derivative financial instruments due to the rise in interest rates in the first six months.
The disposal of non-fixed-interest securities led to an excellent result contribution of €2,716m. As the previous year’s high profits from the sale of non-fixed-interest securities were partly due to non-recurring effects – such as the exchange of HVB shares into UniCredit stock – the result from the disposal of securities was lower overall in 2006.
With its offerings for institutional investors, MEAG mainly meets the needs of insurance companies and pension funds. A significant role in institutional business is also being played by consultancy for asset management, which MEAG has established as an independent service.
Favourable capital markets determined the positive development of business with private and institutional investors. Assets managed in business with external investors thus increased in the investment year 2006 as a whole.
Investment result by type of investment 2006 Prev. year Change €m €m in %
Deposits retained on assumed reinsurance and ceded business, and other investments 553 575 –3.8
Expenses for the management of investments and other expenses 479 492 –2.6
Reinsurance business accounts for approximately 39% of technical provisions and primary insurance business for about 61%. Further information on these provisions may be found in the notes to the financial statements on page 181. 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. The payout pattern of the technical provisions varies considerably from one segment to another and from one line of business to another. In property insurance, for instance, a major portion of the provisions is generally paid out after one year, whereas in life 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. To optimise our capital position and reduce capital costs, we have not only employed internal forms of financing in previous years but have also used strategic debt, primarily in the form of subordinated and/or exchangeable bonds. A detailed analysis of the structure of this funding is provided in the section on strategic debt.
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. For example, the supervisory authorities in some countries require foreign reinsurers to establish premium and reserve deposits with primary insurers. As at the balance sheet date, investments totalling €6.7bn were subject to restraints on disposal. In addition, there were contingent
Analysis of our capital structure The capital structure of the Munich Re Group is essentially governed by its activity as a primary insurer and a reinsurer. Investments on the assets side of the balance sheet serve mainly to cover technical provisions (74.3% of the balance sheet total). Equity (12.2% of the balance sheet total) and bonds classified as strategic debt (1.8% of the balance sheet total) are the most important sources of funds.
Asset-liability management The structure of our technical provisions and other liabilities is the basis for the Munich Re Group’s investment strategy. The main focus of this strategy is asset-liability management, the aim of which is to ensure that economic factors influence the value of our investments and the value of our technical provisions and liabilities in the same way, thus cushioning the effect of capital market fluctuations. For this purpose, we mirror important features of the liabilities, such as maturity patterns, currency structures and inflation sensitivities, on the assets side of the balance sheet by means of investments with similar characteristics. If, for instance, there is a strong rise in inflation, our nominal outflows as a result of claims payments increase significantly. This applies in particular to lines of business with long payout patterns, e.g. liability, as inflation accumulates over a number of periods. To an increasing extent we are endeavouring in our asset-liability management to structure our investment portfolio in such a way that inflows from investments increase in line with rising inflation rates. To configure our asset-liability management as effectively as possible, we also use derivative financial instruments, which are described on page 171 of the notes to the financial statements.
Capital management Through active capital management, we ensure that the capital of the Munich Re Group is always maintained at an appropriate level. The Group’s available capital must always be sufficient to cover the capital requirements determined both by our own internal risk model and by the requirements of supervisory authorities and rating agencies. In this way, we ensure that our financial strength is sufficient for us to take advantage of measured opportunities for growth, while remaining at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group capital as one which does not significantly exceed that required for our operations. A lean capital level makes a decisive contribution to financial discipline in all our business processes. Our active capital management includes returning surplus capital to equity holders through attractive dividends and share buy-backs. Our proposed dividend is linked directly to the Group result, of which we aim to pay out a minimum of 25%. We also make use of share buy-backs as a flexible way of returning capital to our shareholders. Naturally, we liaise closely with the regulators, rating agencies and capital market participants in this regard.
In addition to the level of capital, its efficient deployment is also a key factor. We use our value-based management (see page 52f.) 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 against unacceptable fluctuations by means of suitable reinsurance covers.
In the year under review, our equity increased by €2.0bn or 8.3% to €26.4bn compared with 2005 (for details see page 178 in the notes to the financial statements).
The most important changes in equity were due to the following: – Most of the increase results from the consolidated profit of €3,440m attributable to Munich Re equity holders. The previous year’s profit of €2,679m, net of the dividend payment of €707m for 2005, was transferred to retained earnings.
– Net unrealised gains were €189m higher than as at the beginning of the year because gains on our fixed-interest securities available for sale fell due to higher interest rates. The rise in the net unrealised gains in the share portfolio due to favourable stock-market development was sufficient to compensate for this effect.
– As a result of the rise in the euro, particularly against the US dollar, the reserve for currency translation was reduced by €595m. In this reserve, we recognise the effects of changes in exchange rates arising from the translation into euros of our foreign subsidiaries’ assets and liabilities.
The registered shares are subject to transfer restrictions in that pursuant to Article 3 paragraph 2 of the Articles of Association of Munich Reinsurance Company, they may be transferred to another holder only with the consent of the Company. As at the balance sheet date, 12,355 shares
Amendments to the Articles of Association are subject to the provisions of the German Stock Companies Act (Sections 179 to 181, 133); the Annual General Meeting has made use of the possibility provided for in Section 179 paragraph 1 sentence 2 of the Act. Pursuant to Article 14 of the Articles of Association of Munich Reinsurance
The exchangeable bonds issued by ERGO International AG backed by E.ON AG and Sanofi-Aventis S.A. shares matured in 2006. The exchangeable bond backed by E.ON shares was redeemed almost entirely through delivery of E.ON shares, as the vast majority of the bond investors made use of their right to exchange, whilst the bonds
Subordinated bonds issued by Munich Re Finance B.V., Amsterdam 3,419 3,408
If the own funds recognised under supervisory law are taken as the basis instead of the balance sheet equity, the strategic debt is reduced to €2,265m. This results in a debt leverage of 7.4%.
In 2006, we modified the treatment of subordinated loans as own funds and have adjusted the previous year’s figures for ease of comparison. Thanks principally to the excellent Group result and the lower solvency requirements as a result of a reduced loss burden, the solvency ratio has continued to improve despite the share buy-back.
The ratings for our subsidiaries on 28 February 2007 at a glance: Reinsurance group
Munich Re Finance B.V., 7.625%, £300m, Subordinated Bonds 2003/2028 a A A2 A
The strong cash inflows from operating activities are attributable to the highly satisfactory performance of these activities. The excellent consolidated result of €3,536m has been adjusted in the consolidated cash flow statement by €1,423m to take account of the change in technical provisions. There was an increase in provisions for future policy benefits at the Group’s primary insurers due to the continu-
Insurance Group. We paid €211m of the purchase price in cash and offset this in the cash flow statement against the cash of €21m held by the subsidiaries acquired. The Munich Re Group additionally assumed a total of €124m in investments and €191m in technical provisions through acquisitions.
The cash outflows for financing activities stem primarily from the dividend payment for 2005 of €723m and that part of the redemption of the ERGO International AG exchangeable bonds with impact on cash flow totalling €335m. The share buy-back resulted in a cash outflow of €259m.
Overall, in the year under review cash – which includes cash at bank, cheques and cash in hand – fell slightly by €106m to €2,172m.
Competence and state-of-the-art knowledge for our clients Intelligent solutions for new challenges Highly qualified and motivated staff
The Munich Re Group has different client bases in reinsurance and primary insurance. The reinsurance group works together with over 5,000 corporate clients – traditional insurers and captives – from around 160 countries. By contrast, our primary insurers service around 33 million policyholders throughout Europe, most of whom are private clients. The products and services we offer therefore differ accordingly.
Reinsurance As reinsurers, we aspire to be the preferred partner in risk for our clients. Our operative business consequently provides companies wishing to cede insurance risks with the full range of underwriting products. In addition, they can benefit from our strengths that go beyond actual reinsurance cover: our financial strength, our knowledge, our solution-oriented approach, and the treatment of our clients as partners.
We continued to be the preferred partner in knowledge for many clients throughout the world in 2006. In Munich and at our many offices and subsidiaries, we offer a large number of seminars and workshops each year on fundamental topics in all lines of insurance. Held in various languages, these place the emphasis on dialogue between our clients and Munich Re experts. We also stage numerous specialist events at our clients’ offices every year – forums, symposiums and seminars – dealing with current developments in the individual markets and ensuring a continual transfer of knowledge.
Our two scholarship programmes, which offer highquality advanced training for our clients’ prospective managers, have enabled us over the years to strengthen the partnerships we enjoy with our cedants.
Of course, we also pass on our competence to our business partners in printed form: in 2006, we brought out a total of 44 technical publications – in German, English, French, Italian, and Spanish. How much our clients appreciate this service is indicated by the some 1,150,000 downloads from our publication portal at www.munichre.com last year.
Our solution-oriented approach to collaboration is clearly illustrated by connect.munichre, our internet client portal, where we provide our cedants with round-the-clock assistance: useful knowledge, services, analysis and quotation tools from the areas of property-casualty and life. This both supports primary insurers in daily business and presents a direct and secure interface to Munich Re. With its swift, efficient and safe interactive features, connect.munichre supplements and optimises Munich Re’s range of services and rounds off personal client relationships. The portal is currently used by over 860 insurers globally.
Munich Re Group Annual Report 2006 Management report_Other success factors all-round offering, our companies are well positioned in the market: their clients can cover all their financial-service needs comfortably from one familiar and proven source.
As outlined in the general parameters section, the (re)insurance market is subject to a wide variety of influences. The Munich Re Group concerns itself with these factors at an early stage so as to help shape them wherever possible and to adapt its products and services to the new circumstances or devise innovative solutions.
Lastly, our Knowledge Management Centre of Competence provides the methodological and institutional foundations for the constant updating and exchange of knowledge within the Munich Re Group, enabling us to secure, expand and efficiently utilise our most important resource – the knowledge of our staff. The centre of competence coordinates these activities centrally, advising the working groups about methods, continually optimising structures and processes, improving the infrastructure and so ensuring a living culture of knowledge.
In underwriting, we have set up five cross-divisional innovation teams, i.e. interdisciplinary groups made up of highly qualified experts who work in close contact with the underwriting units to identify and tap new business opportunities. They help promote growth in the respective divisions on three levels: by supporting business transactions, by designing and adapting products, and by developing particular segment strategies. In this process the divisional units, with their direct access to the needs and requirements of our clients, remain the main source of new business ideas – the innovation teams act mainly as internal consultants and are the driving force behind the successful realisation of ideas. Our cedants benefit from these solutions in many ways, be it in the individual design of policies, in claims management, or in analysing and optimising a client’s portfolio structure.
into long-term strategic partnerships: thanks to flexible general conditions and close cooperation on the underwriting side, we have offered selective cedants the chance to make themselves less dependent on the capital markets. Through an exclusive partnership with an international corporation in the US agricultural industry, we have also acquired an alternative direct distribution channel that can, in addition, be transferred to other markets. In sum, we were able to substantially increase our market share in US agricultural insurance.
. sviçre Group has led to the addition of 478 employees outside Germany. On balance, owing to strong growth abroad, we are expanding personnel there, whereas in Germany we show a net reduction of 1,688 staff. Where jobs have been cut, this has been done through natural fluctuation and with due regard to social aspects, avoiding redundancies. In reinsurance and asset management, on the other hand, staff numbers increased slightly by 130 and 83 respectively.
Initial and further training Initial and further training rank among our strategic tasks, not least for reasons of risk management in the human resources sector. Our staff must be highly qualified and motivated to ensure the continued success of our operations. Their knowledge edge is critical to designing solutions for new market developments at an early stage and to meeting the growing requirements of our business. We ensure the necessary qualifications and skills through systematic personnel measures that take into account individual abilities and future requirements. Hence, we consistently offer a large number of internal seminars for personal and specialist training.
We are also firmly committed to giving young people sound professional training and good career perspectives: in 2006, a total of 1,295 trainees were employed in the Munich Re Group. At ERGO, the percentage of trainees
International promotion of talent Since 1997, Munich Re Munich has been systematically identifying and preparing staff for future management tasks with its scheme for assessing and developing staff potential (POE). We have now extended this system to the international reinsurance group. Highly talented and qualified staff are selected and groomed for management functions in Munich and for leading functions at business units abroad. As a result, we create career prospects for our staff internationally throughout the reinsurance group and can fill vacancies with particularly suitable employees. The ERGO Management Academy (EMA) offers a broad range of programmes to support executive staff, 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.
Munich Re’s business is inextricably linked with ecological aspects, even if as a service provider we place comparatively little burden on the environment ourselves. 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.
In addition to this, in April 2005, Munich Re became a founder-member of the Munich Climate Insurance Initiative for insurance solutions intended to benefit people in developing countries. In the Climate Group, an international alliance of companies, governments and cities for climate protection, we work for the reduction of greenhouse gases from the 20 economies with the highest emission levels and the 500 largest firms. In 2006, we also become the first German company to sign the UN PRI, Principles for Responsible Investment, thus committing ourselves to observing social and ecological criteria in our investments (cf. page 92).
We apply such criteria in our operational ecology as well: Munich Re Munich and Victoria have had their environmental management systems certified to EMAS (EU Eco-Management and Audit Scheme) and to ISO 14001, a standard to which DAS UK is also certified. The ERGO Insurance Group has significantly increased its environmental commitment as a whole.
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 likeminded individuals and to provide mutual support. As a result, numerous charitable projects in Germany, Latin America and Asia benefit.
People cannot and should not be considered purely in terms of their economic needs. That is why, for example, we support the Gustav Mahler Jugendorchester on its concert tours. This orchestra of young musicians keeps classical music very much alive and well. The past year’s concert itinerary took these highly talented musicians to venues like Madrid, Munich and Paris. Beyond this, Munich Re supports a number of environmental, social and cultural projects.
Social responsibility is likewise practised by HamburgMannheimer with its foundation Jugend & Zukunft, which awarded prizes in 2006 for the first time. Under the motto “Fußball bewegt” (”Football moves”) it honoured various initiatives that bring young people together using sport as a medium of integration.
Regular external audits have confirmed that Munich Re’s information security is at a high level. However, given that we see security as a process rather than a state, we are constantly refining our strategies and standards as part of our information risk management. This process is geared both to the actual risks and to ways of minimising them in order to support Munich Re’s business operations. The recommended measures are carefully weighed up and taken into account in the security architecture, which not only describes the technical and organisational aspects but also includes risks related to the “human factor” in the broadest sense.
Gloria With our reinsurance platform Global Reinsurance Application (Gloria), we are providing the reinsurance group with a consistent data basis and an integrated system for all business-relevant core processes. Building on various SAP modules, we are thereby harmonising the business processes in our reinsurance, not only enhancing the quality and efficiency of individual process steps – such as underwriting, claims and accounting – but also improving the analysis, management and administration of our reinsurance business as a whole. The harmonisation of all core business processes will also serve our global risk management, which will have extensive data available even more quickly.
We have successfully completed the roll-out at Munich Re Munich and 15 linked branches. In the next few years, we plan to include the remaining branches and our subsidiaries, starting with Munich Re America.
These measures will make a major contribution to reducing IT costs and to modernising ERGO’s IT platforms. Although they require high investment, they will enhance our competitiveness in the long term.
STAR Additionally in 2006, the Munich Re Group established a uniform basis for the investment reporting of all its companies. With STAR (STandardised Asset Management Reporting ), the Munich Re Group now has a central data basis for Group-wide reporting that covers virtually all the Group’s investments. A team of experts from Munich Re, ERGO and MEAG had been working since 2004 to devise and technically implement a Group-wide reporting concept, and in October 2006 we successfully concluded this process with the go-live of STAR at the remaining companies not yet using the system.
This enables us to steer our investments better and more effectively, because reports are prepared more quickly and conform to uniform standards Group-wide. It also makes it easier for us to satisfy the growing demands of investors, rating agencies, analysts and supervisory authorities, who expect comprehensive reporting on the investments of all our Group companies.
How we view corporate governance Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. Of particular importance to us in this context are the promotion of shareholders’ interests, efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies, and open and transparent corporate communications.
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 2006 declaration of conformity can be found on
Articles of Association. This means that our Articles of Association (which can be accessed on our website at any time) are of considerable importance.
Statutory regulations and provisions in the Articles of Association concerning amendments to the Articles The German Stock Companies Act contains general provisions governing amendments to the Articles of Association (Sections 124 paragraph 2 sentence 2, and 179–181 of the Act). These state that only the Annual General Meeting 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.
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 selfdetermined scope, however, the Annual General Meeting can authorise the Board of Management to initiate certain (capital) measures (see page 100 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.
The Annual General Meeting is entitled to transfer to the Supervisory Board the authority to make amendments to the Articles of Association that affect only the wording (Section 179 paragraph 1 sentence 2 of the German Stock Companies Act). This is the case with Munich Re and has been regulated in Article 14 of the Articles of Association.
Statutory regulations and provisions in the Articles of Association governing the appointment and dismissal of members 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 Co-Determination 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.
Authorities of the Board of Management with particular regard to the option of issuing or buying back shares Pursuant to Article 4 of the Articles of Association, Munich Re’s Board of Management is authorised to implement certain capital measures (Authorised Capital Increases 2004 and 2006, Contingent Capital Increase 2003 I and 2005).
Furthermore, by resolution of the Annual General Meeting of 19 April 2006, the Board of Management was authorised to buy back and use the Company’s own shares.
The complete wording of the resolution adopted on agenda item 5 can be accessed on our website (www.munichre.com) at any time. With the share buy-back – resolved and announced on 7 November 2006 for a maximum total purchase price of €1bn – the Board of Management has partially exhausted this authorisation. Additional information is available on page 178 and of course on the internet.
Collaboration between Board of Management and Supervisory Board The Board of Management and Supervisory Board cooperate closely to the benefit of the Company. The Board of Management coordinates the Company’s strategic approach with the Supervisory Board and discusses the current state of strategy implementation with it at regular intervals. It reports regularly to the Supervisory Board. Certain types of transaction, such as investments of substantial size, generally require the Supervisory Board’s consent.
Supervisory Board The Supervisory Board monitors the Board of Management and gives counsel where appropriate. Certain transactions, such as major investments or capital measures, require its approval, but it is not authorised to take management action. The Supervisory Board also appoints the external auditor of the financial statements. Remuneration of the members of the Supervisory Board is regulated in the Articles of Association, i.e. is determined by the shareholders.
Annual General Meeting At Munich Re’s AGM, the principle of “one share, one vote” applies. Shareholders may exercise their voting rights personally or authorise a proxy appointed in writing, a bank or a shareholders’ association to cast their votes. Munich Re also offers its shareholders the opportunity to have their voting rights exercised in accordance with their personal instructions by one of the proxies nominated by the Company.
Significant agreements which take effect, alter or terminate upon a change of control following a takeover bid Based on our underwriting policy, our reinsurance agreements include a clause that grants both parties to the agreement a right of extraordinary cancellation in the event that “the other party merges with another company or its ownership or 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 following a takeover bid. Beyond this, there are no other significant Munich Re agreements that take effect, alter or terminate upon change of control following a takeover bid.
Corporate governance topics in 2006 A code of conduct for all employees of Munich Re and the reinsurance companies of the Munich Re Group has been in force since 2006 and is published on our website. The purpose of the code is to provide clear information and guidance for employees (including members of the Board of Management) on the basic legal and ethical requirements they must comply with in the course of their work for the individual Group companies.
On 1 January 2006, the Board of Management set up two committees from amongst its ranks – one for Group operations and the other for reinsurance operations. This organisational distinction between Group matters and the operative management of our reinsurance business has proven a success. It permits a more focused deployment of resources and enables us to manage the Group as a whole more efficiently in its various fields of business.
As from the financial year 2006, Munich Re is publishing the remuneration of the Board of Management in individualised form for the first time (see remuneration report).
Short-term compensation Consolidated result 0–150% Achievement of objectives Annually, in the component Company result 0–150% following year Annual bonus Divisional result 0–150%
Medium- and long-term Consolidated result 50–150% Achievement of objectives at In the fourth year compensation component least 50% on average over three Medium-term bonus years
Munich Re Group Annual Report 2006 Management report_Corporate governance report tially controversial aspects are rendered transparent for the Supervisory Board’s Personnel Committee.
Medium- and long-term compensation component – Medium-term bonus The medium-term bonus is based on performance over a three-year period. It is measured on the basis of the Group result category from the short-term compensation component. Payments are made only if the achievement rate is at least 50% on average for the three-year period.
Whether the stock appreciation rights can be exercised and, if so, when, is not certain at the time they are granted. The exercising and proceeds depend on the development of the share price and the exercise price and date. The amount of income is limited. Up to now, it has only been possible to exercise stock appreciation rights under the plans set up in 1999, 2003 and 2004. Further information on the long-term incentive plans can be found on pages 207 to 209 of the notes to the financial statements.
Other remuneration In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular compensation computation. Excepted from this is remuneration for personal memberships, which do not exist at present. In the event of a change of control, the members of the Board of Management have no contractual entitlement to payments. As far as the share-price-based remuneration is concerned, the conditions provide for special exercise options in the case of a change of control. Details of this are provided in the notes to the consolidated financial statements on page 209.
Pension entitlement In addition to the regular remuneration, the members of the Board of Management are members of a defined benefit plan under which they will receive a fixed pension whose amount depends on their basic remuneration and their years of service on the Board. The pension level starts at 30% and can reach a maximum of 60% of annual basic remuneration. Members of the Board of Management are entitled to an occupational pension from age 60 if they leave the active service of the Company, or if their contract of employment is terminated prematurely or not extended due to incapacity for work or under certain other conditions.
Total remuneration of the Board of Management In the year under review, after allocation to the appropriate periods, the remuneration of Munich Reinsurance Company ’s Board of Management for the performance of its duties in respect of the parent and subsidiaries showed an overall rise of €4.4m or 20.8% from €21.2m to €25.6m. The
Remuneration of individual Board members (in accordance with Section 285 sentence 1 item 9a sentences 5–9 of the German Commercial Code and Section 314 paragraph 1 item 6a sentences 5–9 of the German Commercial Code)
Pension entitlements Personnel expenses of €1.2m (1.1m) were incurred for the pension entitlements of active members of the Board of Management. The defined benefits for Board members are as follows: Members of the Board of Management appointed before 2006 are contractually entitled to an occupational pension comprising their former basic monthly salary for six months after retirement.
Total remuneration of former members of the Board of Management Payments to retired members of the Board of Management or their surviving dependants totalled €5.2m (4.3m).
(IFRS): each Supervisory Board member receives €4,500 for each full euro by which earnings per share exceed €4, but a maximum of €36,000.
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.
Advances and loans The members of the Supervisory Board and Board of Management did not receive any cash advances or loans in the year under review. Nor were there any notifiable transactions between Board members and the Munich Re Group. Furthermore, no payments were made or advantages extended to members of the Supervisory Board for services provided internally within the meaning of item 5.4.7 paragraph 3 of the German Corporate Governance Code.
Share trading and shares held by members of the Board of Management and the Supervisory Board The Company has to be notified promptly of the acquisition or sale of Company shares or financial instruments based on these by members of its Board of Management and Supervisory Board and by certain persons closely related to or connected with them. This notification must take place for acquisition and sales transactions equal to or exceeding €5,000 in a single calendar year. Under Section 10 paragraph 1 of the German Securities Prospectus Act, Munich Re is obliged to publish information of this kind on its website without delay as well as in an annual document. On 17 May 2006, Dr. Sommer purchased 500 bonus certificates (WKN DE 000CM17127) on the Stuttgart stock exchange at €114.56 each. 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.
Remuneration of Supervisory Board members in the financial year 2006 in accordance with Article 15 of the Articles of Association1 (in €)
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 potential 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.
For this reason, we wish to emphasise the following: predictions about the forthcoming development of our Group are based primarily on planning figures, forecasts and expectations. Consequently, the following assessment of the Munich Re Group’s development merely reflects our assumptions and views. It follows that we cannot accept any responsibility or liability in the event that they are not realised in part or in full.
For information on the risks emanating from our business, please consult page 124 ff.
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. Despite the increase in insurance tax in Germany, we expect slight growth in property-casualty insurance, partly because the significant decline in premium volume in motor insurance will not continue as hitherto. In other countries, growth will remain satisfactory.
We remain committed to active capital management and a shareholder-friendly dividend policy. We therefore resolved on 7 November 2006 to buy back and retire Munich Re shares with a volume of up to €1bn. The buyback was successfully concluded in February 2007. In addition, the Board of Management and Supervisory Board will propose at the Annual General Meeting that the dividend per share again be increased, by €1.40 to €4.50, thus enabling our shareholders to participate in Munich Re’s outstanding result.
Macroeconomic parameters are likely to be slightly less positive in the further course of the year, which has implications for insurance demand and for expected returns on investments.
The US economy is expected to slow down moderately in comparison with last year, also because of a difficult housing-market environment. Moreover, given the tense political situation in the Middle East, a further significant decrease in oil prices is unlikely. For the USA, we expect inflation to be lower than last year.
The anticipated economic slowdown in the main industrial nations is also likely to curb growth in Japan in 2007. Nevertheless, the rate of increase in prices should be moderately positive again, following the slightly positive inflation rate registered in 2006 after years of deflation.
Although growth in the eurozone has been increasingly reliant on domestic demand recently, it will not be immune to the effects of a dampened global export climate. Germany’s foreign trade will be affected, too, while private consumption will be burdened (albeit to a small extent) by the higher value-added tax. These factors lead us to expect a cooling of the economy in 2007.
Risks The economic prospects are subject to uncertainties such as geopolitical threats – particularly in the Middle East and the Gulf region – and the risk of major new terrorist attacks. Other major risks are the global economic imbalances, especially the substantial deficit in the US budget and current account, which could weaken the US dollar and cause interest rates there to rise, impacting the economic situation in Europe as well. In addition, there is a high level of uncertainty regarding the further development of energy prices.
Markets continue to be subject to the risk that unexpectedly intense competition – whether from new or established providers – may have a negative influence on price levels. Keeping a clear focus on profitability before growth and on the efficiency of management systems will remain critical for success.
At present, a host of opportunities for growth in various business models are opening up worldwide in the health segment. By integrating primary insurance and reinsurance as well as extensive services, we cover more than the insurance industry’s typical value chain. Throughout the whole treatment process – from searching for the right specialist, through diagnosis and therapy, to rehabilitation – we provide services whose benefits go far beyond insurance itself. We will further intensify the close cooperation between Munich Re and DKV in selected foreign markets.
In past years, we have laid the foundations in propertycasualty reinsurance for the sustained profitability of our business by consistently adhering to risk-adequate prices, terms and conditions, even in phases with a fortuitously low incidence of major losses. Only in this way can we cope with potential peak burdens which can occur at any time. That is why the renewals at 1 January 2007 (which involved approximately two-thirds of our property-casualty business) were satisfactory overall, despite the low natural catastrophes burden in 2006. The development of reinsurance prices, terms and conditions varied considerably, depending on the class of business and region concerned. We did not observe a globally uniform reinsurance cycle. The trend away from proportional business towards non-proportional forms of cover continued.
Following the substantial price increases for natural catastrophe risks in the US market in the previous year, we were able to maintain and in some cases even significantly increase their prices. The renewals of large multinational property and liability treaties proved very satisfactory, with prices, terms and conditions remaining stable, and we again recorded growth in attractive agricultural business. By contrast, there were further price reductions in European industrial business, parts of aviation business, and German and French motor liability business. We systematically refrained from writing business that did not meet our stringent requirements, and we also terminated unprofitable proportional treaties in the highly competitive
For the forthcoming renewals on 1 April (Japan and Korea) and 1 July (parts of the US market, Australia and Latin America), we expect a similarly stable environment to that prevailing for the renewals at 1 January 2007.
Provided there are no strong movements in exchange rates, gross premium volume in reinsurance in 2007 should total between €22bn and €23bn – roughly the same level as in the previous year. We estimate that positive developments in the growth markets will make up for the premium reductions associated with the shift from proportional to non-proportional forms of cover. In propertycasualty reinsurance, we expect a combined ratio of less than 97% based on a major-loss burden from natural catastrophes of 5% of our earned premiums. Altogether, we anticipate a profit for the year of around €2.3–2.6bn in reinsurance.
Primary insurance The trends currently prevailing in the segments are likely to continue by and large in the coming year.
Group, which was included in our premium income in only one quarter of the past financial year. In Germany, premium development is likely to be weak. Although the significant decline in premium income in German motor insurance will not continue as hitherto and the economy strengthened considerably at the end of 2006, the higher insurance tax and increased value-added tax, with its growth-curbing impact on the overall economy, will have a dampening effect in 2007. We aim to grow again in private and commercial property insurance and above all in personal accident insurance. As far as the result is concerned, we anticipate that we will be able to achieve a combined ratio which, despite a marginal increase, will still total less than 95% for the whole year in property-casualty business, including legal expenses insurance.
Asset management The investment environment in 2006 was characterised by low interest rates and rising share prices.
Since last year’s mid-year peak in interest rates, yields on long-term fixed-interest securities have declined again. Interest-rate developments in the USA, which resulted in an inverse interest-rate structure, have caused the yield curve in the eurozone to virtually level out.
For 2007, we anticipate that increasing inflation rates will result in greater volatility in bond markets. From an economic point of view, we address this risk through our asset-liability management, which gears the maturities of our fixed-interest securities to those of our liabilities. We assume that the yields on long-term bonds relevant for our bond portfolio will increase moderately by the end of 2007.
Rebounding from a course correction in May 2006, the equities market resumed its upward climb for the fourth year in succession. However, the environment for equities might become more difficult, given the geopolitical risks and expected cooling of the US economy.
As at 31 December 2006, our equity-backing ratio stood at 14.1% of total investments on a market-value basis, after taking account of hedging transactions and equity derivatives.
MEAG will expand its business in China on the basis of its stake in and partnership with PICC Asset Management Company in Shanghai and also selectively extend its portfolio with private and institutional investors. A dedicated business unit will increasingly offer institutional investors the real estate expertise MEAG has acquired in managing the Group’s assets. In addition, MEAG will market new guarantee and portfolio protection products to meet investors’ continuing high demand for more security. Private provision for old age continues to be a crucial topic, and MEAG is planning to offer new retail products in the form of special savings plans to support this.
Result and premium of the Munich Re Group If exchange rates remain steady, we expect consolidated gross premiums written in primary insurance and reinsurance in 2007 to be in the range of €37.5–38.5bn. Proceeding on the basis of statistically expectable claims experience, we project a combined ratio of less than 97% in propertycasualty reinsurance and of less than 95% in propertycasualty primary insurance. In life primary and reinsurance business and in health primary insurance, we aim to achieve EEV earnings of between 8% and 9% (in relation to the value of the business in force at the beginning of the year). For the investment sector, we anticipate a return of 4.5% (based on the average market values of the investments ).
Overall, our goal for the financial year 2007 is a return on risk-adjusted capital (RORAC) of 15%. On the basis of our capitalisation at the turn of the year 2006/2007, this is equivalent to a consolidated profit for the year in the range of €2.8–3.2bn and a return on equity of between nearly 11% and 12%. These goals are ambitious yet achievable. Our shareholders will continue to participate in Munich Re’s success: in the coming financial years, we will consistently pursue a policy of active capital management in their interests. We plan to pay out at least 25% of the IFRS consolidated result as dividends and to supplement this with share buy-backs if the circumstances so demand, especially given that – even from the perspective of growing our business – the capital required is likely to remain limited. We thereby intend to permanently strengthen the confidence in our shares and send out a clear signal that we are adhering to our disciplined, profit-oriented corporate approach.
This risk report reflects the German Accounting Standard DRS 5-20. In accordance with IFRS 4, Insurance Contracts, it is supplemented by “Disclosures on the uncertainties of future cash flows from insurance contracts ” (page 200 ff.).
The main responsibility of Integrated Risk Management is to set standards and develop methods and tools as a basis for consistent Group-wide risk management. The decentralised risk controllers in the business units throughout the Group operationalise these in a manner suitable to their business needs and take account of legal requirements when necessary.
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 controllers.
We manage business portfolios by assigning return expectations, derived from the size of the risks assumed, to individual business activities. Our internal risk model, the Munich Re Capital Model, plays a central role here. We use it to analyse how certain risk scenarios affect the results of the segments life and health, property-casualty and the investments of the reinsurance and primary groups. For the segments life and health, we supplement the risk metrics from our internal risk model with risk metrics derived from our market-consistent embedded value steering framework. This framework allows us to take an objective view of the risks, tailored to the long-term nature of that business.
Audit function independently verifies that effective controls are in place and functioning
Manage and own risks of all approved transactions regardless of ultimate approval level
Value-based management Risk management tools and processes are embedded in our business steering concepts through the value-based management system applied in the Group. Various riskadjusted earnings targets are given to our business managers using the results of the Munich Re Capital Model or market-consistent embedded value framework. 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 business which is written by a business unit meets the technically risk-adequate price standard for the aggregate of the business unit’s portfolio. 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, including an allowance for frictional costs.
Qualitative risk assessment Whilst we are in a position to adequately assess the known risks in our portfolio, the growing complexity and dynamism of the environment in which we operate means that we must also remain vigilant with respect to the detection and representation of new or emerging risks. We follow a multidisciplinary approach in this regard using the knowhow and experience of geoscientists, biologists, specialist underwriters, lawyers, economists, sociologists and actuaries. For example, the Geo Risks Research team for natural catastrophes consists of 28 staff, who have published numerous papers on the likely impact of climate change on the future frequency and severity of losses for the insurance industry. We utilise their research to ensure that the capitalisation for risks in our portfolio includes an allowance for the risk of change.
For the holistic assessment of the risk situation, risk surveys coordinated by IRM (Integrated Risk Management) are conducted throughout the Munich Re Group.
Such surveys consist partly of standardised reports based on risk questionnaires, meetings and workshops held with the individual departments and subsidiaries. These are supplemented by various top-down assessments from senior management on concrete topics. The findings thus obtained are additionally reconciled with our operative corporate planning process. Besides this, there
As part of the early-warning system under the German Law on Corporate Control and Transparency, “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. Different forms of cooperation with external partners supplement our internal early-warning system. One example is our collaboration with the US RAND Institute for Civil Justice on the issue of class actions; another is Munich Re’s chairing of the CRO Forum’s Emerging Risks Initiative in 2007 (the CRO Forum being an association of Chief Risk Officers from major insurance companies). The primary objectives of the initiative are to identify key emerging risks for the insurance industry, to create corresponding scenarios for these, and to proceed with developing the requisite range of tools to deal with them. The initiative includes representatives of the European, US and Australasian insurance and reinsurance industries.
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 level as well as at Group level. At all companies, we have established asset-liability teams (ALTs) that advise on and monitor strategic decisions relating to investments. This has enabled us to standardise the Munich Re Group’s investment-related risk management activities and to follow a liability-driven investment strategy. The recommendations of the ALTs are formally presented to the respective Board member responsible for investments, together with independent verification and challenge provided by the Integrated Risk Management Division.
Market risks Risk management processes In the Munich Re Group we are guided by the following ALM principles. In a first step, we structure our investments so that they match the characteristics of our liabilities as closely as possible. We allow in this step for the economic structure of the liabilities as well as any regulatory restrictions on the determination of those liabilities. We call this the “neutral position” for the liabilities. In a second step, the Munich Re Group exploits its expertise in international financial markets to deliver a commensurate return for the risk taken by deviating from the neutral position. Such market risk is taken in a way that is commensurate with the risk-bearing capacities of the Munich Re Group, the skills and expertise of our asset managers, and the strategic level of asset-liability mismatch that is set by the Board or its Risk Committees.
The investment process for the Group’s investments is controlled by the individual companies of the Munich Re Group according to uniform rules. In line with our assetliability management (see page 98), we follow a liabilitydriven investment approach, i.e. we match the outflows implied by the insurance operations with appropriate investments, e.g. by matching currencies, durations and, where relevant, convexity. Our asset-liability mismatch risks are mainly steered on an economic basis, meaning that the pure accounting effects 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 also considers requirements relating to supervisory regulations, accounting and tax purposes.
Munich Re Group Annual Report 2006 Management report_Risk report match the currencies of our underwriting 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 primary life liabilities using derivative financial instruments. Credit derivatives are only employed in our investment portfolio to a limited extent. Changes in value of derivative financial instruments are accounted for at market price and are fully recognised in the income statement on the respective balance sheet dates. Therefore large fluctuations in their prices may impact our income materially, even though they have no effect on our economic value. We show the volumes of all derivatives on page 171 f.
Risk exposures The market value of our fixed-interest securities as at 31 December 2006 totalled €98.0bn, representing 54.9% 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 assetliability -management criteria.
The market value of our equity investments, including participating interests, amounted to €26.1bn at 31 December 2006. As at 31 December 2006, on a market value basis and taking hedging transactions into account, our ratio of equities to total investments amounted to 14.1% (31 December 2005: 13.4%).
The market value of our real estate, including buildings on land owned by third parties, amounted to €6.3bn at 31 December 2006. In the year under review, impairment losses and depreciation on the overall portfolio totalled €162m, depreciation accounting for the major share.
The investments of Group companies that write a substantial part of their business in foreign currencies are subject to currency risks, as exchange rates fluctuate against the euro. However, these risks are balanced by partially similar changes in the value of the liabilities.
The changes in share price assumed in these scenarios, ±10% and ±20% respectively, a corresponding shift in the interest-rate curve of ±100 and ±200 basis points (bp) respectively, and a fluctuation in exchange rates of ±10%, would produce the following changes in the market value of the investments: Market risk – Share prices
The changes in market value shown in the table can only be taken as rough indicators of actual market value losses that might occur in the future, as they do not consider any counteractive measures. Moreover, the effects on the Group’s annual result and equity would be reduced as a consequence of policyholders’ shares and the tax implications.
In order to aggregate the credit risks emanating from the insurance and investment sides, we utilise an in-house counterparty exposure monitoring system. We restrict default risks by limiting our total exposure in respect of individual debtors. To ensure exposures across both the primary and the reinsurance segment are taken into account, the Group Committee of the Board defines and monitors these limits. Moreover, we consider a whole range of individual attributes, including the issuer’s individual rating, its capitalisation as a basis for covering the liability, the quality of the collateralisation and of the respective issue, as well as the industry sector concerned.
We also regularly perform stress tests on our crossbalance -sheet exposures utilising the expertise of our economists, who together with our experts in Integrated Risk Management have developed a range of both shortterm /shock-event-type scenarios and more long-term trends to ensure the resilience of our assigned credit risk capital in aggregate. The results of this analysis are shared with the Board Risk Committees.
Munich Re’s investments were not affected by any significant defaults in 2006.
Risk exposures Credit assessment is of central importance for the management of credit risks relating to fixed-interest securities. The main factor here is the quality of the issuer or the respective issue, which is primarily reflected – according to the investment principles of the Munich Re Group – in the ratings of international rating agencies: 93.5% of our investments in fixed-interest securities at 31 December 2006 had a rating of “A” or better (according to Standard & Poor’s classification). The majority of fixed-interest securities in our portfolio have been issued by governments or banks
The reinsurers and retrocessionaires participating in our external placements are approved by our Security Committee, which screens their creditworthiness regularly according to several criteria. One of the minimum criteria is a rating of A– or better from one of the major rating agencies or equivalent, e.g. collateralisation. Furthermore, concentrations of credit risks are avoided by a broad spread of our cessions.
As at 31 December 2006, our accounts receivable on ceded business were split between the following ratings (based on those of Standard & Poor’s): €251.3m 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 €158.3m.
Liquidity risks The liquidity risks of companies in the Munich Re Group are managed in the first instance on a decentralised basis with aggregation provided by our reinsurance and primary insurance liquidity management departments, which report to the Group Committee of the Board.
Detailed liquidity planning ensures that the Group companies are able to make the necessary payments at all times, taking into account Group funding requirements for Group financing activities as well as Group acquisitions and divestitures. Liquidity risks may also arise because the actual payout structure of our liabilities differs from that assumed in our asset-liability management (e.g. due to a lengthening or acceleration of claim payments in a line of business or region). We thus have processes in place that regularly track these differences and report their implications to the Group Committee of the Board. This planning concept, which has been in place for many years, has proved its value after major loss events.
writing 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.
In addition, exposures arising from other lines of business for which no stochastic models on nat cat have been developed so far (e.g. casualty and aviation) are assessed in close cooperation with the respective business units, using their expertise.
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. We have procedures in place to reallocate unused capacities between business units.
In those markets where such partnerships cannot be achieved, Munich Re offers terrorism coverage on a limited and selective basis. Munich Re is committed to controlling its risk accumulation and has therefore adopted various measures to control, limit and manage its aggregate terrorism exposure. Accumulation risks arising from terrorism are monitored centrally, based on a selection of markets, terrorism accumulation zones and scenarios. The methods for exposure analysis are developed by a group of experts from business units and Corporate Underwriting. Line/ market-specific exposure is assessed in close cooperation with the respective business units and, where appropriate, with the support of terrorism models. 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.
An interdisciplinary team has thoroughly analysed the Munich Re Group’s exposure. From a Group-wide perspective, the overall impact could be significant – depending on the scenario chosen.
Insurance risk: Life and health Risk management processes In life insurance and reinsurance, biometric, lapse and interest-guarantee risks are especially relevant. The calculation of underwriting provisions is based on “biometric” actuarial assumptions, i.e. on assumptions with regard to mortality and disablement, which also take future trends into account. 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 life insurance is concerned, the guaranteed actuarial interest rate applicable at the time a policy is established 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.
In reinsurance, we exclude the interest-guarantee risk in many cases through suitable treaty design or by a backto -back micro hedge of the risk.
Operational risks Operational risks comprise the risks of losses as a result of inadequate processes, technical failure, human error or external events. These include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations or disagreements with business partners.
Combined ratios for the last ten years *Thereof World Trade Center and reserve strengthening at American Re: 24.3%. **Thereof World Trade Center and reserve strengthening at American Re: 17.1% .
To prevent infringements of insider law, Munich Re has appointed a Compliance Officer, who ensures that inside information is handled in conformity with the law. In addition, a Disclosure Committee has been established to ensure that disclosure requirements regarding pricesensitive information are complied with.
ERGO is also implementing important major projects, such as the ongoing convergence of its systems and processes in the health segment.
Risks involving human resources The companies in the Munich Re Group have binding rules setting out minimum standards of corporate integrity for conduct within the companies themselves, their business transactions and other relationships with external parties. These standards, which are included in a detailed code of conduct, are tailored to the special features of each company and serve to prevent conflicts of interest for staff, thus ensuring that we use only fair and legal means of competition. The clear separation of management and control functions limits the risk of internal and external regulations being breached. We ensure that the German General Equal Treatment Act and similar anti-discrimin-
Given its business model, the Munich Re Group is particularly dependent on the knowledge and proficiency of its staff. We control the resultant human resources risks by means of appropriate indicators and metrics. Our human resources tools as a whole serve to strengthen our staff’s ties with the Group and consequently to safeguard our business intelligence.
Legal and supervisory risks Legal risks may arise on the one hand from court decisions and legislation (changes in legal parameters) and on the other from legal disputes and arbitration proceedings in which we as an international insurance group are involved, especially in the area of claims settlement.
The following are examples of currently relevant legal risks: – In April of 2004, New York State Attorney General Eliot
Spitzer started an investigation into the use of Placement or Market Service Agreements (PSAs) in the insurance industry. Several other US state regulators subsequently commenced similar probes into this matter, as have other regulators. We have received requests to provide information in connection with these investigations and are cooperating fully with the authorities. Entities of the Munich Re organisation, together with several other insurers and brokers, have been named defendants in several PSA-related class actions by US policyholders. Munich Re denies any wrongdoing and will defend itself vigorously.
– Given the hitherto unbroken trend of rising claims against insurance companies, we increased our provisions for asbestos claims as at 31 December 2006. In February 2006, the federal legislative procedure for the Fairness in Asbestos Injury Resolution Act in the USA foundered. With the Democrats gaining the majority of seats in the House of Representatives in the Congressional elections in November 2006, the chances of the Bill being revived have fallen substantially. Revelations about questionable asbestos-related disease diagnoses and resultant lawsuits have led to the convening of various investigation committees in the USA to look into these practices. This could be a sign of a positive trend with regard to the asbestos situation in the USA. However, it is too early to say whether and to what extent this will have favourable implications for the insurance industry’s loss development.
Thus, for instance, the ongoing discussion about the reform of the social security systems in Germany still harbours risks for the health insurers in the ERGO Insurance Group. We are therefore closely monitoring these developments by (among other means) being active at insuranceassociation level and making regular scenario calculations that simulate the effects of possible changes in basic parameters. We are also proactively investigating the implications of the recent reforms for our product strategy in comprehensive and supplementary health insurance.
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, weaknesses, 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 to ensure these risks can be adequately reflected in the “stress tests” applied under the Munich Re Capital Model and in our management of cross-line, cross-segment and cross-balance-sheet accumulations of risks.
At the present time, the way we determine our financial strength differs somewhat from the regulatory and ratingagency approaches. This means that we must constantly compare and contrast these calculation methods and resultant evaluations of our financial strength as part of our active capital management. It is not yet possible for insurance groups to adopt one measure of financial strength, although the Solvency II project to reform insurance supervision in Europe and various initiatives of all major rating agencies may assist in converging these indicators of financial strength over time.
The Munich Re Group meets the regulatory solvency requirements stipulating a specified minimum capitalisation supplemented by the criteria of specific ratings from the major rating agencies. More detail is provided in the “Financial situation” section (see page 97 f.).
With our risk management instruments, we will systematically control the risks in our reinsurance business and ensure that we firmly adhere to our policy of riskadequate prices, terms and conditions (e.g. exclusions), even if this means having to refrain from participating in some business.
Outlook The external requirements for Group-wide risk management are likely to increase further since national and international initiatives such as IFRS are setting new standards for accounting, and Solvency II is fundamentally restructuring insurance supervision in the European Member States. Rating agencies increasingly and explicitly take the quality and effectiveness of risk management into account in their ratings and their requirements are very much in line with what we have adopted internally as best practices. Insurance associations and research institutions such as the Geneva Association actively promote an exchange of views on risk management best practices and their establishment. At the end of 2006, Munich Re hosted the second CRO Assembly of the Geneva Association, which is the largest global gathering of insurance and reinsurance CROs. The programme organised by Munich Re provided a unique opportunity for our clients and peers to exchange views on developments in risk management and to interact with regulators, rating agencies, policymakers and analysts. Munich Re’s experts from the fields of geosciences, biosciences, liability regimes and macroeconomics also conducted workshops during the Assembly to assist our clients in a deeper understanding of the risks of change in their portfolio. It is our hope that our efforts in these areas will help reduce the cyclicality of results in our industry and further improve the underwriting standards adopted by insurers and reinsurers globally.
Munich Re also participates actively in the CRO Forum and in 2007 will chair the Emerging Risks Initiative of the CRO Forum, which it co-founded (see section on qualitative risk management on page 126 f. for a description of the activities of this initiative).
Consolidated financial statements and notes / Affiliated companies / Auditor’s report
Notes to the consolidated financial statements Application of International Financial Reporting Standards (IFRSs) 156
Declaration of conformity with the German Code of Corporate Governance as per Section 161 of the German Stock Companies Act 156
(36) Risks from insurance contracts in the life and health segment 200
Fi n an ci al s ta te m en ts
Assets Notes Prev. year* Change €m €m €m €m €m %
I. Land and buildings, including buildings on third-party land (3) 4,720 5,798 –1,078 –18.6 Thereof: – Investment property held for sale (16) 1,164 – 1,164 –
F. Cash at bank, cheques and cash in hand 2,172 2,337 –165 –7.1
Thereof: – Deferred taxes relating to disposal groups 16 – 16 –
Total assets 215,874 218,737 –2,863 –1.3 *Adjusted owing to first-time application of IAS 19 (rev. 2004). Details are provided in the notes on recognition and measurement.
Munich Re Group Annual Report 2006 Consolidated financial statements_Consolidated balance sheet
Equity and liabilities Notes Prev. year* Change €m €m €m €m %
Thereof: – Provision for deferred premium refunds relating to disposal groups (16) –169 – –169 –
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (23) 1,930 1,516 414 27.3
Total equity and liabilities 215,874 218,737 –2,863 –1.3 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Gross premiums written (28) 37,436 38,199 –763 –2.0 1. Earned premiums (28)
Statement of recognised income and expense 2006 Prev. year €m €m
Unrealised gains and losses on investments – Gains (losses) recognised in equity 1,616 2,972 – Included in the income statement –1,450 –1,315
Issued Capital Retained earnings Other reserves Consolicapital reserve dated result Retained Own Unrealised Reserve Valuation earnings shares gains and from result from before held losses currency cash flow deduction translation hedges of own All figures in €m shares
Adjustments pursuant to IAS 8 – – –59 – – – – – –14 –73
Adjustments pursuant to IAS 8 – – –52 – – – – – 1 –51
Change from the acquisition, sale and maturities of other investments –4,157 –2,529
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 102 f.
II. Investments in affiliated companies and associates 2,553 2,910 3,281 3,238
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.
Life and health Property-casualty 31.12.2006 Prev. year* 31.12.2006 Prev. year* 31.12.2006 Prev. year* 31.12.2006 Prev. year* 31.12.2006 Prev. year*
Thereof: – From insurance transactions with other segments 751 859 760 848 – From insurance transactions with external third parties 6,914 6,952 13,791 13,699 1. Earned premiums 2. Investment result
Thereof: 4. Expenses for claims and benefits 5. Operating expenses 7. Result before impairment losses of goodwill 922 1,105 3,486 1,284 8. Impairment losses of goodwill – – – –
Thereof: – Attributable to Munich Re equity holders 561 977 2,134 420 – Attributable to minority interests – – – –
Life and health Property-casualty 2006 Prev. year* 2006 Prev. year* 2006 Prev. year* 2006 Prev. year* 2006 Prev. year*
Gross premiums written* Reinsurers Primary insurers Total 2006 Prev. year 2006 Prev. year 2006 Prev. year €m €m €m €m €m €m
Application of International Financial Reporting Standards (IFRSs) Munich Re’s consolidated financial statements have been prepared on the 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 (€).
Figures for previous years The first-time application of IAS 19 (rev. 2004) as at 1 January 2006 necessitated the retrospective adjustment of the consolidated balance sheet as at 31 December 2005 and the consolidated income statement for the financial year 2005. Details are given in the section “Changes in accounting policies”. Otherwise, the previous-year figures have been calculated on the same basis as the figures for the financial year 2006.
Consolidation Consolidated companies In accordance with IAS 27, the consolidated financial statements include Munich Reinsurance Company (the parent) and all the entities in which Munich Re owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries). This applies analogously to the special funds held by Munich Re and its subsidiaries. The only exceptions are subsidiaries and special funds determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size.
An overview of the group of consolidated companies and other important shareholdings is provided on page 213 f. The list of all our shareholdings is filed with the Company Registry, Munich, under registration number HRB 42039.
Recognition and measurement The annual financial statements of the consolidated subsidiaries and special funds are subject to uniform accounting policies. For the annual financial statements of significant associates we have, in accordance with IAS 28.27, made appropriate adjustments for the purposes of the consolidated financial statements. Valuations used in the financial statements of associates not classified as significant are maintained.
Changes in accounting policies Application of the recognition, measurement and disclosure methods follows the principle that a method once chosen should be applied consistently. 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 2006. The following standard is of significance in this context: IAS 19, Employee Benefits, was amended in December 2004 and now provides the option of recognising actuarial gains and losses on defined benefit plans directly in equity, outside profit or loss. We have taken advantage of this option as from 1 January 2006, replacing the previously used corridor method.
All figures in €m recognised (rev. 2004) 2005 4. Expenses for claims and benefits
Thereof – Attributable to Munich Re equity holders 2,671 8 2,679 – Attributable to minority interests 72 – 72
The effects on the consolidated income statement for the financial year 2005 are as follows: Assets 31.12.2005 Effect from as originally IAS 19
Total equity and liabilities 218,639 98 218,737 of risks from financial instruments; the requirements of IFRS 4, Insurance Contracts, regarding risks from insurance contracts have been adjusted in the same way. Parallel to this, IAS 1 (rev. 2005), Presentation of Financial Statements, requires disclosures on objectives, policies and processes for managing capital.
Other intangible assets mainly comprise purchased and internally generated software and acquired insurance portfolios. The software is carried at cost less straight-line amortisation. The useful life assumed is generally three to five years, in exceptional cases up to ten years. Acquired insurance portfolios are recognised at their present value on acquisition (PVFP: present value of future profits). This is determined as the present value of expected profits from the portfolio acquired, without consideration of new business and tax effects. The items in question are amortised in accordance with the realisation of the profits from the insurance portfolios underlying the PVFP calculation. The other intangible assets are tested for impairment at each balance sheet date and write-downs made if required. Write-downs of software and other intangible assets are distributed in the consolidated income statement between investment expenses, expenses for claims and benefits and operating expenses. If it is not possible to allocate the expenses to these functional areas, they are shown under “other expenses”. Write-downs of purchased insurance portfolios are recognised under operating expenses. Write-ups of software and other intangible assets are included in “other income”.
Investments in associates are valued by the equity method at the Group’s proportionate share of their net assets. The associate’s earn-
A ings 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 approach or the net asset value method.
Fixed-interest or non-fixed-interest securities available for sale and not held for trading or recognised under loans are accounted for at fair value. The relevant unrealised gains or losses are calculated taking into account interest accrued and, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation (provision for deferred premium refunds), are recognised directly in equity.
Impairment Regularly, at each balance sheet date, we assess whether there is any substantial objective evidence of impairment in a financial asset or group of financial assets.
Acquisition cost is determined on the basis of the average company purchase prices. 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. 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.
Investments for the benefit of life insurance policyholders who bear the investment risk These are investments for policyholders under unit-linked life insurances. They are measured at fair value. Unrealised gains or losses
Equity and liabilities securities available for sale are recognised in equity (see notes on asset item B “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.
Subordinated liabilities Subordinated liabilities are liabilities which, in the event of liquidation or insolvency, are only satisfied after the claims of other creditors. They are measured at amortised cost in accordance with the effective interest method.
Gross technical provisions The technical provisions are shown gross in our balance sheet, i.e. without deduction of the share apportionable to business ceded by us; cf. the explanatory remarks on assets item D. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs for insurance contracts are capitalised and amortised over the terms of the contracts; cf. notes on assets item G. We base the measurement of technical provisions on the standards FAS 60, FAS 97 and FAS 120. Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. The posting of unearned premiums is restricted to short-term underwriting business, i.e. property-casualty and health business in both primary insurance and reinsurance.
The provision for future policy benefits in long-term insurance 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 prospective 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 interestrate 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.
Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders This item includes the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance). The value of the provision for future policy benefits essentially corresponds to the market value of the relevant investments shown under assets item C. Besides this, as under the provision for future policy benefits as per FAS 97, they may include additional premium components; cf. the notes on assets item C. Changes in this provision are fully recognised in the underwriting result. Insofar as these changes derive from unrealised gains and losses from alterations in the fair values of the related investments, they are matched by opposite changes of the same amount in the investment result.
Other accrued liabilities This item includes provisions for post-employment benefits. The companies in the Munich Re Group generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the staff member’s length of service and salary. Under defined contribution plans, the companies pay fixed contributions to an insurer or a pension fund. This fully covers the com-
Tax provisions for current taxes are posted – without discounting – in accordance with the probable tax payments for the year under review or previous years.
The goodwill results mainly from the acquisition of Munich Re America (formerly American Re) in November 1996 and from the acquisition of the additional shares in the ERGO Insurance Group in 2001 and 2002. The additions of €121m derive mainly from the purchase of a 75% stake in the share capital of the I
. sviçre Insurance Group, described in detail in our notes on the consolidated companies
Impairment test for the main items of goodwill For the purpose of impairment testing, IFRS 3 in conjunction with IAS 36 requires that the goodwill be allocated to the cash-generating units expected to derive benefit (in the form of cash flows) from the business combination. To ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cash-generating unit is compared with that unit’s recoverable amount. The recoverable amount is the higher of – its fair value less costs to sell and – its value in use (present value of the future cash flows expected to be derived from a cash-generating unit). The future cash flows used for determining the value in use are based on management’s most recent financial plans/forecasts. Beyond the period covered by these financial plans/forecasts, the future cash flows are estimated by extrapolating the prognoses on which the financial plans/forecasts are based, applying constant growth rates for the subsequent years.
Main assumptions for calculating the cash-generating units’ value in use The impairment test for the goodwill from the acquisition of Munich Re America and from the acquisition of ERGO was carried out on the basis of the current cash flow plans at the time of testing in the first quarter.
Detailed cash flow planning 3 years 3 years on the basis of financial plans/forecasts
Gross carrying amount at 31 Dec. previous year 843 1,097 298 2,238 2,342
Carrying amount at 31 Dec. financial year 353 562 140 1,055 1,036
Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 550 537 243 1,330 1,202
Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year 1,220 1,460
Accumulated depreciation and accumulated impairment losses at 31 Dec. financial year 891 1,220