4 Excluding health insurance conducted like life insurance. 5 This includes own shares earmarked for retirement.
Gross premiums written €bn 5.1 4.0 Investments €bn 4.1 3.1 Net technical provisions €bn 3.3 2.9
ERGO Previdenza almeda assistance and health services Bank Austria Creditanstalt Versicherung AG
Thinking Thinking furtherfurther A special kind of insurerA special kind of insurer 0202
Why Poland continues to boom in the crisis // Interview with Piotr Sliwicki
“get ready for an unbelievable experience!”“get ready for an unbelievable experience!” 1818
WWW.MuniChre.COM/Thinking-furTher p. 02 p. 12 p. 22 p. 18 p. 14 p. 08
The answers to these questions provide us with the key to tomorrow: To new markets, new clients and new products. To new thinking and new solutions. That is one of the reasons why, in 2010, we brought together most of our primary insurance activities under the eRGO brand. We are sure that as a result we are optimally equipped for the future challenges facing our industry.
Think further – that is what we aspire to do in all our activities. On the following pages, you can read how.
The year Luisa Antonia was born in Cologne also saw the birth of an insurer of a special kind in Germany. eRGO is the fi rst insurer to systematically gear itself to the needs and wants of its clients. how many customers welcome this approach is shown by the numerous reactions following the eRGO launch. By the time Luisa Antonia celebrates her tenth birthday, it is likely that people’s perceptions of taking out insurance and being insured will have undergone a fundamental change.
PRiMARY inSuRAnce it is one thing to create a new kind of insurer, but quite another to make it a household name. On 18 July 2010, the new eRGO launched an extensive, authentic advertising campaign in cinemas, papers and magazines, with huge posters at Potsdamer Platz in Berlin and at the docks in hamburg, and a 60-second commercial that was broadcast almost simultaneously on nearly all the main German TV channels. The outcome: by the end of the year, well over half of all Germans were familiar with the name eRGO.
When consumers are asked about their views on insurers, the answers often express disappointment, dissatisfaction and distrust. insurance agent is the least popular profession in Germany, beating even politician, truck driver or road sweeper. And on a scale of 1 (“extremely trustworthy“) to 6 (“not at all trustworthy “), Germans give insurers an average rating of only 3.3 – a disappointing result for a sector that depends on its clients’ trust almost more than any other. But what is it that really bothers people about insurers? Why do they feel that they are keenly wooed but seldom well advised? And above all, what makes a good insurer, one that takes its clients’ wishes and complaints seriously?
As a result, ergO today strives for exceptionally clear communication and a consistent feedback culture, underlining its client focus with the newly created institution of eRGO customer advocate. The relaunch of the brand structure has also made life considerably simpler for clients, given that now eRGO’s broad portfolio of life and property-casualty insurances is available via various distribution channels under one strong brand name. Whether clients are seeking advice in person or by phone or wishing to take out insurance after office hours or at the weekend – they will always obtain a good and fair offer from eRGO, whichever channel they choose.
PRiMARY inSuRAnce advertising slogan: “eRGO – To insure is to understand ”. The budget: a mid-range eight-fi gure amount. The response: overwhelming.
and distribution partners that are otherwise our competitors. We are therefore well advised to leave these brands intact.
hamburg-Mannheimer and Victoria had many long-standing clients. Didn’t you risk losing their trust with the name change? no, we didn’t, because most of them have strong ties with their insurance agents, who have helped them make the transition to the new brand. And anyway, there is no change to existing pol icies. For new clients, the eRGO brand generates an aboveaverage degree of trust – after all, eRGO is one of the heavyweights in the insurance sector.
You are keeping the brands of your specialty insurers DkV, D.A.S. and erV. Why? Because in contrast to the broadbased hamburg-Mannheimer or Victoria, they are specialists that stand for very specifi c insurance solutions and particular expertise. They are leaders in their respective markets and also sell their products both nationally and internationally through insurers
Mr. Bischof, does the world really need yet another insurance brand? Thomas Bischof: no, not at all. But what customers desperately want – as our market research shows – is another kind of insurer. One that talks to them on the same level. One that makes its products and services clear, in understandable and simple language. One that understands the reality of their lives and the actual problems they face. That is what the new eRGO aspires to be.
But a big fi rm with more than 30,000 employees cannot be transformed overnight. Our guiding principle is “To insure is to understand”, and we take that very seriously. We listen. We are self-critical. We are also becoming more transparent internally, which has really boosted motivation among us. Our employees and insurance agents, together with our clients, are seeking points throughout the Group where eRGO can improve in some way. The fact is that we will not succeed in doing all this at once. But we have made a start – and are beginning to see the fi rst results.
Munich Re 2010Thinking furTher infant mortality in india is still almost nine times higher than in germany. in 20 years, however, when Ayaan has reached an age when he himself has children, the mortality risk for babies should be much lower. Particularly in india’s metropolises, ultramodern hospitals are being created to provide top-quality medical care. And insurers like Apollo Munich health help to ensure that a good healthcare system is accessible and aff ordable for all sections of india’s population.
Since India opened herself to the world market, the subcontinent’s economy has been growing at a breathtaking pace. The volume of health insurance policies alone has increased twelvefold within only eight years. Antony Jacob, CEO of Apollo Munich Health, explains how this has happened and why the sector is nevertheless still in its infancy. //
india is a land of festivals. Trichur, in the state of Kerala where i was born, is famous for its annual elephant festival. My mother gave birth to me at home, with the help of a midwife. if there had been complications, there would have been a kindly general practitioner nearby and, somewhat further afield, a simple mission hospital. however, people who went to hospital in those days frequently had to pay for their treatment beforehand in cash (a practice that is still customary in some hospitals today). insurance companies, which were nationalised in 1972, either did not have any health insurance scheme or, in the case of those that did, would not reimburse the costs immediately or even failed to do so entirely. And in any case, only a small number of indians even had such cover.
The not-so-good news is that so far only a relatively small section of the population has access to these services. The state-of-the-art care in the metropolises contrasts starkly with the patchy healthcare in the provinces. With an average of one hospital bed per 1,000 inhabitants, india lags far behind china (4.3) and Western europe, where there are 7.4 beds available per 1,000 people on average. To further add to the challenges, when access to care becomes available, more than 40% of indians who have treatment in hospital have to borrow money or sell property to pay for it. Personal financing of medical care is among the three most important causes of poverty in india. With the cost of healthcare rising, it is becoming obvious to the common man that he can no longer fund this exposure from savings or borrowing. new methods of empowering people to finance these expenses are the need of the hour.
10 heALTh inSuRAnce of private health insurance. in the past eight years, premium income has increased twelvefold. Yet less than 3% of all indians have private insurance against health risks. Why is this so? An obvious reason is that indians with a good income initially have other priorities. Traditionally, my compatriots invest mainly in land, jewellery or a house of their own. When the cost of healthcare was lower, health insurance was just not on the list – people believed they could pay for it from savings or by borrowing from friends and family. This was compounded by the lack of trust in insurers – a legacy of the pre-liberalisation era, when insurance cover was a purely state business and was felt to be complicated and not transparent for the customer.
With Apollo Munich health, we have the best prerequisites for gaining the trust of the market. The indian joint-venture partner, the Apollo hospitals Group, is Asia’s largest integrated healthcare group, with 50 hospitals, a nationwide chain of pharmacies, consulting services and renowned medical research institutions. in other words, we combine the practical experience of a leading healthcare provider with the insurance expertise of the world’s leading reinsurer. For the next fi ve to ten years, we expect premium growth of 25% per year. i suspect there are few industries in the world that can show such constant and strong growth.
however, we have started from a very low level. even if our sector continues to grow at this pace, only every tenth indian will have health insurance in ten years’ time. if public and private expenditure is added together, the per-capita amount spent on healthcare in the uSA comes to 7,285 dollars and in china to 233 dollars. in india, it is a mere 109 dollars per inhabitant per year.
A good one-and-a-half years ago, an energy and infrastructure project of unprecedented dimensions was unveiled in Munich. Together with major fi rms in Germany and beyond, Munich Re and the Desertec Foundation launched the industry initiative Dii in July 2009. in the coming years, it plans to create the basis for a network of many hundred solar and wind power plants in north Africa and the Middle east. its objective: to supply large areas of this region and europe with carbon-neutral power. its time horizon: 40 years. The estimated investment volume: many billion euros. i was delighted by the overwhelming response to the launch of the power-from-the-desert project, even if this included a number of critical questions: What is an insurer doing getting involved in producing green electricity? What does Munich Re expect to gain from its Dii participation? And why doesn’t one of the world’s leading risk carriers concentrate on its core business?
The basic answer to these questions is: Because it is part of our social responsibility as a Group, given one of the great challenges faced by humanity – climate change and its consequences. We cannot remain silent and must act on this issue when we are in a position to help develop or support solutions with our knowledge and infl uence. But there is also an answer that is “nearer to home”: What is looming in connection with climate change has direct implications for our core business. Weather-related natural catastrophes are on the increase, and the evidence is that this is partly due to climate change. The consequences of global warming, if left unchecked, could be so serious in the long term that in a few decades adequate insurance protection would no longer be conceivable for people and fi rms in some regions. in all likelihood, this scenario can only be prevented if the warming is restricted to the much-cited limit of two degrees.
What does Munich Re have to do with power generation in North Africa? And why is Munich Re concerning itself with off shore oil drilling? Legit imate questions, answered by Munich Re CEO Nikolaus von Bomhard.
You yourself are one of the Poles that played an active part in building up your country after the fall of the iron Curtain. Tell us about it. i was 29 when, in 1991, i received the offer to develop an insurance company. Our licence was the first to be granted to a private insurer in Poland, and our very first client was the Prime Minister. At our meetings back then, all our employees could sit at one table. They were exciting times, and we are doing our utmost to maintain this entrepreneurial spirit for the future.
further information: www.ergohestia.pl ergO hestia is the second-largest company in the Polish property-casualty insurance market. Together with its subsidiaries, it makes up the eRGO hestia Group with premium income of nearly €950m. To date, it has won the trust of more than 5.7 million clients. The Group employs as many as 2,000 staff, who work at the head office in Sopot and at 38 regional branches.
Daniel gros, Director of the Brussels Centre for european Policy Studies considers it possible that your country may even overtake germany in the coming generation. Do you share his view? We do indeed have one major advantage that i have already mentioned: the large number of “hungry” young people who want to achieve something. Perhaps that distinguishes us from a highly developed, more satiated country like Germany. investors take higher risks in Poland, but obtain much greater opportunities in return. On the other hand, you just have to look at our infrastructure to see that Poland still has a long way to go before it can compare itself to Germany.
What does that mean for ergO hestia? in the coming years, we will profi t from the rise in living standards and the strength of the economy. experience shows that growth in insurance premiums is usually around two-and-a-half times economic growth. And for 2011, economists are forecasting growth of 3.5% in GnP.
Where does ergO hestia stand today? We have grown fourfold in the last ten years and are now number two among Poland’s approximately 40 property-casualty insurers. Around 1,750 employees and 3,500 insurance agents work for eRGO hestia today. Last year, we overtook Warta, the almost 100-year-old state insurer that for many years formed a duopoly with PZu.
how do you explain ergO hestia’s market success? We are not the cheapest or even the most active in terms of marketing measures. But we are defi nitely committed to one idea: swift, competent and comprehensive claims management. We were the fi rst insurance company in Poland to set up a mobile department for claims handling. Besides this, we have created an e-account for every client that enables them to see, at any time, what stage the processing of their claim has reached. Before that, insureds who wanted to get a claim settled after fl oods, for example, had to join the long queues outside insurance off ices. Surveys show that Poles associate eRGO hestia with the feeling that someone is really looking after their needs.
Space tourism, solar power stations, rare raw materials: the opportunities that will emerge in space in the coming decades are almost as infinite as space itself. But before that, there are a few very down-toearth challenges that need to be mastered. Thomas Reiter, Europe’s most experienced astronaut, and Ernst Steilen, Head of Space Underwriting at Munich Re, discuss them. //
is it a mission to explore for natural resources? Some of your colleagues reckon there are valuable raw materials out there in space. no, the primary purpose of this mission is purely scientific. Are comets made of ice or rock? And what do they tell us about the prehistory of our solar system? We are still a long way from mining raw materials in space.
Oh, so you have read the novel “Limit“ by frank Schätzing as well? Of course – we actually gave Frank some some support in researching the novel. his idea of an elevator from the earth into orbit is naturally science fiction, but it highlights the critical hurdle: transport capacities and above all transportation costs. in the history of humanity, the development of transport has always played a crucial role, and it will be just the same with this part of our history where we venture into space. At the moment, the means of transport available are just too expensive for conquering space. energy consumption is gigantic.
OK, but with Ariane 5 we already have a pretty reliable launch vehicle with around 40 successful launches to its name. if we succeed in reducing the costs of space transportation by only a third, we will suddenly have quite different new commercial possibilities for transporting earth-observation and telecommunication satellites. Maybe we will not put satellites into orbit at all any more in future, but just geostationary platforms on which providers can mount their indi vi d ual transponders. What is your take on that?
Certainly, that would be a whole new ball game. And it would be no problem from the underwriting point of view – it is a situation just like the one we faced 40 years ago when we ventured to tackle a whole new technology – satellites. Without insurance cover, their commercial development would have been unthinkable. What does it cost to insure a satellite?
One satellite, including launch, costs around uS$ 250m, and a big satellite with a complex payload as much as uS$ 400m. if the investments on the ground are added to this, we are talking about roughly a billion dollars – risks that even major operators could not shoulder alone. every year, around 20 to 30 commercial satellites are put into space and, as the leading space insurer, we are essentially involved in all of them. Besides this, there
Thomas reiter has the most experience in space of any european astronaut. From September 1995 to February 1996, he worked on board the Russian space station Mir. in 2006, he went back into space for five months aboard the international Space Station (iSS). he is a member of the executive Board of the German Aerospace center (DLR) with responsibility for space research and development.
ernst Steilen is head of Space underwriting at Munich Re. A qualified lawyer, he has been responsible for the insurance of space risks since 1982 and, in this underwriting role, has partnered around 500 launches over this period. his most defining experience with regard to space flight was the explosion of the challenger Space Shuttle, which he witnessed live on tele vision and which really brought home to him the fact that, despite application of the highest safety standards, humans and materials are fallible.
Some of your colleagues are in favour of sending robots into space to minimise the costs and the risks of manned space flight. That’s right. The costs of life support systems could be dis pensed with. On the other hand, robots do not yet have the specific cognitive, sensory and manipulative capabilities of humans. And something like intuition is virtually impossible to recreate in a machine. But the fact is that intuition can be crucial in the isolated situation of a space capsule. During my first mission, for example, a gas analyser failed. The specialists at mission control could not provide any explanation, and telemetry data of the device that were radioed to earth did not throw any light on the matter. But since the experiment could not be continued anyway, i simply unscrewed it – and actually found what was wrong.
What practical challenges are people confronted with in space? When you are trying to repair or assemble something, you really need a third arm or leg in order to brace yourself in position. And when you return to earth you have to regain your sense of balance, just like after a long ocean voyage. Besides that, a longer trip has negative effects like demineralisation, muscular atrophy and a certain sluggishness of the system that regulates blood pressure. But these effects can be mitigated. Merely the improved sports equip- ment that we had on my second mission to the iSS hugely reduced the calcium depletion in my bones.
Thomas reiter and ernst Steilen talk in front of a model of the Rosetta landing craft “Philae”, the original of which is en route to the comet churyumov-Gerasimenko. The aim of the mission, headed by the european Space Agency eSA, is to extract samples that provide information on the composition of comets.
While the West is starting to come to terms with demographic change, a much more drastic shift is looming in the People’s Republic of China. The country is moving from a young population to an old and declining one with a speed rarely seen elsewhere. Within one generation, China is ageing to an extent which has taken Europe 100 years. In the coming decades, there will be massive growth in the number of Chinese senior citizens – and thus in the need for long term care and its insurance. //
in the meantime, the long-term consequences of declining fertility rates are becoming apparent. in the past decades, the changes in family size have moved like a huge wave through provinces and age cohorts, developing into a demographic tsunami. For the inescapable fact is that the millions of chinese who were born in the 1960s and 1970s have been followed by fewer and fewer young chinese. in the words of a report by the center for Strategic & international Studies: “By 2040, assuming current demographic trends continue, there will be 397 million chinese elders, which is more than the total current total population of France, Germany, italy, Japan and the united Kingdom combined.“ if the forecasts are correct, china’s population in 2040 is likely to be older than that of the uSA. And just four years from now, the number of working chinese will have reached its peak, from which it will then fall continually and relentlessly.
Accompanied by Zhang, Mr. Feng recently led a delegation to the united States to study long term care insurance. Besides LifePlans, uS federal government departments, state insurance regulators and insurance trade associations, Mr. Feng also visited nursing homes and talked with uS providers of long term care insurance. “The support of Munich Re can be helpful for us in developing a product that is financially viable and meets the demands of an ageing society.”
24 eXPeRTiSe care. in 2050, there are likely to be over 100 million 80-year-olds in china – more than the current total worldwide.
Many Chinese are therefore already making private provision for illness and old age. Thus “critical illness” policies are a common additional insurance taken out with savings products today. “it is clear to everybody that neither families nor the state will be able to cope with the challenges of an ageing society alone,” explains Zhang, “and that applies not only to china but also to other societies in Asia.” Munich Re has therefore designed similar long term care insurance solutions for markets like Japan, South Korea and Singapore as well.
it is therefore no longer a question of whether the market for long term care and pension insurance in china will take off . it is just a question of when, at what speed and with what force. //
How will we live in the future?How will we live in the future? Just like today? Or quite di� erently?Just like today? Or quite di� erently? Topics and blueprints for the future at Topics and blueprints for the future at www.munichre.com/future.linkswww.munichre.com/future.links
Our strong capital base and clear positioning make us a formidable player and allow us to grow profitably in a dynamic market.
Thanks to their risk knowledge and innovative thinking, our highly qualified and motivated staff create sustained value.
To our shareholders 001 notable events in 2010 003 letter to shareholders 004 the Board of Management 006 Munich Re shares 008 strategy 013
Munich Re 048 Business environment 064 Business performance 070 Financial position 100 other success factors 108 Risk report 116 prospects 138
Consolidated financial statements 145 consolidated balance sheet 150 consolidated income statement 152 statement of recognised income and expense 153 changes in Group equity 154 consolidated cash flow statement 156 notes to the consolidated financial statements 157
Glossary 284 index of key terms 291 important addresses 292 imprint/service 294 locations Multi-year and quarterly overview important dates
earnings per share dividend per share €587.7m share capital €21.4bn Market capitalisation dividend yield €1,118m dividend payout
Deoxyribonucleic acid // deoxyribonucleic acid, usually abbreviated to dna, is a chain molecule which carries the genetic information. dna is characteristically arranged as a double helix. it contains all the information required for protein synthesis and thus for the biological development of an organism and cell metabolism.
We achieve the first milestone in our climate neutrality strategy for the reinsurance group: the Munich offices became carbon neutral in 2009. The whole international reinsurance group will follow suit in 2012.
5 March 2010 // Munich Re welcomes the appointment of prof. Klaus Töpfer as strategic advisor to the industry initiative dii.
Munich Re pays a dividend of €5.75 per share for the financial year 2009 (previous year: €5.50), distributing almost €1.1bn to shareholders. This is preceded by a share buy-back programme, with €1bn worth of shares repurchased by 21 april 2010.
Q3 / 2010 eRGO launches an advertising campaign for its new brand. “To insure is to understand” – the motto of the campaign – emphasises eRGO’s consistent focus on clients’ concerns and requirements. The Germanywide advertising effort, centred on consumers, formulates a new maxim for eRGO’s approach to and handling of clients. “We want to have a close, ongoing exchange with our clients, because it is important for us to understand what they expect of us,” stressed eRGO ceO Torsten Oletzky.
Munich Re invests in German wind energy via its asset manager MeaG, acquiring at the turn of the year 40 wind turbines in a total of 11 wind parks with an overall output of 73 megawatts. The investment in the low three-digit million range is part of the RenT programme (Renewable energy and new Technologies), through which Munich Re plans to invest up to €2.5bn in renewable energies and new environmental technologies over the next few years.
our objective for the financial year 2010 was to continue systematically implementing our proven strategy and thus to fulfil your expectations with regard to results. this, i believe, we succeeded in doing. in the third year of the crisis, we posted another good result, with a profit of over €2.4bn. the result is good in particular because, despite very low interest rates, our 13.5% return on risk-adjusted capital is very close to our target of 15%. that was by no means to be taken for granted, given the price pressure in many insurance markets, the heavy burden from major losses, and the uncertainties persisting in the capital markets.
Besides the dividend payments, we have also carried out extensive share buy-backs since 2006, and we intend to buy back more shares with a volume of up to €500m by the 2012 annual General Meeting. taking dividends and share buy-backs together, we are set to have returned more than €10bn to our shareholders in the five financial years up to 2010. in the same period, we have additionally financed the purchase of various shareholdings and acquisitions with an equivalent value of over €3bn entirely from our own resources. at the same time, our iFRs equity remained stable throughout. at 31 december 2010, it totalled €23bn and our eligible solvency capital was more than two-and-a-half times the regulatory requirement.
in primary insurance, we successfully launched the eRGo brand on the German market in 2010. eRGo has already become a household name in Germany, with clients responding positively to its brand proposition of “to insure is to understand”. i am proud of what our eRGo colleagues have achieved. i know that they feel a personal obligation to live up to the claim. What remains difficult, at least for the time being, is business with traditional life insurance, where the low interest-rate level is having an adverse impact on demand and on earnings. this is a challenge that affects not only us, of course: all the market players have to deal with this environment. it is proving very helpful that we hedged our investments sufficiently in good time so that we can cope with a longer phase of low interest rates.
Munich Re GRoup annual RepoRt 2010 to ouR shaReholdeRs // letteR to shaReholdeRs in the reinsurance market, ample capacity is still available. exceptions, and thus the opportunity for price increases, have only occurred in segments with above-average claims burdens. We benefit decisively from our great proximity to clients and our ability to structure complex reinsurance programmes to their needs. as a result, we can set ourselves apart from our competitors and conclude major treaties or even whole insurance programmes at our own individual terms and conditions. We continue to selectively tap attractive niche markets, which we service via specialist insurers. an additional positive factor is that some clients are currently using our reinsurance capacity for capital relief, particularly in life and health insurance, but recently in property-casualty insurance as well.
Torsten Jeworrek Chairman of the Reinsurance Committee Reinsurance development/corporate underwriting/accounting, controlling and central Reserving for Reinsurance/information Technology/Global Business architecture/ Geo Risks Research/corporate climate centre
in mid-april, investors’ attention began to focus on insurance companies’ exposure to bonds of highly indebted eurozone countries. This led to considerable pressure on share prices, including ours, until the end of May. From June to October, in a very volatile environment, our share price fluctuated at around its start-of-the-year level. positive impulses from investors’ improved risk appetite following good economic data, especially in Germany, contrasted with fears of a recession and other crisis scenarios. at the same time, the implications of a prolonged low-interest-rate phase and unrelenting competition in the insurance sector fuelled uncertainty among investors.
in the fourth quarter, Munich Re shares profited not only from the generally buoyant mood on the capital markets but also from the initial prospect of a good technical result following a benign hurricane season. Throughout the year, within the constraints of its diversified, conservative investment portfolio, Munich Re was able to benefit from market opportunities and realise substantial investment earnings through its active asset management and decisions based strictly on economic criteria. Munich Re shares thus did well in comparison with the european insurance sector as a whole in 2010, outperforming the dJ euRO sTOXX insurance, for instance, but unable to match the strong performance of the daX 30, driven largely by export-oriented stocks.
// after the macroeconomic upheavals triggered by the financial crisis in the preceding years, the global economy staged a marked recovery in 2010.
// in an environment of persistently low interest rates and challenging conditions in the insurance markets, Munich Re shares proved themselves a reliable investment. Over the course of the year, our share price increased by 4.4%, giving a shareholder return of 10% when the dividend is included.
dJ euRO sTOXX 50 1.2 dJ euRO sTOXX insurance 11.8 Msci euRO 1.1 FTse euROTOp 100 0.6 dJ sustainability World 0.3 1 as at 31 december 2010.
For the financial year 2010, the Board of Management and the supervisory Board intend to propose a dividend of €6.25 at the annual General Meeting on 20 april 2011. altogether, this would mean a total payout to shareholders of just over €1.1bn, after just under €1.1bn in the previous year. The dividend will be paid on 21 april 2011, the day after the annual General Meeting.
With a dividend yield of approximately 5.5% (in relation to the year-end share price), Munich Re shares remain an attractive equity investment, which is also included in the divdaX, a subindex of deutsche Börse aG that features the 15 daX companies with the highest dividend yields.
as announced, between October 2009 and april 2010 we bought back and retired shares with a volume of €1bn (nearly nine million shares) as part of our share buy-back programme. in May 2010, utilising the authorisation granted by the annual General Meeting on 28 april 2010, a new buy-back programme was launched. By 25 February 2011, we had acquired around eight million shares for a total of €844m. altogether, we intend to repurchase up to 15 million shares with a maximum volume of €1bn by the annual General Meeting on 20 april 2011.
The average daily turnover of Munich Re shares in Xetra and floor trading on the German stock exchanges was €116.2m in the year under review, putting our shares in 18th place among the daX stocks at year-end 2010. in terms of market capitalisation, we ranked 13th with around €21.4bn.
Key figures for our shares share capital €m 587.7 587.7 number of shares at 31 december m 188.5 197.4
For many years, Munich Re has been awarded consistently excellent ratings by the leading rating agencies. despite the challenges of 2008 and 2009 for the insurance industry, the outlook for all Munich Re’s ratings remained unchanged at a high level in 2010.
The high degree of confidence in our Group’s financial strength is reflected in trading with credit default swaps (cdss). These tools enable investors on the capital market to hedge against the risk of an issuer’s default. The lower the cds spread, the higher the assessment of the issuer’s security. Munich Re continues to be among the firms with very low cds spreads at both national and international level.
// integrated business model proves its worth // eRGO with new brand proposition // innovative solutions in reinsurance // Well positioned in growth market of healthcare strategy
The international healthcare market will continue to grow at an above-average rate. The ageing of whole societies and medical advances are leading to rising healthcare costs, putting immense pressure on social security systems in many countries. in emerging and developing countries, on the other hand, basic healthcare and its financing are often still lacking. Both these factors are creating greater demand for private providers. We tap this growth potential in our Munich health field of business, positioning ourselves in the markets where we can add the most value.
Chromosomes // chromosomes are the individual structures that contain the genetic information and thus the blueprint for life. humans, for example, have 23 chromosome pairs, one of which determines the sex of the individual. the chromo­ somes consist of Dna chain molecules and are found in the cell nucleus. they are often depicted in an “X” shape, but really only assume this form for a short time during cell division.
the Board of Management satisfied its reporting obligations towards the Supervisory Board in all respects. it consulted us in good time on all decisions of fundamental significance and regularly briefed us both verbally and in writing about all important business transactions. at the scheduled meetings, the Board of Management kept the Supervisory Board up to date on the competitive position, strategic development, corporate planning, and the current situation in the group. the Supervisory Board requested detailed explanations for any deviations in business performance from the planning. We always had sufficient opportunity to critically review the reports of the Board of Management and submit suggestions and proposals for improvement. the collaboration between the Supervisory Board and the Board of Management was constructive and characterised by a spirit of mutual trust. the shareholder representatives and employee representatives had the chance prior to the Supervisory Board meetings to discuss important topics separately with the chairman of the Board of Management.
to better fulfil its supervisory and consulting activities, the Supervisory Board had agreed to hold two additional regular meetings from 2010 onwards. 2010 was therefore the first year in which six ordinary meetings of the full Supervisory Board took place. a representative of the german Federal Financial Supervisory authority (BaFin) took part as a guest in the July meeting.
Focal points of the meetings of the full Supervisory Board the performance of Munich Re featured on the agenda of every meeting but one. in this context, we regularly engaged in in-depth discussions with the Board of Management about business opportunities and risks, including the situation of life insurance in germany. the Board of Management briefed us in each quarter on the performance of investments. at every meeting, we discussed in detail with the Board of Management its reports to us on topics of current interest, including the introduction of the new eRgo brand, the progress on Solvency ii and its implications for business, the exceptional Deepwater horizon oil rig loss and the liability coverage concept developed by Munich Re in its aftermath for individual offshore oil drilling operations.
at our first meeting in 2010, we concerned ourselves with the company and group financial statements for the financial year 2009 and prepared the motions for resolution by the 2010 annual general Meeting. We took the decision to extend the appointment of a Board of Management member and established for the first time in full session the individual objectives for the Board members’ variable remuneration components for 2010. We also concerned ourselves with BaFin’s requirements regarding remuneration systems in the insurance industry and with the establishment of a group-wide remuneration committee. We obtained reports on important developments at eRgo, in
at our July meeting, besides covering the topics routinely included on the agenda, we looked into the strategy for expanding agricultural covers in the reinsurance segment and addressed focal points of the group’s human resources work.
Work of the committees the Supervisory Board has a total of five committees in place that enable us to perform our tasks efficiently. the committees’ main tasks include preparing resolutions to be taken by the full Supervisory Board and handling the topics assigned to them. Details regarding the responsibilities of the respective committees are available in the corporate governance report on page 22. the membership of the Supervisory Board committees is shown in the overview on page 24 ff. the chairmen of the committees provided detailed reports on their work at all meetings of the full Supervisory Board.
Munich Re gRoup annual RepoRt 2010 committee obtained comprehensive reports on the 2009 fringe benefits and remuneration in kind for the Board of Management and made adjustments to the guidelines for gifts and for company cars. it prepared a proposal for a resolution by the full Supervisory Board on the adjustment of the Board members’ contracts, which had been necessitated by the german pension Rights adjustment act and the new regulation on remuneration schemes. at the last meeting of the year, the personnel committee prepared proposals to be submitted to the full Supervisory Board regarding the Board of Management’s remuneration from 2011 onwards and the weightings of the individual target categories and financial objectives for the Board of Management’s variable remuner ation for 2011. Moreover, it suggested to the full Supervisory Board that the conditions of all current long-term incentive plans (lips) for the Board of Management be adjusted in order to ensure that retiring Board members and heirs receive largely the same treatment with regard to lips and the variable remuneration component restructured in 2010. in individual meetings, the personnel committee also approved the acceptance of seats on supervisory, advisory and similar boards by members of the Board of Management. Before being submitted to the full Supervisory Board, the topics of the BaFin circular on the requirements for remuneration schemes in the insurance industry, the establishment of a remuneration committee and the amendments to the german corporate governance code were studied thoroughly by the personnel committee.
the Standing committee met four times in the year under review. its essential tasks comprised preparing the meetings of the Supervisory Board and attending to corporate governance issues. it also received regular reports on developments in the shareholders’ register.
the audit committee held five meetings in 2010. at two meetings, it discussed in detail the company and group financial statements, the company and group management report, the auditor’s report and the Board of Management’s proposal for the appropriation of the net retained profits for the financial year 2009. at one of the two meetings, the annual financial statements were discussed in the presence of the external auditor. the chief Risk officer closely discussed with the audit committee the main components of the risk capital model, and reported on the group’s risk situation. the head of internal audit provided information on the result of the 2009 audits and the audit planning for 2010. topics of compliance were dealt with by the audit committee at every meeting. additionally, the committee had the compliance officer report personally on focal points of his work and on the compliance organisation. the development of the embedded values in life reinsurance business and in life and health primary insurance business was also an item of discussion.
the audit committee looked into the impact of the financial crisis on Munich Re again in the financial year ended. a recurrent item of discussion was asset management. the group’s risk situation was debated and monitored regularly. Finally, the audit
the conference committee as per item 7.5 of the rules of procedure for the Supervisory Board did not need to be convened in the financial year ended.
in november 2010, the Board of Management and Supervisory Board submitted their annual declaration of conformity with all the recommendations of the german corporate governance code as per Section 161 of the german Stock companies act and their intention to continue complying with it in future. Further information on corporate governance in general is available in the joint report of the Board of Management and Supervisory Board on page 22.
Words of thanks to the Board of Management and employees the Supervisory Board wishes to thank all the members of the Board of Management and staff for their personal commitment and excellent work, which is refl ected in a gratifying business result for Munich Re.
1. Declaration of the Board of Management and Supervisory Board of Munich Reinsurance Company in accordance with Section 161 of the German Stock Companies act, dated November 2010
“Münchener Rückversicherungs-gesellschaft aktiengesellschaft in München fulfils all the recommendations of the german corporate governance code of 26 May 2010 (published on 2 July 2010) and will continue to do so in future. Since the last declaration of conformity in november 2009, Münchener Rückversicherungs-gesellschaft aktiengesellschaft in München has fulfilled all the recommendations of the german corporate governance code of 18 June 2009 (published on 5 august 2009).”
the declaration of conformity is permanently accessible on our internet website (www.munichre.com).
2. Corporate governance report it is our conviction that good corporate governance creates lasting value. We therefore apply the highest standards to our operations and activities, complying with all the recommendations and proposals of the german corporate governance code.
global compact to make clear Munich Re’s understanding of important values – and thus also its corporate responsibility – inside and outside our group, Munich Re joined the united nations global compact in 2007. the ten principles of this declaration form the benchmark for our actions throughout the group and thus provide the fundamental framework for our corporate responsibility. our annual communication on progress for the un global compact is integrated into the corporate responsibility portal on our website.
how we view corporate governance corporate governance stands for a form of responsible company management and control geared to long-term creation of value. one of our aims in this context is to foster the confidence of investors, clients, employees and the general public. also of great significance for us are efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies and with the companies’ staff, and open and transparent corporate communications.
as a result of its international organisation, Munich Re 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 Reinsurance company has its headquarters, corporate governance rules are laid down above all in the german Stock companies act and the german corporate governance code. the german insurance control act standardises the “fit and proper” requirements for Board members of insurance companies. it also provides particular rules for insurance companies’ remuneration systems. these rules formed the basis for the regulation on remuneration schemes in the insurance sector (versvergv) issued by the german Federal Finance Ministry in october 2010.
also applicable to Munich Reinsurance company is the german act on the co-Determination of employees in cross-Border Mergers (Mgvg) and a co-determination agreement; these provisions supersede those of the german co-Determination act. the co-determination agreement is published on our website.
the german corporate governance code, which entered into force in 2002 and has since been amended several times, contains the main legal rules that must be observed
Duties and responsibilities internal regulation and working procedure composition and working procedure of the Board of Management committees
Munich Re gRoup annual RepoRt 2010 to its voting members’ divisions unless the full Board of Management is mandatorily responsible. in addition, it prepares decisions that have to be taken by the full Board.
the committee meetings are held as needed, and usually take place every two weeks. only the members of the Board of Management are entitled to vote.
Supervisory Board the Supervisory Board monitors the Board of Management and gives counsel where appropriate. certain transactions require its approval, but it is not authorised to take management action. the Supervisory Board also appoints the external auditor for the company and group financial statements and for the half-year financial report.
Subcommittees of the Board of Management committees collaboration between Board of Management and
the Supervisory Board is quorate if all its members have been invited to the meeting or called upon to vote and if ten members including the chairman or alternatively 15 members participate in the vote. the chairman of the Supervisory Board is authorised to make declarations on the Supervisory Board’s behalf.
in accordance with item 5.4.1 para. 2 of the german corporate governance code, the Supervisory Board has set itself the following objectives for its future composition: // the main criteria focus on sustained corporate profitability, personal abilities, talents, experience (especially of an international nature), independence, professional knowledge and enterprise.
// all members of the Supervisory Board should be free of relevant conflicts of interest. // in selecting candidates for membership, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. By the beginning of the next term of office (scheduled for 2014), at least 20% of the members should be female, with this figure increasing to at least 30% by the start of the following term of office (scheduled for 2019). currently, three members of the Supervisory Board are women: two representatives of the employees (since the Supervisory Board elections in 2009) and one shareholder representative (since February 2010).
the above-mentioned objectives apply to the Supervisory Board as a whole. Shareholder and employee representatives will each contribute their share to meeting them, and the bodies responsible under the co-determination agreement for election proposals to the european electoral Board are requested to take due consideration of the objectives within the framework of the current rules. the nomination committee has updated its list of criteria for nominating candidates for election to the Supervisory Board as shareholder representatives.
the Personnel Committee prepares the appointment of members of the Board of Management and, together with the Board of Management, concerns itself with longterm succession planning. it also prepares the Supervisory Board’s resolution on the remuneration system for the Board of Management, including the total remuneration of the individual members of the Board of Management. the personnel committee represents the company vis-à-vis the members of the Board of Management and is responsible for other personnel matters involving members of that Board unless these are issues that have been allocated to the full Supervisory Board. it approves loan transactions between the company and members of the Board of Management or parties related to them, as well as any material transactions between the company or its associated companies and members of the Board of Management or parties related to them. it also decides on secondary occupations that members of the Board of Management may pursue and seats they hold on the boards of other companies.
Members of the personnel committee are hans-Jürgen Schinzler (chairman), herbert Bach and Dr. Bernd pischetsrieder.
the Audit Committee prepares Supervisory Board resolutions on the adoption of the annual company financial statements and approval of the group financial statements, reviews the financial reporting, discusses the quarterly reports, and takes delivery of the audit reports and other reports and statements by the external auditor. the committee monitors the accounting process, including the effectiveness of the company’s internal control system, risk management system, compliance system, and internal audit system. Furthermore, it initiates the decision on the appointment of the external auditor and monitors the latter’s independence and quality. it appoints the external auditor for the company and group financial statements, determines focal points of the audits and agrees the auditor’s fee for the annual audit; the same applies to the review of the half-year financial report. in addition, together with the Board of Management, the audit committee prepares the annual discussion of the risk strategy held before the Supervisory Board and discusses any changes or deviations from the risk strategy with the Board of Management during the year.
comprising solely representatives of the shareholders, the Nomination Committee suggests suitable candidates to the Supervisory Board for the latter’s election proposals to the annual general Meeting. it has drawn up and adopted a list of criteria on which these proposals are to be based.
Members of the conference committee are Dr. hans-Jürgen Schinzler (chairman), herbert Bach, hans peter claußen and Dr. Bernd pischetsrieder.
at the company’s annual general Meeting, the principle of “one share, one vote” applies. insofar as shareholders are entered under their own name as being the holders of shares which belong to a third party and exceed the upper limit of 2% of the share capital as stated in the articles of association, the shares entered do not carry any voting rights. the aim of this provision is greater transparency of the share register. Besides this, it is intended to facilitate direct contact with the shareholders, especially in connection with the convening of the annual general Meeting and the exercising of voting rights.
the remuneration system for the Board of Management was revised with effect from 1 January 2010 on the basis of the remuneration-related amendments to the german act on the appropriateness of Management Board Remuneration (vorstag) and the german corporate governance code, with particular attention being paid to comprehensibility and transparency.
the new structure comprises only two remuneration components: basic and variable remuneration. the variable remuneration component contains both annual and threeyear objectives, thus replacing the annual bonus and Mid-term incentive plan. the longterm incentive plan has been done away with. the obligation to invest in Munich Re shares that must be held for at least a two- or four-year period means there continues to be an element geared to the development of Munich Reinsurance company’s share price. overall, the new remuneration system focuses more strongly than before on long-term targets and thus creates an even greater incentive for sustainable corporate development.
70% corporate performance Result contribution of organisational unit(s) personal performance group objective company objective Divisional objectives individual objectives 0–200% (fully achieved = 100%)
achievement of three-year objectives in the fourth year, on condition that 25 % of the net amount paid out is invested by the Board member in shares that must be held for at least a two-year period
Fixed > Retirement > insured event > premature termination or non-extension of employment con- tract under certain circumstances
Fixed components Basic remuneration the fixed annual basic remuneration is paid in the form of a monthly salary.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits are granted according to function, and are commensurate with market conditions (DaX 30 companies). income tax on the benefits in question is paid individually for each member of the Board of Management, with the company bearing the amount due. Remuneration in kind and fringe benefits are valued on the basis of expenditure for disclosure in the annual report.
the variable remuneration for annual performance is reviewed and decided on by the full Supervisory Board and then paid out in the year after the one-year period under consideration. payment is effected on condition that 50% of the net payout amount is invested in Munich Reinsurance company shares that must be held for at least a fouryear period.
For the value-based performance objectives, three-year average targets are set for each of the business fields reinsurance, primary insurance and Munich health. achievement of objectives is measured at the end of the plan’s term, there being no adjustment of the targets during the course of the plan.
the tSR represents the total return on shares, comprising both the rise in the share price and the dividends paid over a period of three years. Further information on the Mid-term incentive plan can be found in the notes to the financial statements under (45) Mid-term incentive plan.
Weighting of remuneration components in the case of 100% achievement of objectives (annual performance and multi-year performance ), the weightings of the individual components in terms of total remuneration for 2010 were as follows: basic remuneration around 30% and variable remuneration around 70%, of which 30% was based on annual performance and 70% on multi-year performance. annual objectives, multi-year objectives and investment in shares together form a well-balanced and economic, i.e. strongly risk-based, incentive system, designed to ensure that the targets set for the members of the Board of Management do not have undesirable effects. no guaranteed variable salary components are granted.
Beyond the actual remuneration system, the level of total remuneration has been set and regularly monitored by the full Supervisory Board since 2010, acting on recommendations from the Supervisory Board’s personnel committee. the consideration of what is appropriate remuneration takes into account data from peer-group companies and the relation to remuneration of other Munich Re employees. criteria also include the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re. new Board members are generally placed at a level which allows sufficient potential for development in the first three years.
other remuneration in the case of seats held on other boards, remuneration for board memberships must be paid over to the company or is deducted in the course of regular remuneration computation. exempted from this is remuneration for memberships explicitly recognised by the company as private.
the members of the Board of Management have no contractual entitlement to severance payments. if the Board member’s activities on the Board are terminated prematurely without good cause within the meaning of Section 626 of the german civil code, payments due may not surpass the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of Section 29 para. 2 of the german Securities acquisition and takeover act) and may not cover more than the remaining period of the employment contract. the calculation is to be based on the overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
in the event of a change of control, only the conditions of the long-term incentive plan (under which stock appreciation rights were granted to members of the Board of Management for the last time in 2009) provide for special exercise options. Details of this are available in the notes to the financial statements under (44) long-term incentive plan.
Beginning in 2009, pension plans for Board members were changed to a defined contribution system. the main aim of this change was the fullest possible outsourcing of all pension-specific risks from the company’s balance sheet. this major risk transfer was achieved by financing increases in entitlements exclusively by paying premiums into insurance policies concluded to cover these benefit obligations. this means the company is no longer liable for the pension benefits, as these are covered by the aforementioned insurance policies. the longevity risk, the biometric risks of premature occurrence of a pensionable event (e.g. disability or death of a member of the Board during active service), and the capital market risk were thus transferred to the insurer and the individual Board members.
Board members who had not reached the age of 55 by the end of 2008 maintained as a vested pension their pension entitlement under the previous defined benefit plan (fixed amount in euros) existing at the point of transition on 31 December 2008. as of 1 January 2009, these Board members receive an incremental pension benefit generally based on the defined contribution plan for new Board members. Since the conversion of the pension system took place while Board members’ contracts were in force, the pension contributions were calculated in such a way that the total of vested pension, pensionfund pension and incremental pension benefit results in an expected pension at age 60 equivalent to that of the previous pension benefit based on realistic estimates.
Benefits on termination of employment Occupational pension // Board members are entitled to an occupational pension on retiring from active service with the company after reaching the age of 60 or, at the latest, 65.
Benefit amount: // For a period of six months, previous monthly basic remuneration (only for Board members appointed prior to 2006) // under the defined contribution plan for new members as from 2009: annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum
// For Board members transferred from the old system to the new: vested pension from the defined benefit plan up to 2008 and annuity or lump sum from the policy reserve under the defined contribution plan
// in the case of defined benefit plans: Defined benefit of between 30% and 60% of pensionable basic remuneration
Disability pension // Board members are entitled to a disability pension if, due to permanent incapacity to work, their contract ends by mutual agreement, is terminated by the company, or their appointment is not extended or revoked. permanent incapacity to work means if the Board Member is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him.
Reduced occupational pension on early retirement // Board members are entitled to an occupational pension if the contract of employment is terminated as a result of nonextension or revocation of the Board member’s appointment without the Board member having given cause for this through a gross violation of his duties or at his own request. the precondition is that the Board member has already passed the age of 50, has been in the employment of the company for more than ten years when the contract terminates, and has had his appointment to the Board of Management extended at least once.
Benefit amount: // For a period of six months, previous monthly basic remuneration (only for Board members appointed prior to 2006) // under the defined contribution plan for new members as from 2009: annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum at the date the pension benefit is claimed
// in the case of defined benefit plans: Defined benefit of between 30% and 60% of the pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 65th birthday vested benefits for occupational pension, disability pension and surviving dependants // vested benefits are paid upon the Board member reaching the age of 60, in the case of incapacity to work, or in the event of the Board member’s death.
// in the case of defined benefit plans: the defined benefit is between 30% and 60% of the pensionable basic remuneration. the vested benefits are a proportion of the occupational pension, based on the ratio of actual service with the company to the period the Board member would have worked for the company altogether until his 65th birthday (Section 2 para. 1 of the german employers’ Retirement Benefits act)
improved vested benefits // improved vested benefits are granted if the contract ends owing to non-extension of the Board member’s appointment (by the company) but not due to gross violation of duties or to the Board member giving notice. a further precondition is that the Board member leaves the Board before reaching the age of 60 and has at least ten years’ service with the company.
// Doubling of the orphan’s pension if no widow(er)’s pension or pension for registered civil partner is payable.
Amounts payable for the variable remuneration of the individual Board members in the event of full achievement of objectives of full achievement of objectives (= 100%) as per DRS 17 (revised 2010) Corridor 0–200%
2 the remuneration set for multi-year performance for 2010 is payable in 2013, that for 2011 in 2014. 3 the information on the calculation bases and parameters on page 30 for the amounts set for 2010 also apply to the amounts set for 2011.
Defined contribution plan Pension Present contribution value of Personnel rate for target Entitlement entitlement expenses Financial total direct as at as at for Name year remuneration 31 December 31 December provisions
Georg Daschner6, 8 2010 – – – – 2009 – – – –
1 in the case of Board members transferred from the old system to the new, the amount corresponds to the value of the vested pension at 31 December 2008; in the case of Mr. Daschner, it corresponds to the defined benefit at 31 December.
the fixed components for Munich Reinsurance company senior executives comprise a fixed annual basic remuneration, paid out as a monthly salary, plus customary market fringe benefits and remuneration in kind (e.g. company car, insurance). the variable components are made up of the short-term components “performance-related bonus” and “company result bonus”, and the share-price-linked components Mid-term incentive plan and long-term incentive plan.
the performance-related bonus is based on quantitative and qualitative objectives. We use indicators from operative planning for the quantitative objectives, while personal objectives are agreed on for the qualitative portion.
the key indicator used for the company result bonus is RoRac. the targets correspond to the group objective for the variable remuneration of members of the Board of Management. the company result bonus basically takes the form of a “bonus pool” model. Depending on corporate performance, an aggregate amount is calculated that can be distributed between staff as a bonus. the higher the management level, the higher the target range under the company result bonus. the way this bonus works ensures that the performance of Munich Re as a whole is systematically reflected in the remuneration of staff and that the bonus amount bears a reasonable relationship to overall corporate performance.
the Mid-term-incentive plan, with a duration of three years, and the long-term incentive plan, with a duration of seven years, are based on the corresponding plans for members of Munich Reinsurance company’s Board of Management, as explained on page 31. Besides the senior executives in Munich, the most important executives in Munich Reinsurance company’s international organisation also participate in the longterm incentive plan.
Result- related Fixed remuneration remuneration For committee Name Financial year Annual work2 Annual Total
Dr. Benita Ferrero-Waldner (from 12.2.2010) 2010 44,246.57 – 3,539.73 47,786.30 2009 – – – –
under Section 10 para. 1 of the german Securities prospectus act, Munich Reinsurance company is obliged to publish information of this kind on its website without delay as well as in an annual document.
Remuneration of Supervisory Board members for membership of supervisory boards at Munich Reinsurance Company subsidiaries, in accordance with the companies’ respective articles of association1¹
€23,028m equity return on risk-adjusted capital €45,541m gross premiums written €193,108m Investments employees €2,430m Consolidated result
Human cells // there are about 220 different types of cell and tissue in the human body, with each cell representing an independent and self-perpetuating system. each one is able to take up nutrients and release energy for its own use. However, the most important characteristic of human cells is their ability to divide and produce two almost identical new daughter cells.
Financial position 100 analysis of our capital structure 100 asset-liability management 102 Capital management 102 Information in accordance with section 315 para. 4 of the german Commercial Code and explanatory report of the Board of management 103 group solvency 106 analysis of the consolidated cash flow statement 107
Other success factors 108 Clients and client relationships 108 research and development 109 staff 110 Corporate responsibility 114
Structure munich re is one of the world’s leading risk carriers. With its integrated business model consisting of insurance and reinsurance, munich re can cover large sections of the value chain in the risk market. the group strives to leverage synergies in revenue and costs, whilst reducing the risk-based capital required through better diversification. munich re is also active in the field of asset management.
the reinsurance companies of the group operate globally. Its primary insurers traditionally focus on germany and high-growth european markets, but have meanwhile been looking to extend their activities to promising asian markets such as India, south Korea or China. the companies conduct their business from their respective headquarters and also via a large number of branches, subsidiaries and affiliated companies. specialist insurers in niche segments, whose business requires special competence in finding solutions, are in some cases coupled to reinsurance as the risk carrier. We therefore transact this business from within reinsurance. Domination and profit-transfer agreements are in place with many group companies, especially between holding company ergo Versicherungsgruppe ag and its subsidiaries. munich Health also operates on a global basis in reinsurance and exploits business opportunities in the field of health primary insurance outside germany in selected growth markets such as the gulf region, India, and the usa.
since 2005, munich reinsurance Company and ergo Versicherungsgruppe ag have been under unified control within the meaning of the german stock Companies act. the relevant statutory regulations and a group directive govern the distribution of responsibilities and competences for key decisions between group management and ergo.
// group’s organisational set-up reflected in improved segment disclosure; new segment munich Health
management report // munICH re munICH re group annual report 2010 the present management report summarises the activities of the group according to its segments of reinsurance, primary insurance and asset management rather than on the basis of its legal or corporate structure or individual companies.
In reinsurance, we operate in life and property-casualty business, the latter being subdivided into liability, accident, motor, marine, aviation, space, fire, engineering, credit and bonding, and other classes of business. the last heading comprises the remaining lines of property business, i.e. burglary, plate glass, hail (including agricultural reinsurance ), water damage, contingency, windstorm, livestock, householders’ and homeowners ’ comprehensive reinsurance as well as fidelity guarantee reinsurance. under reinsurance, we include specialised primary insurance activities that are handled by the reinsurance organisation and business from managing general agents (mgas). For the most part, they are currently being transferred to the munich re brand under the descriptor “risks solutions”.
our europe and latin america Division is responsible for the property-casualty business of our clients from europe (except germany), latin america and the Caribbean.
the germany, asia pacific and africa Division conducts property-casualty business with our clients in germany, africa, asia, australia and the pacific Islands.
special and Financial risks (sFr) is in charge of the classes of credit, aviation and space, agriculture, enterprise and contingency risks, and of alternative markets business. Insurance risk securitisation and risk transfer to the capital markets are handled by our risk trading unit. In addition, the division attends to our own reinsurance requirements (retrocession).
Health primary insurance1 property-casualty primary insurance munich Health2 asset management 1 Health primary insurance in germany and travel insurance business. 2 Health reinsurance business worldwide and health primary insurance business outside germany.
Life american modern life Insurance Company, amelia, ohio munich american reassurance Company, atlanta, georgia munich re Japan services K.K., tokyo munich reinsurance Company Canadian life Branch, toronto munich reinsurance Company life reinsurance eastern europe/Central asia, moscow munich reinsurance Company of australasia limited – new Zealand Branch, auckland munich reinsurance Company of australasia ltd., sydney munich reinsurance Company uK life Branch, london southern pioneer life Insurance Company, Jonesboro, arkansas
Germany, Asia Pacific and Africa great lakes australia Branch, sydney great lakes reinsurance (uK) plC new Zealand Branch, auckland münchener rückversicherungs-gesellschaft australian Branch, sydney munich Holdings of australasia pty. ltd., sydney munich mauritius reinsurance Co. ltd., port louis munich re retakaful malaysia Branch, Kuala lumpur munich reinsurance Company Beijing Branch, Beijing3 munich reinsurance Company Hong Kong Branch, Hong Kong3 munich reinsurance Company Korea Branch, seoul3 munich reinsurance Company malaysia Branch, Kuala lumpur munich reinsurance Company new Zealand Branch, auckland munich reinsurance Company of africa ltd., Johannesburg munich reinsurance Company singapore Branch, singapore3
Special and Financial Risks great lakes reinsurance (uK) plc., london3 great lakes switzerland Branch, Zurich munich re of malta p.l.c., Floriana3 new reinsurance Company ltd., Zurich3
management report // munICH re munICH re group annual report 2010 the Corporate underwriting Division performs an important function for our propertycasualty reinsurance, without direct responsibility for operative business: its staff clarify fundamental issues of underwriting policy, oversee quality assurance, and integrate mathematical methods into our business processes. on the claims side, a similar function is performed by Corporate Claims.
ergo implemented its new brand strategy in the year under review and has been marketing life and property-casualty insurance under a single brand since summer 2010. the brands Victoria and Hamburg-mannheimer were withdrawn from the market. In February 2010, the group’s direct insurer KarstadtQuelle Versicherungen was renamed ergo Direkt Versicherungen. through this clear focus on the ergo brand, the group’s all-round offering in primary insurance has become more visible. ergo sets itself apart from its competitors with the claim “to insure is to understand”. this expresses its value proposition and aim of consistently gearing its products and services to people’s actual needs. at the same time, ergo has refined the profile of its specialist brands. In october 2010, health insurance was pooled under the DKV brand, legal protection insurance under D.a.s., and travel insurance continues to be represented by the erV brand, one of europe’s leading providers.
In international business, the group operates under the ergo brand name in many markets and will continue to do so even more consistently in future. the turkish ergoİsVİÇre sigorta, one of the main companies outside germany, was renamed ergo sigorta in spring 2010. Further major companies outside germany are the polish property-casualty insurer ergo Hestia and ergo austria. In addition to many european markets, ergo is present in India, south Korea and China and seeks to tap into other selected markets in asia. ergo is now also represented in the american market through D.a.s. Canada.
Value proposition sets ergo apart from its competitors roanoke Companies Inc., schaumburg, Illinois temple Insurance Company, toronto the Boiler Inspection and Insurance Company of Canada, toronto the Hartford steam Boiler Inspection and Insurance Company of Connecticut, Hartford, Connecticut the Hartford steam Boiler Inspection and Insurance Company, Hartford, Connecticut the princeton excess and surplus lines Insurance Company, Wilmington, Delaware the midland Company, Cincinnati, ohio Watkins syndicate Hong Kong limited, Hong Kong Watkins syndicate middle east limited, Dubai Watkins syndicate singapore pte. limited, singapore 1 a complete list of shareholdings can be found on page 269 ff. in the notes to the consolidated financial statements. 2 only subsidiaries outside germany with equity capital generally exceeding €5m are listed by name. 3 units that also transact business in munich Health and are therefore allocated proportionately to reinsurance.
HealthCare DKV Deutsche Krankenversicherung ag, Cologne ergo Direkt Krankenversicherung ag, Fürth europÄIsCHe reiseversicherung ag, munich europaeiske rejseforsikring a/s, Copenhagen
1 only group companies with equity capital generally exceeding €5m are listed. a complete list of shareholdings can be found on page 269 ff. in the notes to the consolidated financial statements.
Companies fully allocated to munich Health apollo munich Health Insurance Co. ltd., Hyderabad Daman – national Health Insurance Company, abu Dhabi DKV Belgium s.a., Brussels DKV globality s.a, luxembourg DKV luxembourg s.a, luxembourg DKV seguros y reaseguros, sociedad anónima española, saragossa ergo generales seguros y reaseguros, s.a., madrid ergo Vida seguros y reaseguros, sociedad anónima española, saragossa marina salud s.a., alicante mednet Holding gmbH, munich munich Health Holding ag, munich munich Health north america, Inc., Wilmington, Delaware munich re stop loss, Inc., Wilmington, Delaware sterling life Insurance Company, Bellingham, Washington unión médica la Fuencisla, s.a., Compañía de seguros, saragossa
our value-based management is characterised by the following aspects: // We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed, which is material in measuring added value as well. that is why we have implemented high quality standards for underwriting, pricing, accumulation control and claims management. only the risk-return relationship reveals how beneficial an activity is from the shareholder point of view.
all initiatives are ultimately geared to the overriding financial objective of enhancing corporate value on a sustained basis.
mCeV comprises a company’s equity and the value of in-force covered business. the latter is the present value of future profits (where profits are post-taxation shareholder cash flows from the in-force covered business and the assets backing the associated liabilities) calculated using financial and actuarial methods, taking into consideration the time value of the financial options and guarantees and the explicitly determined costs of capital.
mCeV relates to the portfolio existing at the valuation date. It encompasses 100% of our life reinsurance business and more than 94% of our life primary insurance and long-term health primary insurance business. By contrast, mCeV does not include the value of future new business. However, the valuation is made under the assumption of continued operations, i.e. taking into account the related costs in particular. options and guarantees – especially for the policyholders – are explicitly valued using stochastic simulations. mCeV reflects the present value of all cash flows for all important currency regions on the basis of the swap rates and the implicit volatilities at the valuation date of 31 December 2010. assets that are traded on the capital markets are valued on the basis of the market values observed at the valuation date.
the development of the insurance portfolio is modelled by applying the current expectations for biometrics, lapses and costs. In primary insurance, the participation of policyholders in surplus is modelled according to the current planning and in line with the statutory regulations. For the individual companies, the tax rates and calculations used are based on national regulations; in addition, tax loss carry-forwards are included in the calculation. Withholding taxes on dividends paid by group companies are disregarded. the cost of capital includes not only the taxes and costs of investment management but also the not explicitly modelled risks of the business and, for health primary insurance, the participation of policyholders in surplus.
Despite substantial major losses, munich re again posted a satisfying consolidated result of €2.4bn (2.6bn) in 2010. this profit is equivalent to a return on equity or roe of 10.4% (11.8%) in terms of the average value of IFrs equity at the year-end and quarterly reporting dates. moreover, we achieved a slight improvement to 4.5% (4.3%) in the return on investment, notwithstanding the low interest-rate environment. the return on investment is the ratio of the investment result of €8.6bn (7.9bn) to the average market value of the investment portfolio at the year-end and quarterly reporting dates, totalling assets reflect liabilities
management report // munICH re munICH re group annual report 2010 €194bn (181bn). Despite reaching our result target of over €2bn for 2010, we fell short of our long-term return target of a 15% return on risk-adjusted capital after tax (roraC) over the full cycle. With a roraC of 13.5% (15.1%), we achieved a respectable result, given the major-loss events and low level of interest rates.
When it comes to interpreting the combined ratio, the particular circumstances of the class of business in question have to be taken into account. the composition of the portfolio, for example, is of great significance. the following factors (among others) are important: // the more the claims burden fluctuates over time, the greater the risk is and so the premiums needed to cover the risk must be higher. this means that the loss ratios in good years are low, as are the average loss ratios that provide the reinsurer with an adequate return for assuming the risk. this is particularly true in the case of natural catastrophes, which may occur rarely, but are often very severe when they do.
// another important distinguishing feature relates to the time-lag between premiums being received and claims being paid. the longer these periods are, the longer the premiums received can be invested in the capital markets. High combined ratios in classes of business in which claims settlement takes a long time (e.g. casualty) therefore generally entail higher returns from investments with which the loss reserves are covered. these returns are not reflected in the combined ratio.
the key factor we consider is economic value added, which cannot be properly reflected by the combined ratio. We pursue this target internally through the performance indicator of value added, which measures value creation not only on the basis of current and forecast profits but also taking into account the size of the risks assumed. thus, when considering group performance, we gear targets (by way of a common, linking element) to a risk-adjusted return. although this is not a direct performance measure, it is a strong indication of munich re’s value creation.
risk-based group return target for the financial year 2011 given the continued uncertainties involved in estimating possible implications of the financial and economic crisis, it remains difficult to define guidelines for our future entrepreneurial success. against this background of continuing uncertainties, the targets we have set ourselves for 2011 must be regarded as ambitious. For this purpose, we are again employing a risk-based performance measure which we have used for external communication since 2006: roraC. We derive this target by placing the profit achieved or aimed at, expressed in euros, in relation to the necessary risk capital, the amount of which we determine using our internal risk model and publish once a year. Information on the internal risk model is provided on page 126 ff. 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: the numerator in the formula comprises the published IFrs net income adjusted for post-tax income (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. the basis for the adjustment is the capital exceeding the necessary risk-based capital, which is referred to as additional available economic equity. Its determination is described in detail on page 133. It is also necessary for rating and solvency purposes, as well as for profitable growth, but we strive to keep it lean through our active capital management, because the additional available economic equity in the system presented here only earns a risk-free interest rate. this is due to the fact that all the risk components of the investment and underwriting are covered with risk-based capital by the internal risk model, and thus assigned return requirements. even though we take a risk-adjusted return as our target, we aspire to meet the high, but fair, expectations of our investors with regard to the return on total capital placed at our disposal.
RORAC = net income – Interest rate x (1 – tax rate) x additional available economic equity risk-based capital
management report // munICH re munICH re group annual report 2010 at what level should the roraC target be set?
In both primary insurance and reinsurance, we are proceeding on the basis of statistically expectable claims experience. provided there are no significant shifts in the composition of our business portfolio, we project a combined ratio in property-casualty reinsurance of around 97% of our net earned premiums over the market cycle as a whole, based on an expected average major-loss burden from natural catastrophes of 6.5%. since we were affected by major losses at the end of February 2011, i.e. the floods in Brisbane and Cyclone Yasi (also in australia) and the earthquake in new Zealand, we will only be able to achieve our target if random major losses remain below expectations in the further course of the year. In property-casualty primary insurance, we expect a combined ratio at a good level of under 95%.
In selecting suitable targets, contrasting aspects have to be considered and weighed. on the one hand, undue complexity should be avoided in order to ensure transparency for investors, staff, and the public. on the other hand, the challenge lies in reflecting economic realities as closely as possible, avoiding oversimplification, and enshrining added value as the group’s overriding guiding principle. as the above description shows, the background is multifaceted, especially as the parallel use of different performance indicators is unavoidable.
Dr. rer. nat. Torsten Jeworrek (Chairman of the reinsurance Committee) reinsurance Development Corporate underwriting accounting, Controlling and Central reserving for reinsurance Information technology global Business architecture geo risks research/Corporate Climate Centre
Dr. jur. Jörg Schneider group reporting group Controlling Corporate Finance m&a Integrated risk management group legal, Compliance group taxation Investor and rating agency relations
Dr. jur. Hans-Jürgen Schinzler (Chairman) member since 2 January 2004, last re-elected on 22 april 2009 Former Chairman of the Board of management of munich reinsurance Company
Herbert Bach member since 9 December 1994, last re-elected on 22 april 2009 employee of munich reinsurance Company
Dina Bösch member since 22 april 2009 member of the national executive Board of ver.di (trades union)
Frank Fassin member since 22 april 2009 regional section Head Financial services, ver.di north rhine-Westphalia
Dr. jur. Benita Ferrero-Waldner member since 12 February 2010 Former member of the european Commission
Christian Fuhrmann member since 22 april 2009 Head of Divisional unit, munich reinsurance Company
Prof. Dr. rer. nat. Peter Gruss member since 22 april 2009 president of the max planck society for the advancement of science
Silvia Müller member since 22 april 2009 employee of ergo Versicherungsgruppe ag
Marco Nörenberg member since 22 april 2009 employee of ergo Versicherungsgruppe ag
Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder member since 17 april 2002, last re-elected on 22 april 2009 Consultant to the Board of management of Volkswagen ag
Andrés Ruiz Feger member since 22 april 2009 employee of münchener rückversicherungs -gesellschaft sucursal de españa y portugal
Richard Sommer member since 22 april 2009 trades union secretary and Head of the Federal specialist group, Insurances, ver.di
Dr. phil. Ron Sommer member since 5 november 1998, last re-elected on 22 april 2009 member of the Board of management of JFsC sistema, moscow
Dr. Ing. Thomas Wellauer member until 30 september 2010 Former member of the executive Committee of novartis International ag
Membership of the Supervisory Board Committees standing Committee Dr. jur. Hans-Jürgen Schinzler (Chairman) Herbert Bach Hans Peter Claußen Wolfgang Mayrhuber Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder personnel Committee Dr. jur. Hans-Jürgen Schinzler (Chairman) Herbert Bach Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder audit Committee Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann (Chairman) Christian Fuhrmann Marco Nörenberg Anton van Rossum Dr. jur. Hans-Jürgen Schinzler nomination Committee Dr. jur. Hans-Jürgen Schinzler (Chairman) Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder
CommerZBanK ag ergo Versicherungsgruppe ag2 (Chairman) munich Health Holding ag2 (Chairman)
2 own group company within the meaning of section 18 of the german stock Companies act.
Herbert Bach – – Dina Bösch – – Frank Fassin ergo Versicherungsgruppe ag2 provinzial nordWest Holding ag –
Christian Fuhrmann – munich re Holding Company (uK) ltd., london2 prof. Dr. rer. nat. peter gruss siemens ag – prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann
Bayerische motoren-Werke ag Deutsche Bank ag Deutsche post ag nokia Corporation, Finland Wipro ltd., India peter löscher – – Wolfgang mayrhuber Bayerische motoren-Werke ag lufthansa-technik ag2 uBs Deutschland ag aua austrian airlines, austria2
management report // BusIness enVIronment munICH re group annual report 2010 the recovery of the global economy, which had begun in mid-2009, continued in 2010 as expected, with momentum exceeding expectations in some industrialised countries. However, there were still major differences across the world. While growth in the economies of some industrial nations was weak, most emerging and developing countries showed high growth rates. among the emerging countries, China recorded particularly strong economic expansion.
there were regional differences within the eurozone as well. Whereas spain, greece and Ireland remained in recession and the economies of France and Italy grew only slowly, germany benefited from the upswing in the world economy. the annual average unemployment rate in Germany fell to 7.7%, with the number of jobless (3.2 million) at its lowest level since 1992.
With global demand recovering, inflationary pressure increased as expected, but in industrialised countries it remained slight, owing to low capacity utilisation and high unemployment. Despite a strong recovery driven by exports, Japan experienced a further year of deflation.
1 national economic output weighted for aggregation with purchasing power parities. source: International monetary Fund
Varying developments in the eurozone source: International monetary Fund, national statistical institutes and european statistical office
In the “prospects” section of our 2009 management report, we mentioned the negative medium- to long-term effects of rising public debt on economic development. the heightened sensitivity of investors to default risks of government bonds was clearly evident in 2010, leading to volatility on the capital markets. after the beginning of the year, when greece in particular grappled with the problem of rising risk premiums and had to seek financial support from the eu partner countries and the International monetary Fund (ImF), capital market players’ distrust spread to other countries on the eurozone’s periphery. this initially caused the euro to fall substantially in value, not only against the us dollar but also against other leading currencies. to calm the capital markets and secure the stability of the single currency, the member countries of the eurozone, the european Commission and the ImF set up a “rescue umbrella” of loans and guarantees with a total volume of €750bn. Ireland then availed itself of this support with an amount of €85bn in november. In the second half of the year, muted growth prospects for the us economy triggered a fall in the dollar against the euro and the yen. speculations about an imminent “devaluation race” between the currencies led to high volatility in exchange rates.
Jan. Feb. mar. apr. may Jun. Jul. aug. sep. oct. nov. Dec.100
management report // BusIness enVIronment munICH re group annual report 2010 regulatory changes
at european level, a system of authorities for financial market supervision (european system of Financial supervision, esFs) has been created. a new body is the European System Risk Board (esrB), whose purpose is to identify macrorisks, serve as an earlywarning system for the financial markets, warn of systemic risks within the eu financial market, and make suitable recommendations. as part of the esFs, moreover, a strong european financial supervisory authority for insurance and occupational pensions has been created, which started work at the beginning of 2011. to this end, the previous european committee (CeIops) has been transformed into an authority (eIopa) with certain rights of intervention vis-à-vis markets, insurance institutions and national supervisors. parallel to this, the eu committees for the supervision of banking and securities trading are being converted into authorities. national supervisors will essentially retain their existing powers.
as far as the new european insurance supervisory regime Solvency II is concerned, work in 2010 concentrated on the implementing measures to be issued, which will regulate numerous important details. adoption of these measures is not expected before summer 2011.
// heavy burden from major losses // Very good investment result despite difficult environment // Return on risk-adjusted capital (RoRac) of 13.5% after tax the past year was marked by high claims expenditure for major losses. on the other hand, we posted a very good investment result, in spite of the pronounced volatility on the capital and currency markets. We report on our investment performance on page 94 ff.
although the return on risk-adjusted capital (RoRac) was below our long-term target, it is nevertheless a clear sign of our earnings strength given the difficult environment. We want our shareholders to participate in last year’s success through another increase in the dividend: we will therefore propose to shareholders at the annual general Meeting a dividend of €6.25 (5.75) per dividend-bearing share, thus maintaining our profit distribution at a high level. We also continued our share buy-back programme, on which we report on page 102 f.
Reinsurance: life Primary insurance: life 1 after elimination of intra-group transactions across segments.
Munich Re gRoup annual RepoRt 2010 imprecise division based on an allocation key. We have refined the method employed for this calculation. up to 2009, with the exception of Munich Reinsurance company, we divided investment portfolios and investment results on the basis of the amount of the technical provisions. for the division of Munich Reinsurance company’s investment result, certain result components were allocated to the segments directly and then the remainder according to premium volume. as of 2010, we are allocating investment result and investment portfolio according to a key based on the technical provisions. the figures for the previous year have been adjusted accordingly.
in the period under review, our reinsurance business was affected by high claims costs from major losses, leading to a reduction in the technical result. further details on business performance in reinsurance can be found on page 75 ff.
Despite impairment losses of goodwill amounting to €109m, our primary insurance business posted a higher consolidated result, thanks to a better investment result. We report on primary insurance on page 87 ff.
Munich Health contributed a higher consolidated result in the year under review. this segment, which covers our health reinsurance business worldwide and our primary health insurance outside germany, is shown for the first time as a separate segment as per ifRs 8 in 2010. its business was previously disclosed mainly in the segments “life and health reinsurance” and “health primary insurance”. Without the business written by Munich health, the segment “life and health reinsurance” has become simply “life reinsurance”. the health primary insurance segment continues to include our german health insurance business and our travel insurance business. the figures for the previous year have been adjusted accordingly. further details of Munich health’s business performance can be found on page 92 f.
Whereas in reinsurance and Munich health we operate on a global basis, in primary insurance the bulk of our premium comes from the german market. the portion of international business in primary insurance increased further due to organic growth and positive exchange rates.
the reduction in the effective tax rate compared with the previous year is mainly due to a higher proportion of profits from the usa in the consolidated result. apart from this, the effective tax rate for last year was increased by subsequent tax payments for the previous year.
in contrast to this, currency translation differences are largely recognised in profit or loss in our subsidiaries’ individual financial statements. this involves the translation of foreign currency items into the respective functional currency, i.e. the currency in which the individual financial statement is prepared. overcoverage1 in a particular foreign currency leads on balance to a positive result contribution if exchange rates for that currency rise, and in a negative result contribution if they fall. With undercoverage, the effects are the opposite. in the consolidated financial statements, we recognise these currency translation differences under the other non-operating result.
Reinsurance primary insurance Munich health 1 after elimination of intra-group transactions across segments.
also with effect from 1 January 2011, we acquired 100% of the voting shares in 11 wind park companies for a provisional purchase price of €40.5m. further information is provided in the notes to the consolidated financial statements under (53) events after the balance sheet date.
in china, eRgo intends to establish a joint venture with the shandong state-owned assets investment holding company (ssaih) to offer mainly life insurance products for private clients in the province of shandong. ssaih and Munich Re will each hold half the shares in the planned joint venture. under the articles of association, we will pay RMB 300m (€34m) for our portion of the share capital. the company, whose startup will begin as soon as the supervisory authority has given its approval, is to be called eRgo china life insurance co. ltd.
// combined ratio of 100.5% satisfactory given significantly higher major-loss burden
// investment result of €3.4bn // satisfactory consolidated result of €2.1bn
Marketing as reinsurers, we write our business directly with the primary insurers and also via brokers. in addition to traditional reinsurance business, we also participate as Risk solutions in the primary insurance business of industrial clients, insurance pools, public -private partnerships, and business in specialist niche segments. our risk expertise is key to our success.
Gross premiums written life €m 7,901 6,796 life and health €m 7,130 7,293 7,665
Loss ratio thereof natural catastrophes2 percentage points 11.0 1.4 6.2 4.7 1.0 Expense ratio
Operating result3 life €m 434 718 life and health €m 930
Result in 2010, Munich Re’s reinsurance business was impacted by high claims costs for major losses. at €2,228m (1,157m), the total burden from major losses was higher than the projected amount and the multi-year average, with 11.0 (1.4) percentage points of the combined ratio attributable to natural catastrophes. the consolidated result declined by 18.5% to €2.1bn (2.6bn). our investment result was good at €3,436m (3,796m), mainly owing to gains on the disposal of investments. our operating result for reinsurance, which includes the investment result, decreased by 28.2% to €2.9bn (4.1bn). the technical result totalled €1.3bn (1.9bn).
Gross premiums by division 26% (28%) global clients and north america 12% (12%) special and financial Risks 14% (13%) germany, asia pacific and africa 15% (16%) europe and latin america
// increase in premium of 16.3% // Market consistent embedded Value (MceV) of €8,284m life reinsurance treaties are valued on the basis of Market consistent embedded Value (MceV) principles. MceV comprises a company’s equity and the value of in-force covered business. the latter is the present value of future profits (where profits are post-taxation shareholder cash flows from the in-force covered business and the assets backing the associated liabilities) calculated using financial and actuarial methods, taking into consideration the time value of the financial options and guarantees and the explicitly determined costs of capital (see also page 55 ff.).
however, we expect fundamental growth impulses for our future new business to come from such developments as the continuing privatisation trends in the provision for old age, long term care and disability, and the dynamic expansion of the insurance markets in asia. We see increasing demand in the management of investment risks in life insurance products, and have therefore created the infrastructure necessary to provide our clients with comprehensive solutions for covering options and guarantees dependent on the capital markets. Besides this, we are successively expanding the spectrum of services we offer our clients with the aim of thus obtaining access to profitable reinsurance. of particular significance in this regard are consulting services and products to enhance the efficiency of our clients’ core processes. for example, our subsidiary Allfinanz provides the latest internet-based software solutions for automating the underwriting process in life insurance.
life business in Spain and Portugal has grown strongly in recent years. to further support the expansion of our leading position and better leverage the potential in latin america, we will considerably strengthen the team at Munich Re, Madrid in 2011, assigning it operational management responsibility for spain, portugal and latin america. this will benefit our business especially in countries with high economic growth rates, such as Brazil.
in the light of high claims expenditure for random major losses, we achieved a satisfactory result in property-casualty reinsurance. thanks to our capital strength and our risk expertise, we succeeded in achieving good terms and conditions in the 2010 treaty renewals and keeping the profitability of our portfolio virtually constant in a still highly competitive market environment.
our subsidiary Munich Reinsurance company of australasia ltd., which writes life reinsurance business in Australia and New Zealand, has recorded strong growth in recent years. in 2010, it posted a further increase in premium income of 45.5% and secured attractive profit margins.
Munich Re gRoup annual RepoRt 2010 sizeable losses were also caused by various pharmaceutical liability cases (€121m), leaking tubes following refurbishment at a nuclear reactor (€51m), the explosion in a power plant in the usa (€51m), and the solidifying of aluminium in the potlines of a plant in Qatar (€47m).
the combined ratios of the individual divisions developed differently. the special and financial Risks Division, which in 2009 had been badly hit by the financial crisis and default losses in trade credit, surety and D&o insurance, improved its combined ratio to 89.2%. some 0.2 (0.4) percentage points of this were attributable to retrocession cover for the whole reinsurance segment – business which is fully accounted for in the special and financial Risks Division. the combined ratio for the other divisions was higher than in the previous year, owing to the burden from major losses. in the germany, asia pacific and africa Division, the combined ratio rose owing to major losses in australia. the europe and latin america Division recorded an increase of 23.6 percentage points, owing mainly to the earthquake in chile. the combined ratio in the global clients and north america Division rose to 99.6% (88.8%), an acceptable figure in view of the major losses from the chilean earthquake and Deepwater horizon.
premium the renewal negotiations for reinsurance treaties in 2010 produced satisfactory outcomes.
as expected, the market environment was more difficult than in the previous year. the capital markets recovered more quickly than expected and, as a result, so did the balance sheets of many insurers and reinsurers. there was sufficient capacity available in most lines of business. generally, prices showed a slight downward trend, some exceptions being the motor insurance market in the uK or markets and lines recently affected by major losses. the chilean earthquake, for instance, meant that prices for natural hazard covers in the region rose significantly, while the weather-related losses in australia led to a stabilisation of the price level there. Rate increases were also implemented in lines that had been hit by losses in 2009, such as credit reinsurance, some natural hazard covers and offshore energy covers in the gulf of Mexico. Marine business and the engineering classes, on the other hand, suffered from recessioninduced declines in prices and volume. thanks to our disciplined underwriting policy, we were able to maintain the quality of our portfolio. in areas where there is currently little prospect of profitable results, such as sectors of motor business in eastern europe and germany, but also in credit business and selected us liability segments, we consistently reduced capacity. at €15.7bn (15.0bn), we nevertheless managed to increase our premium volume by 4.8%. We expanded our business in the segment of complex liability risks, making available capacity at short notice for high-quality risks and writing profitable new business. premium income was also boosted by our strong involvement in niche segments.
Munich Re gRoup annual RepoRt 2010 in contrast to the previous year, the development of the euro against other currencies had a positive effect of €798m on our premium income.
the pressure on primary insurers’ rates in motor insurance, the class of business with the largest premium volume, persisted on a broad front. Reinsurance premium volume also declined market-wide with lower margins, causing us to further reduce our motor business in 2010.
our premium volume in Japan and Korea grew to €578m (554m), despite the competitive insurance and reinsurance environment and the effects of the global financial crisis. notwithstanding the difficult economic situation and the strong yen, we were able to keep the capacity we provided in Japan constant, especially for coverage of the natural hazards earthquake and typhoon. in addition, we supported Japanese companies in their international expansion, in designing products and in enhancing their risk management in anticipation of new solvency and accounting regulations (ifRs).
in Australia and New Zealand, we remained the market leader and recorded year- on-year premium growth to €788m (555m). however, the result was burdened by the hailstorms and floods in australia and the earthquake in new Zealand. Despite the turbulences on the financial markets, the capitalisation of australian insurance companies is still very solid so that – given our high market share – the growth potential in traditional reinsurance business is limited in the medium term.
in the United Kingdom, we were able to increase our premium level by 1.6% to €2,985m (2,937m), despite the keen competition in the reinsurance market. We strictly adhered to our policy of withdrawing from business that did not offer risk-commensurate prices and conditions, but we managed to more than compensate for this with growth in profitable motor business via our participation in a strategic partner. We also again improved the premium level of our primary insurance business written via our managing general agency (Mga) Bell & clements, thanks to organic growth with existing clients, to new products and to selected shares in niche business.
in Latin America, we extended our market leadership, with premium income climbing to €691m (606m). While prices generally remained constant, rates for natural catastrophe covers rose significantly in some cases. the result benefited from our profit- oriented underwriting policy and a low claims burden in the caribbean. We were only marginally affected by the earthquake in haiti, owing to low insurance density.
our subsidiary Münchener Rück do Brasil Resseguradora S.A. increased its premium volume to €163m (126m), thus maintaining a leading position in the market. owing to low claims costs, the combined ratio improved markedly to 83.2% (120.1%).
in US business, we posted pleasing results both at Munich Reinsurance america, inc. and at the primary insurers aMig and hsB group. north america was largely spared natural catastrophes in 2010. We successfully completed the integration of the hsB group at the beginning of 2010. its premium income of €643m has been consolidated for a full year for the first time, as compared with nine months in the previous year. the result was again very satisfactory at €122m. Benefiting from synergies with Munich Re, the hsB group is selectively expanding its international activities in promising markets. since mid-2010, the primary insurance operations in the usa have been even more closely aligned under single management. With stronger cross-selling, we will leverage further business potential in future.
2010 Prev. year Change % gross premiums written R$ m 378 347 8.9 thereof property-casualty R$ m 335 322 4.0 net earned premiums R$ m 169 147 15.0 thereof property-casualty R$ m 146 131 11.5 loss ratio property-casualty % 49.7 83.0 expense ratio property-casualty % 33.5 37.1 combined ratio property-casualty % 83.2 120.1 Result for the year R$ m 25.0 –22.5 –
Munich Reinsurance America 2010 Prev. year Change % gross premiums written us$ m 3,621 3,360 7.8 thereof property-casualty us$ m 3,111 3,042 2.3 net earned premiums us$ m 2,881 2,677 7.6 thereof property-casualty us$ m 2,364 2,366 –0.1 loss ratio property-casualty % 71.0 63.4 expense ratio property-casualty % 33.2 30.3 combined ratio property-casualty % 104.2 93.7 Result for the year us$ m 276.5 314.5 –12.1
our swiss subsidiary New Reinsurance Company Ltd. (NewRe) posted another very pleasing result. in traditional business, it now focuses exclusively on non-proportional covers, writing a considerable volume of natural catastrophe business. in addition, it is successfully establishing itself in the market for structured, made-to-measure reinsurance solutions. newRe continued its consistent cycle management, compensating for its active reduction in traditional business with newly acquired structured contracts. at sfr 1,289m (1,518m), its business volume was distinctly lower in the financial year 2010 due to the scheduled termination of a large-volume quota share treaty which had been concluded to cover a client’s capital requirements during the financial crisis.
in marine reinsurance, premium income was lower than in 2009, totalling €1.2bn. some €392m (361m) of this was earned by our lloyd’s Watkins syndicate. the decrease in premium was caused by the global fall-off in trade on account of the recession. Besides this, pressure on rates in the classic marine lines continued in 2010, especially cargo insurance. We also withdrew consistently from unprofitable business. in reinsurance
Munich Reinsurance Canada Non-Life Group 2010 Prev. year Change % gross premiums written can$ m 399 414 –3.6 property-casualty can$ m 399 414 –3.6 net earned premiums can$ m 298 295 1.0 property-casualty can$ m 298 295 1.0 loss ratio property-casualty % 60.7 57.2 expense ratio property-casualty % 34.6 32.9 combined ratio property-casualty % 95.3 90.1 Result for the year can$ m 59.6 76.0 –21.6
in the market for aviation and space risks, pressure on market rates increased. premium volume was up 4.6% to €635m (607m). in space business, our position as market leader and the conclusion of long-term treaties enabled us to largely avoid the consequences of the pressure on rates. the result also benefited from only moderate claims costs. in aviation business, the rise in rates apparent in some sub-segments in 2009 did not continue, despite a sequence of major losses in 2010. consequently, the combined ratio rose to 87.7% (83.4%).
our Risk Trading Unit places insurance risks on the capital and retrocession markets. We provide this unit’s services primarily for our clients but we also use them for our own purposes when laying off insurance risks is expedient from a risk management perspective. in 2010, for example, us hurricane capacity was placed with investors in two client transactions (us$ 305m and us$ 96m). Munich Re also provided consulting services in a further capital market transaction (us$ 150m). in addition, we acquired protection for the scenarios european windstorm and us hurricane in a transaction of our own in the first half-year (eos Wind, us$ 80m). the total number of transactions made Munich Re one of the most important players in the capital market in this respect in 2010. in the meantime, we have also become one of the main european investors in insurance-linked securities (ils), which allows us to systematically exploit further market opportunities.
Munich Re gRoup annual RepoRt 2010 through primary insurance companies in our group, we offer our clients in industrial and major project business a wide range of products, customised solutions and services based on our recognised industry- and risk-related knowledge. We operate the business in our unit corporate insurance partner with experts in Munich, london, paris, new York, princeton and singapore. our specialist knowledge in identifying and assessing risks and in structuring insurance solutions allows us to create value in a highly dynamic and globalised environment and to stand out from our competitors. We succeeded in slightly increasing our premium volume in this segment. the combined ratio for 2010 was burdened by investments for the expansion of these activities and major losses such as the earthquake in chile.
// Year-on-year increase of 5.4% in total premium income to €19.2bn; premium growth in german and international business
// good combined ratio of 96.8%, despite numerous natural hazard events // investment result of €5.6bn // Result of €656m significantly higher than in previous year // successful implementation of new brand strategy
in the first quarter of 2010, the brand restructuring was launched with the renaming of KarstadtQuelle Versicherungen as eRgo Direkt Versicherungen. in summer, important milestones achieved were the presentation of eRgo as an operational brand following entry of the new eRgo companies in the german commercial register and the start of the large-scale advertising campaign on 18 July. life insurer hamburg-Mannheimer Versicherungs-ag was renamed eRgo lebensversicherung ag. property-casualty insurer Victoria Versicherung ag is now called eRgo Versicherung ag, into which the property-casualty insurers of D.a.s. and hamburg-Mannheimer have been merged. at the beginning of october, the implementation of the new brand strategy was brought to a conclusion with a reorganised brand presence for the areas of health and legal protection. Victoria Krankenversicherung was merged into DKV and hamburg-Mannheimer Rechtsschutz-Versicherungs-ag into D.a.s. in international business, the eRgo brand also gained in significance: eRgoİsVİÇRe sigorta was renamed eRgo sigorta, and at eRgo hestia the new brand presence and logo gives greater emphasis to eRgo.
Result in the year under review, eRgo was able to maintain the upward trend initiated in the second quarter of 2009. the result in the primary insurance segment totalled €656m (367m), or 78.7% more than the previous year’s crisis-weakened figure, while the consolidated result for the eRgo subgroup came to €355m (173m). a major factor in the increase was the investment result, which improved by 20.8% on the previous year, in particular owing to the year-on-year reduction of €740m in write -downs and losses on disposals. another positive effect of €46m before tax and policyholders’ participation resulted from the derivatives used to hedge against prolonged low-interest-rate scenarios. there was an adverse impact, however, from impairment losses of goodwill totalling €109m for eRgo sigoRta a.s, istanbul, in the second quarter of the year. this write-down reflects the difficult profit situation on the turkish motor insurance market.
We value the life, health and personal accident insurers with their long-term liabilities on the basis of Market consistent embedded Value (MceV) principles. MceV comprises a company’s equity and the value of in-force covered business. the latter is the present value of future profits (where profits are post-taxation shareholder cash flows from the in-force covered business and the assets backing the associated liabilities) calculated using financial and actuarial methods, taking into consideration the time value of the financial options and guarantees and the explicitly determined costs of capital (see also page 55 f.).
the MceV of life primary insurance business decreased to €2,375m (3,155m) in the financial year 2010, largely owing to the strong fall in interest rates and high interest-rate volatility. this constitutes a challenge for the industry as a whole. given the strict rules of market-consistent valuation at 31 December 2010, long-duration contracts that provide guarantees for policyholders sometimes show declining results, despite our hedging against prolonged phases of low interest rates. total MceV earnings came to –€602m (1,329m), with the value of new business totalling €114m (96m). a detailed presentation of MceV is available on Munich Re’s website.
premium from german new business climbed to €1.9bn compared with 2009, an increase of 21.3% on the same period last year. this is primarily due to single-premium business, where we recorded double-digit growth rates in traditional annuity business. nevertheless, we adopted a restrained approach in marketing these products and only wrote business on the basis of stringent risk and return considerations. given the current economic environment, clients are still shying away from concluding long-term contracts with regular premium payments for old-age provision. in terms of annual premium equivalent (ape) – the customary international performance measure – our new german business volume was up by 5.6% compared with the previous year. international business rose by 8.5% to €980m. Measured as ape, it increased by 8.8%.
the most recent health reform in germany has changed the conditions in german comprehensive health insurance since 1 January 2009, increasing the influence of policyholder behaviour in particular: policyholders now have the right to change provider and take ageing reserves with them in some cases, while insurers cannot cancel the policies of clients who have failed to pay their premiums and must continue to indemnify them for certain treatment. the alterations are taken into account in the MceV model on the basis of current experience, but future client behaviour is still difficult to premium growth of 3.6% in german business and increased volume in international business
International annual premium equivalent1 260 239 8.8 1 the annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
Munich Re gRoup annual RepoRt 2010 estimate. changed assumptions due to future experience could influence our MceV figures substantially. Discussions regarding the german healthcare system are still ongoing, and possible future statutory changes could lead to significant changes in our MceV figures.
as from the beginning of 2010, premium volume in health climbed by 6.3% to €5.5bn (5.2bn). Business with supplementary benefit covers grew by 6.0%, while premium income in comprehensive health insurance expanded by 6.9%, reflecting the marked price increases we were obliged to make at the beginning of 2010 owing to a general rise in medical costs. premium growth in the year under review was also driven by the conclusion of a major contract in the previous year. new business expanded considerably – by 21.1% to €299m (247m) – due to the conclusion of the above-mentioned contract in comprehensive health insurance and to growth in supplementary health insurance, where we recorded expansion thanks to the introduction of new products. in travel insurance, which is included in the health segment, we registered a rise in premium volume of 10.3% in 2010. after a difficult 2009, we see this as a sign that the travel sector has recovered.
Property-casualty the consolidated result in property-casualty insurance totalled €319m (257m). at 96.8%, the 2010 combined ratio was higher than for 2009 (93.2%) but was nevertheless still good. Market-wide problems in important countries like turkey, poland and south Korea and natural hazard events such as the long, harsh winter and flood losses were responsible for considerably higher claims expenditure in international business. the combined ratio rose to 107.8% (102.5%) in international business, but in our key market germany it was a very good 89.8% (87.9%).
Munich health thus covers our health reinsurance business worldwide and our health primary insurance outside germany. the cornerstones of Munich health are the international subsidiaries of our health primary insurer DKV, the specialised us health insurer sterling life insurance company (sterling), Munich Re’s worldwide health reinsurance business, and the service companies of the Mednet group.
Gross premiums written were appreciably higher than in the previous year, climbing by 29.3% to €5.1bn (4.0bn). if exchange rates had remained the same, premium volume would have risen by 20.2% year on year.
the combined ratio in the Munich health segment for 2010 was 99.7% (99.4%). this key indicator relates only to short-term health business, not to business conducted like life insurance (for instance, in Belgium and luxembourg), the figure for the latter amounting to 12.5% (15.4%) of gross premiums written in the year under review. the relatively high combined ratio was due to a greater claims burden from individual reinsurance accounts in asia, the Middle east and italy. By contrast, sterling’s combined ratio was improved, benefiting partly from cost-saving measures introduced because of the drop in Medicare advantage business.
Munich Re gRoup annual RepoRt 2010 1 after elimination of intra-group transactions across segments.
// another good result of €1.6bn from gains on disposal // pleasing return on investment of 4.5%
in the following section, we report on the performance of our group’s own investments, which derive almost entirely from our core business fields of reinsurance, primary insurance and Munich health. in addition, we provide information on third-party business, where we manage the assets of non-group investors, both institutional and private.
Distribution of investments by type 2.2% (2.2%) Real estate equity funds 58.7% (60.8%) fixed-interest securities 0.6% (0.6%) participating interests 9.8% (8.6%) Miscellaneous investements
Munich Re gRoup annual RepoRt 2010 given a decline in risk-free interest rates, we also benefited from adherence to our policy of lengthening the duration of our investments, which amounted to 6.3 (5.9) years at the balance sheet date. however, rising risk spreads meant that our total valuation reserves (excluding owner-occupied property), which are partly recognised in the balance sheet, fell from €7.9bn to €7.4bn.
in 2010, our investment portfolio continued to be dominated by fixed-interest securities, loans and short-term fixed-interest investments. over 47% of these are government bonds or instruments for which public institutions are liable, of which 14% are bonds of portuguese, italian, irish, greek, and spanish issuers. additionally, around 28% of our interest-bearing investments are in securities and debt instruments with top-quality collateralisation, around 43% of which are german pfandbriefs.
in the period under review, we switched from corporate bonds into equities, at the same time extending our hedging against falling share prices. at the reporting date, corporate bonds made up 9% of our fixed-interest portfolio. our portfolio of structured interest -bearing products, which are held chiefly by our reinsurance companies, expanded by €0.8bn to €6.1bn (5.3bn), mainly due to exchange-rate developments and a few additions. around 79% of these securities have an aaa rating.
Valuation reserves not recognised in the balance sheet 31.12.2010 Prev. year Valuation Fair Carrying Valuation Fair Carrying €m reserves value amount reserves value amount tangible assets in renewable energies – 46 46 – – –
3% (4%) policy and mortgage loans 47% (44%) government bonds thereof: 9% (11%) inflation bonds 4% (3%) structured products (credit structures)
Munich Re gRoup annual RepoRt 2010 at the balance sheet date, we held €7.2bn (7.8bn) in inflation-indexed bonds. these offer a certain degree of protection against the risks of future inflation and a rise in interest rates.
the net balance from write-ups and write-downs was –€403m (–1,122m). We posted small net write-ups of €80m (–366m) on our swaptions, due primarily to falling interest rates. swaptions are used by our life primary insurers as protection against reinvestment risks in low-interest-rate phases. Mainly owing to the volatile stock markets, we made writedowns of €277m (385m) on our non-fixed-interest securities.
for our investment portfolio as a whole, we again posted good net realised gains on disposal in 2010. some €634m (943m) came from the disposal of non-fixed-interest securities available for sale, while around €90m was apportionable to the reduction of our stake in helvetia holding ag, st. gall, from approximately 8.2% to under 3% in the second quarter. the total disposal result also contains €1,067m (782m) from fixed- interest securities available for sale. this includes the sale of corporate bonds we had acquired in the previous year, which subsequently recorded market gains as risk spreads fell. furthermore, when switching investments in government bonds, we
Write-ups/write-downs –403 –1,122 –2,847 –1,032 – 865 other income/expenses –353 –236 –1,304 –628 – 556
investments in affiliated companies 9 –18 – investments in associates 50 –123 – Mortgage loans and other loans 2,150 1,984 8.4
Munich Re gRoup annual RepoRt 2010 profited from the interest-rate level remaining low. altogether, therefore, Munich Re benefited from its conservative yet active asset management.
We generated €271m (441m) from investments for the benefit of life insurance policyholders who bear the investment risk. We post this in the investment result under “other income/expenses”.
Meag Munich eRgo assetManagement gmbh is the asset manager of Munich Re. in addition to its asset management function for the group, Meag also offers its expert ise to private and institutional clients. the amount managed by Meag in privateclient business via investment funds totalled €2.1bn (2.0bn). assets under management for institutional clients outside the group rose by around 37% to €8.1bn (5.9bn), reflecting the fact that Meag was able to win new clients. the assets managed by picc asset Management company ltd. (paMc), shanghai, 81% of which belongs to picc people’s insurance company of china, and 19% to Meag, reached €30.0bn (18.8bn).
Total assets under management 31.12.2010 Prev. year Change % third-party investments €bn 10.2 7.9 29.1 2010 Prev. year Change % group asset management result €m 37 19 94.7
Analysis of our capital structure munich re’s capital structure is essentially governed by its activity as an insurer and reinsurer. investments on the assets side of the balance sheet serve mainly to cover technical provisions (74.7% of the balance sheet total). equity (9.7% of the balance sheet total) and bonds classified as strategic debt (2.2% of the balance sheet total) are the most important sources of funds.
Rating agency Rating Outlook a. m. Best a+ (superior) stable Fitch aa– (Very strong) stable moody’s aa3 (excellent) stable standard & poor’s aa– (Very strong) stable
// Debt leverage down 0.2 percentage points // asset-liability management as basis for our investment strategy // share buy-back programme continued
technical provisions reinsurance business accounts for approximately 32% of technical provisions, primary insurance for about 67% and munich health for some 1%. in contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. this is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. the currency distribution of our provisions reflects the global orientation of our group. Besides the euro, our main currencies are the us dollar and 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.
Asset-liability management the structure of our technical provisions and other liabilities is the basis for munich re’s investment strategy, the main focus of which is asset-liability management: our aim is to ensure that economic factors influence the value of our investments and that of our technical provisions and liabilities in the same way, thus cushioning the effect of capital market fluctuations. For this purpose, we mirror important features of the liabilities, such as maturity patterns, currency structures and inflation sensitivities, on the assets side of the balance sheet by acquiring investments with similar characteristics if possible. in this approach, any deviations from the structure of our liabilities are made consciously, taking due account of our risk tolerance and the risk spreads. in 2010, for instance, we extended the maturities of our investments in relation to our liabilities and were able to benefit from the fall in interest rates. in addition, we are endeavouring in our asset-liability management to partially structure our investment portfolio in such a way that investments increase in line with rising inflation rates.
Capital management through active capital management, we ensure that munich re’s capital is maintained at an appropriate level. munich re’s available financial resources must always be sufficient to cover the capital requirements determined both by our internal risk model and by the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of measured opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. at the same time, we also define an appropriate level of group economic capital as one which does not exceed that required for our operations. such a needs-based, risk-commensurate capital level makes a decisive contribution to financial discipline in all our business processes.
management report // Financial position munich re group annual report 2010 share buy-back programme completed by the annual general meeting on 28 april 2010, and 6.1 million shares or a total of €650m under the 2010/2011 programme involving share buy-backs of up to €1bn. after the balance sheet date and up to 25 February 2011, we repurchased a further 1.7 million shares with a volume of €195m. since the beginning of the share buy-backs in november 2006, we have been able to return a total of over €10bn to our shareholders including dividend payouts. after completion of the 2010/2011 share buy-backs, the revenue reserves shown as at 31 December 2010, calculated in accordance with german commercial law, will decrease to €1,473m. We intend to continue our attractive capital repatriation policy with a further share buyback programme in 2011. up to the annual general meeting in 2012, a buy-back volume of up to €500m is planned. in the interests of our shareholders, we will carefully weigh up the benefit of further buy-backs against the advantages of comfortable capitalisation, also with a view to opportunities for organic and possibly external growth.
Warren e. Buffett and the aforementioned companies in his group informed us in a letter dated 15 october 2010 that the objective of the investment is to generate trading profits and not to implement strategic objectives.
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 to be made by the annual general meeting. Within a self-determined scope, however, the annual general meeting can authorise the Board of management to initiate certain (capital) measures. the authorisations relating to munich reinsurance company are listed below. in all such cases, a resolution of the annual general meeting is required that has been adopted by at least a three-quarter majority of the share capital represented in the vote. Where these resolutions are concerned, the company’s articles of association again do not provide for other (i.e. higher) majorities or further requirements.
management report // Financial position munich re group annual report 2010 powers of the Board of management with particular regard to the option of issuing or buying back shares the powers of the members of the Board of management are defined in sections 71 and 76 to 94 of the german stock companies act. the Board of management has the following powers to issue and buy back shares (the complete wordings of the relevant resolutions and provisions in the articles of association can be viewed on our website): // the annual general meeting of 28 april 2010 authorised the company under agenda items 7 and 8, pursuant to section 71 para. 1 item 8 of the german stock companies act, to buy back shares until 27 april 2015 up to a total amount of 10% of the share capital at the time of the annual general meeting resolution (€587,725,396.48). the shares acquired plus other own shares in the possession of the company or attributable to the company in accordance with section 71a ff. of the german stock companies act may at no time amount to more than 10% of the share capital. the shares may, in accordance with the provisions of the authorisation, be acquired in various ways: the company may buy back shares amounting to a maximum of 5% of the share capital using derivatives. the Board of management is authorised to use shares thus acquired for all legally admissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights. among other things, the Board of management is empowered under section 71 para. 1 item 8 sentence 6 of the german stock companies act to retire the shares without requiring further approval from the annual general meeting. the Board of management availed itself of this authorisation to acquire shares by resolution of 7 may 2010. By 31 December 2010, a total of approximately 6.1 million shares had been purchased for an overall price of €650m. as part of the 2009/2010 share buy-back programme, around 5.7 million shares were acquired between January and april 2010 for an overall price of €650m. as announced in april 2010, these shares and the approximately 3.2 million shares already repurchased in 2009 were retired in a simplified process.
// the annual general meeting of 28 april 2010 resolved to cancel the contingent capital 2005 of €100m and authorised the Board of management to issue, with the consent of the supervisory Board, convertible bonds or bonds with warrants on one or more occasions up to 27 april 2015 for a maximum nominal amount of €3bn with or without a limited maturity period. shareholders are generally entitled to a subscription right in respect of these bonds, but the Board of management is authorised, with the consent of the supervisory Board, to exclude this subscription right in the cases specified in the authorisation. the holders of such bonds may be granted conversion or option rights in respect of shares issued by the company up to a maximum amount of €117m of the share capital, in accordance with the respective bond or warrant conditions; as a precautionary measure, capital of €117m was conditionally authorised under article 4 para. 3 of the articles of association (contingent capital 2010).
// under article 4 para. 1 of the articles of association, the Board of management is authorised, with the consent of the supervisory Board, to increase the company’s share capital at any time up to 21 april 2014 by an amount of up to €280m by issuing new shares against cash or non-cash contribution (authorised capital increase 2009). in accordance with the above-mentioned provisions of the articles of association, it may exclude subscription rights.
Group solvency munich re is subject not only to the supervisory requirements applying to individual insurance companies but also to supervision at group level. Furthermore, munich re insurance company as the parent has introduced suitable control methods and, when reporting to BaFin, which is also responsible for the group, includes supplementary aspects at group level, such as shareholdings, consolidated financial data and intra-group transactions.
solvency in the case of insurance companies is generally understood to be the ability of an insurer to always meet the obligations assumed under its contracts. in concrete terms, this means an insurance company must fulfil specific minimum capital requirements. the aim of the “adjusted solvency” rules is to prevent the multiple use of equity to cover risks from underwriting business at different levels of the group hierarchy. to calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the iFrs consolidated financial statements. to determine the eligible capital elements, the iFrs equity is adjusted; in particular, it is increased by portions of the subordinated liabilities and reduced by intangible assets. munich re’s eli g ible capital is more than two-and-a-half times higher than the legal requirement.
Adjusted solvency 31.12.2010 Prev. year Change % eligible capital of the group €bn 22.2 21.2 4.7 adjusted solvency ratio % 260.5 268.5
management report // Financial position munich re group annual report 2010 the adjusted solvency ratio decreased from 268.5% in the previous year to 260.5% in 2010, mainly due to the increased solvency requirement.
in the consolidated cash flow statement, the consolidated profit of €2,430m is used as the starting point for determining the cash inflows from operating activities. the consolidated result is adjusted by €7,141m to take account of the higher technical provisions. in reinsurance, provisions for future policy benefits increased, partly due to new business. provisions for future policy benefits also rose in primary insurance, with companies outside germany expanding their portfolios and writing new business. the technical provisions for life insurance policies where the investment risk is borne by the policyholders (unit-linked life insurance) grew as a result of pleasing portfolio development. the net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows – are essentially attributable to the disposal of securities available for sale.
the cash outflows for investment activities were determined by payments for the acquisition of investments. they exceeded the inflows from the sale and/or maturity of investments by €7,042m. in november 2010, through its subsidiary europÄische reiseversicherung ag (erV), munich, munich re paid €3.4m to acquire a further 75.0% in the subsidiary cJsic “european travel insurance”, moscow, and a further 70.1% in the subsidiary geschlossene aktiengesellschaft europäische reiseversicherung, Kiev. Both companies had been previously accounted for using the equity method. in the cash flow statement, we have reduced the purchase price by the cash of €1.1m held.
the cash outflows for financing activities stem mainly from the purchase of own shares with a volume of €1,268m and the dividend payment of €1,076m in 2010.
1 previous year’s figures adjusted pursuant to ias 7 (see “changes in accounting policies”).
// munich re as clients’ first port of call for all risk matters // ongoing development of innovative coverage concepts for new and complex risks // corporate responsibility for our staff, society and the environment other success factors
Clients and client relationships munich re has differently structured client bases in reinsurance and primary insurance. in reinsurance, we work together with over 4,000 corporate clients from more than 160 countries. our primary insurers in the ergo subgroup service some 40 million (mainly private) clients in over 30 countries in europe and asia. the munich health business segment has over six million clients in primary insurance and 400 in reinsurance.
primary insurance in primary insurance, we attend to the needs of private, commercial and industrial clients, with private clients making up the bulk of our customers. ergo offers them products and services in connection with old-age provision and saving schemes, health, legal and travel protection. thanks to our many different sales channels, clients can choose how to approach us: via one of the 20,000 full-time self-employed agents, through brokers, via the internet, by phone for direct insurance, or via a number of sales partners.
asset management meag is present in europe, asia and north america and centrally manages all important asset classes such as bonds, equities and real estate. our investment experts follow a prudent, risk-based approach with the aim of achieving long-term, above-average performance. Key factors in this regard are the close cooperation and trust they enjoy with clients in the group and with other institutional investors, the good service they provide to private investors and meag’s years of experience in handling investment risks. the financial crisis has shown that we set the right course for generating positive returns after the difficult market phase of 2002/2003.
reinsurance traditional liability and property covers also recurrently provide innovation opportunities.
management report // other success Factors munich re group annual report 2010 primary insurance in primary insurance, our emphasis lies on analysing and forecasting demographic trends. these trends constitute important parameters for calculating policy durations and hence for structuring products. Demographic change also impacts social security systems and consequently influences our clients’ need for private provision.
munich health this business field combines our long-standing experience and expertise in health reinsurance and health primary insurance and our risk management services. For the analysis of health risks, munich health already offers its clients tools for standardised medical risk assessment. munich health’s experts are working continuously on the further expansion of analytical capabilities using prognostic methods. enhancing the efficiency of internal processes is a significant success factor for munich health and its clients. the use of new automation options and test algorithms, e.g. in the transmission of claims notification and claims processing data, can detect billing errors and fraud at an early stage and help to reduce medical and operating costs.
Staff the financial year saw a variety of cross-corporate initiatives in the group. the brand restructuring in primary insurance succeeded in creating a pioneering spirit amongst employees in the wake of the new brand’s successful launch. in reinsurance, we carried out the first performance and talent management process on a global scale and on the basis of uniform criteria, generating scope for activities that enable us to appraise, promote and flexibly deploy our top performers and talent within the group worldwide in accordance with consistent and transparent processes.
the availability of competent, motivated staff and high-calibre talent continues to be an important feature of successful human resources work. the optimal utilisation of our staff’s many qualifications, different ways of thinking, cultural and social backgrounds and their individual qualities are an important economic success factor for us. our philosophy is unity through diversity, and the recognition and encouragement of variety and individuality in our employees is an essential element of our corporate culture. a group-wide project on the subject of diversity management will open up new paths in this context.
in accordance with our globally oriented human resources strategy, we are taking measures designed to promote international occupational mobility and development. a new programme prepares employees from our international organisation for appointments to management positions outside their home countries. high-quality leadership skills are one of our prime objectives. the latest international survey on leadership behaviour confirmed the previous year’s positive result. at the same time, we conducted the first worldwide survey on employee satisfaction to determine what we refer to as the “engagement” index. the overall outcome (both on a national and international level) was good.
the reduction in personnel begun in 2009 and required under the project “continuous improvement of our competitive position” was concluded according to plan and without giving rise to any forced redundancies.
Munich Reinsurance Company ERGO MEAG 2010 Prev. year 2010 Prev. year 2010 Prev. year
asset management meag continues to base its hr policies on the professional and personal development of staff. a programme has been established that provides managers who are assigned leadership responsibility for the first time with the key skills needed for effective management.
the same premises regarding corporate responsibility also apply to investments, where our asset management company meag manages significant sums worldwide. in 2006, we became the first german company to sign the un principles for responsible investment (pri). in addition, our globally binding general investment guidelines in place since 2005 specify that at least 80% of group-wide investments in shares and government and corporate bonds should comply with sustainability criteria. munich re also systematically invests in renewable energy and new technologies. in mid-2010, we launched our investment programme rent (renewable energy and new technologies). and we also attach great importance to high sustainability standards in new building projects and real estate acquisition.
this guarantees that our risk management covers the whole group, and the resultant transparency enables us to actively manage the risks incurred.
Besides this, the group committee also meets quarterly as the Group Investment Committee, which includes additional specialists from our insurance and reinsurance operations and meag. this committee is the central management committee for major group-wide issues affecting the group’s investments. it is also concerned with risk matters.
segment level the Global Underwriting and Risk Committee (GURC) was formed from within the ranks of the reinsurance committee to function as a special risk committee for reinsurance.
munich re’s risk strategy takes into account the interests of both clients and shareholders. its objectives are: the risk strategy is determined by a risk appetite defined by a series of risk limits. the risk appetite is based on the capital and liquidity available and on our earnings target within certain volatility limits, and provides a term of reference for the group’s operational divisions.
We are constantly refining our risk measurement tools, which are tailored to the segment we are monitoring. in each case, the lead risk measure is an economic risk measure. We regularly compare the results produced by our risk model with both regulatory and rating-agency measures at a number of levels, including group, segment, legal entity and risk type. We also regularly perform benchmarkings of our risk-model results and participate in industry surveys to constantly challenge and refine our risk measurement tools. Beyond this, we compare our model with the current status of solvency ii and take part in the Quantitative impact studies. We explain the results of our internal risk model on page 126 ff.
Risk analysis and assessment are carried out at the top-most level in irm, in the form of a consolidated group view, taking into account limitations of capital fungibility. they are based on the analyses prepared in the risk management units of our reinsurance, ergo, munich health and asset management operations. Besides this, irm is constant refinement of our risk measurement tools
management report // risK report munich re group annual report 2010 responsible for checking and validating the analyses of downstream units, working closely with many units and experts within, and in some cases outside, the group. this provides us with a quantitative and qualitative assessment that considers possible inter actions between risks.
control and monitoring systems in 2010, we largely completed the enhancement of our internal control system (ics). the ics is a uniform worldwide system for managing operational risks integrated across all risk dimensions and areas of the group that both meets group management needs and satisfies local legal and regulatory requirements.
the Board of management has group-wide responsibility for the ics, which falls structurally under the responsibility of the cro. experts and staff in our specialist areas are responsible for the detailed content of the system and perform the risk and control assessments. By involving them, we have been able to reinforce the harmonised understanding of risk within the group and considerably raise awareness of the importance of risk and controls in our operational processes.
We also use the ics to manage accounting risks with comprehensive internal controls, enabling us to guarantee that financial reporting is reliable and, in particular, our published financial statements are correct.
the consolidated financial statements are prepared centrally in munich on the basis of the iFrs accounts for individual entities and subgroup financial statements. underwriting and general business transactions are in principle accounted for through the companies included in the consolidated financial statements, while accounting for investments is predominantly centralised at meag, with the exception of certain units where it is performed by external service providers.
transactions are posted at the companies included in the consolidation using a standard general ledger in place throughout most of the group, with harmonised basic data, standard processes and posting rules, and a standard interface for delivery of data from companies to the group or subgroup. clear authorisation systems regulate access to accounting systems.
the aim of our external risk reporting is to provide a clear overview of the group’s risk situation. this includes information on our risk management methods and processes, our risk governance, and the individual risks to which munich re is exposed.
We not only meet legal requirements with our risk reporting, but also create transparency for management, our clients and our shareholders.
this operational responsibility is increased or limited by instructions and procedures, which define the activity of each underwriting unit and recognise the particular characteristics of the insurance business concerned.
selected exposures may only be written after approval by the committees responsible.
in order to prevent munich re’s risk appetite being exceeded as a result of participation in a single risk, mandatory procedures ensure that the extent to which we might already be involved in such a risk is checked before it is written to ascertain the size of our overall participation.
Due to the diversity and extensive ramifications of munich re’s business, it is not possible to produce a set of rules for acceptance that would fully cover relevant risks. the expertise of the underwriter on the ground is therefore of prime importance and we recognise this by providing training and it systems for risk assessment and pricing, publishing internally information sheets and underwriting recommendations, and setting up working groups to create and transmit underwriting knowledge.
application of group-wide reserving rules guarantees a consistent procedure. in addition, internal audits are carried out group-wide to provide a continuous check of compliance with the rules and the appropriateness of the reserves.
Further information on underwriting risk can be found in the notes to the consolidated financial statements under (38) risks in property-casualty business.
random annual fluctuations in insurance benefits or surrender behaviour can lead to short-term falls in the value of the portfolio. this applies particularly to expenses, which can rise as a result of exceptional one-off events such as a pandemic. For pandemic scenarios, budgets derived from the risk strategy are allocated to the operational units.
the assessment of our business on an embedded-value basis is based on these ac tuarial biometric and surrender assumptions, which are regularly reviewed and adapted to take account of new findings, in particular relating to our own experience and expected future developments.
We deal with market risks by means of suitable limit and early-warning systems and through our asset-liability management, which is described on page 102. We limit the deviations in overall investments from those investments that are economically required to cover underwriting liabilities and needed to pursue our business operations with minimum market risk. a breakdown of investments by type can be found on page 94 f. We also make use of derivative financial instruments, which are described under (9) other securities at fair value through profit or loss.
in addition to credit risks arising out of investments and transactions with clients, we actively assume credit risk through the writing of insurance and reinsurance business, including trade credit reinsurance and surety business, financial reinsurance and the granting and insurance of loans. credit risks can also arise through risk transfers to the capital markets and other financial transactions.
control of market risks by means of suitable limit and early-warning systems and through our asset-liability management monitoring and control of credit risks through our groupwide cross-balance-sheet counterparty limit system
in the area of retrocession, we control the default risk through the retro security committee. the experts on the committee review the quality of our potential retrocessionaires independently and on the basis of various criteria (e.g. minimum ratings, market data and capital requirements) and issue appropriate limits in line with a guideline produced by irm. this system enables us to achieve a broad and high-quality spread of cessions in the reinsurance market.
We reduce the credit exposure for capital market placements, such as our catastrophe bond, by requiring first-class collateral or integrating suitable hedging mechanisms into the structure.
We set very high standards for issuers of fixed-interest securities in which we invest, and these are reflected in our group-wide investment principles. there are additional limits on investments in structured products according to their risk profile.
through our internal control system, we identify and mitigate these risks (see page 119 f.). it is our declared corporate aim, which we consistently pursue, to make employees aware of the potential risks and to continue to strengthen our risk culture. this includes willingness to learn from mistakes and to recognise them as opportunities for improvement.
Liquidity risk our objective in managing liquidity risk is to ensure that we are in a position to meet our payment obligations at all times.
We also manage liquidity risk through our holistic risk strategy, with the Board of management defining limits for liquidity risk, on which minimum liquidity requirements for our operations are based. these risk limits are reviewed annually and compliance with the minimum requirements continuously monitored. the management of liquidity risk includes taking account of // known and expected payment obligations through regular, detailed liquidity planning at individual entity level and a central cash-flow reporting system; // short-term margin and collateral obligations arising out of derivative positions where companies make use of such instruments; // unexpectedly high payments resulting, for example, from accumulation losses that far exceed normal loss expectations.
We monitor reputational risk through identification processes we have established in various internal units. as soon as we receive an indication that such a risk exists or could arise in the course of a process or transaction, the information is submitted to a reputational risk committee, which was set up specifically for this purpose. the committee decides on the action to be taken in the case in question, with a view to ensuring that operational risks are not accompanied by reputational risks. the committee is made up of experts from various units and is headed by the compliance officer. rules of procedure regulate the functions and work of the committee. they are derived primarily from our code of conduct, which sets out the main rules and principles for legally correct and responsible behaviour by employees.
We use our central risk management to assess our risk situation on the basis of qualitative and quantitative factors. throughout the entire period under review, munich re’s risk situation was manageable and under control. in the interests of our clients and shareholders, our carefully implemented, modern risk management processes combined with our solid level of capitalisation ensured the solvency and viability of the group at all times. in addition to the underwriting and capital market risks inherent in our business model, which we can assess very well so that we are fully aware of the implications of taking them, there are a large number of other risks to which munich re – like every other undertaking – is exposed. the incidence of these risks is not planned and their occurrence probability and impact are generally difficult to estimate. We therefore closely monitor our environment and our own group to identify even these risks in good time and to take suitable measures to avert loss or damage.
We also show the diversification effects we achieve through both our broad spread across the different risk categories (underwriting, market and credit) and our combination of primary insurance and reinsurance business. this enables us to reduce our capital requirements. at the same time, we recognise that the various risks are not completely independent of each other by taking account of tail dependencies. compared with a situation where the risks are assumed to be independent, this results in a lesser diversification effect, which is reflected in a higher capital requirement.
management report // risK report munich re group annual report 2010 to determine munich re’s economic risk capital, we use the economic profit-loss distribution across all risk segments. the economic risk capital corresponds to 1.75 times the value at risk of this distribution over a one-year time horizon with a confidence level of 99.5%. the value at risk with a confidence level of 99.5% gives the economic loss for munich re which, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. it represents the future risk tolerance under solvency ii. By calculating 1.75 times the capital requirement in respect of this risk tolerance, our group adopts a conservative approach, aimed at offering our clients a high degree of security.
the distribution of economic losses between the individual legal entities in munich re may vary, but the ability of one unit to support another in the event of a loss is in some cases subject to legal constraints. in determining munich re’s capital requirements, restrictions of capital fungibility resulting from legal or regulatory requirements are therefore explicitly taken into account.
// the economic risk capital for our life and health business rose by €1.4bn, owing in particular to portfolio growth in life business, currency translation effects and the lower interest-rate level in the usa, canada and europe.
1 munich health is shown separately as from 2010. the previous-year figures have not been adjusted.
31.12.2010 Prev. year1 Change Re- Primary Segment Re- Primary Segment insur- insur- Munich diversi- insur- insur- diversi- €bn Group ance ance Health fication Group ance ance fication Group
Diversification effect –9.3 –8.1 –2.0 – – –5.3 –4.9 –1.2 – –4.0 increase of €3.3bn in economic risk capital
// the diversification effect between the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risks” grew by around €4.0bn, mainly due to the increase of €7.3bn to €30.0bn in the subtotals of the individual risk categories and reduced tail dependencies between risk categories. tail dependencies are estimated using cross-balance-sheet scenarios, evaluated annually on the basis of the current risk profile. the segment diversification increased markedly in the risk categories “market” and “life and health”. the rise in respect of the market risk is mainly due to the higher interest-rate-risk share in the segments reinsurance and primary insurance. in the life and health risk, the increase in the diversification effect is due to the modelling of the munich health segment and the higher risk capital in the reinsurance and primary insurance segments.
the following diagrams show our estimated exposure to the two peak scenarios for a return period of 200 years.
Storm Europe aggregate Var (return period: 200 years) €bn (before tax)
management report // risK report munich re group annual report 2010 the figure for both scenarios has risen due to the change in the placement of external retrocessions. in the case of “atlantic hurricane”, an additional factor is the weakening of the euro against the us dollar.
as a global risk carrier, we can diversify our portfolio through the broadest possible mix and spread of individual risks, significantly reducing the volatility of total claims payments and substantially increasing the value added by all divisional units.
in addition to the simple risk of random fluctuations resulting in higher claims expenditure in a particular year, the adverse developments with a short-term impact that we model notably include the risk of above-average claims that could arise on the occurrence of rare but costly events such as pandemics.
Economic risk capital (ERC) – Property-casualty 31.12.2010 Prev. year Change Segment Segment Re- Primary diversi- Re- Primary diversi- €bn Group insurance insurance fication Group insurance insurance fication Group
Diversification effect –7.4 –5.8 –4.0 – –7.3 –5.9 –3.1 – –0.1
interest-rate risks in primary insurance, the increase in interest-rate risks is primarily due to the fall in long-term interest rates and the simultaneous rise in implicit interest-rate volatilities.
Credit risks munich re determines credit risks using a portfolio model which takes into account changes in market value caused by rating migrations and the default of debtors. the model is calibrated over one credit cycle.
the market value of our investments in fixed-interest securities and loans as at 31 December 2010 was €163.9bn, representing 83.4% of the market value of munich re’s total investments. these securities thus made up the bulk of the portfolio. a detailed presentation of our fixed-interest securities and loans, including short-term investments, on a market-value basis can be found on page 97. ratings for these investments are provided in the notes to the consolidated financial statements under (5) loans, (6) other securities held to maturity, (8) other securities available for sale and (9) other securities, at fair value through profit or loss.
the valuation reserves include post-tax adjustments to items in the property-casualty segment that are not accounted for at fair value under iFrs, in particular to land and buildings and loans. We perform various valuation adjustments for property-casualty and life and health. in property-casualty, we discount the reserves that under iFrs are not discounted from a strict economic perspective or at all, adjusting them for the resultant tax effects, and add on a risk margin derived in accordance with economic principles. in the case of business for which we show a market consistent embedded Value (mceV), we regard the embedded value as capital available to cushion risks. this is only partially included in iFrs equity, which is why we make an adjustment. on the other hand, capitalised goodwill and other intangible assets are included in the group’s iFrs equity. as they might not retain their value following a severe loss event, we deduct them when calculating available financial resources, taking tax effects into account. We treat deferred tax assets recognised for loss carry-forwards under iFrs in the same way if they are not covered by an excess of deferred tax liabilities over deferred tax assets at the respective company.
BBB and lower 1.5 1.2 no rating available 5.5 4.9 increase of €1.2bn in available financial resources
management report // risK report munich re group annual report 2010 the economic capital buffer is the amount by which the available financial resources exceed the economic risk capital. the economic solvency ratio is the ratio of the available financial resources (less announced but not yet completed capital measures such as the 2010/2011 share buy-back and the 2010 dividend payment) to the economic risk capital. over the course of time, the situation has developed as follows: the economic solvency ratio of 136% (153%) reflects munich re’s capital strength. munich re’s economic risk capital, which produces the solvency ratio described above, corresponds to 1.75 times the capital that is likely to be necessary under solvency ii on the basis of the internal risk model.
in calculating rorac (see definition on page 58), the factor “additional available economic equity” is also relevant. it is the difference between the economic equity capital and the economic risk capital and amounted to €4.1bn (6.2bn) as at 31 December 2010.
We report on the regulatory solvency requirements on page 106 f.
Available financial resources €bn 31.12.2010 Prev. year Change iFrs equity 23.0 22.3 0.7 Valuation reserves 0.9 0.9 – Value adjustments for property-casualty and life and health 5.1 5.2 –0.1 goodwill and other intangible assets1 –4.1 –4.6 0.5 tax effects and other2 –0.1 –0.2 0.1 hybrid capital 4.8 4.8 – Available financial resources 29.6 28.4 1.2 1 change in methodology: the figure as at 31 December 2010 takes tax effects into account; the previous year’s figures have not been adjusted. 2 change in methodology: in the figure as at 31 December 2010, deferred tax assets for loss carry-forwards under iFrs are only deducted if they are not covered by an excess of deferred tax liabilities over deferred tax assets at the respective company; the previous year’s figures have not been adjusted.
(B) minus (D): economic capital buffer €bn 8.9 11.0 –2.1 (c) divided by (D): economic solvency ratio % 136 153
as insurers, we incur risks through financial exposure to other parties on the liabilities side of the balance sheet arising out of our traditional reinsurance activities in trade credit and surety business. at the same time, as a major institutional investor, we must accept certain credit risks when we invest. this is clearly the case for corporate bonds, but there are also risks in government bonds, which were considered safe in the past. We use government bonds to match the term and currency of our underwriting liabilities, especially for insurances of the person.
We have reacted to the increased risk on certain government securities by modifying our internal control system for country risks so that, for example, limits for certain countries were reduced in our counterparty limit system and greater weight given to market indicators in our risk management process. in our internal risk model, we calculate and allocate risk capital even for highly rated government bonds. of our holdings in government bonds or instruments for which public institutions are liable, 7% (6%) stems from italian, 3% (3%) from spanish, 2% (3%) from irish, 1% (3%) from greek, and 1% (1%) from portuguese issuers.
Pandemic a further example of an overarching accumulation risk is a major pandemic. like other companies in the insurance industry, munich re would be exposed to risks resulting from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk by analysing our overall exposure in detail (scenario an alysis), defining suitable limits, and optimising our risk structure by transferring risk, e.g. through the launch of the nathan pandemic bond programme.
Whilst we are in a position to adequately assess the known risks in our portfolio on the basis of current knowledge, scientific research into climate change is complex and the political and regulatory environment in which we operate is developing dynamically, so that we must remain vigilant with regard to the identification and representation of new and emerging risks. We adopt a multidisciplinary approach, using and combining the pertinent experience and expertise of our scientists, specialist underwriters, lawyers, economists, sociologists and actuaries as appropriate for the risk situation.
management report // risK report munich re group annual report 2010 climate change represents one of the greatest risks of change for the insurance industry. in munich re’s corporate climate centre, we are developing a holistic strategic approach to analysing and assessing these risks. the findings are made available to all business areas and our asset-liability management function. however, changes in the physical environment and new regulations resulting from climate change also open up many business opportunities. applying the knowledge we have accumulated over decades, we exploit these opportunities – for example, through new insurance products for renewable energy technologies.
We identify trends and faint signals in many ways, including systematic trend research, using munich re’s knowledge management, and regular structured discussions in our “emerging risks think tank”. to ensure that emerging risks are understood, a group of experts reports on the issues involved from various perspectives. they derive conceiv able scenarios and analyse their possible impact on munich re, looking at interdependencies between different risks and other aspects related directly or indirectly to emerging risks. cooperation with external partners complements our internal earlywarning system. one example is our collaboration with the us rand institute for civil Justice on the issue of class actions.
as a consequence of increasing global dependencies and the rapid spread of technological innovations, events with impacts difficult to identify using traditional scenario processes are occurring with greater frequency. one example was the eruption of the eyjafjallajökull volcano in 2010. the disruption of air traffic across much of europe led not only to travel restrictions for individuals but also to airfreight delays and hence business interruptions in manufacturing. such chains of events will take on greater importance in future. at munich re, we adopt a system-based approach to analyse dependencies in complex risks, with the aim of making potential loss cascades more transparent and reducing the risk of inappropriate simplifications in our scenario building.
munich re entities have also been named together with other insurers and brokers as defendants in a number of psa-related class actions by us policyholders. munich re will continue to defend itself against the accusations in the appropriate manner.
management report // risK report munich re group annual report 2010 in 2004, the us securities and exchange commission (sec) and the office of the new York state attorney general initiated inquiries into “certain loss mitigation insurance products”. subsequently, a number of other authorities in the usa and elsewhere made both formal and informal requests for similar information from munich re and some of its subsidiaries. munich re has fully cooperated with these inquiries.
after the federal legislative procedure for the us Fairness in asbestos injury resolution act foundered in February 2006, several us states adopted legislation initiatives (tort reform) which may have a positive effect on the settling of asbestos claims. Following revelations about often questionable asbestos-related disease diagnoses and the resultant lawsuits, a number of investigation committees are at work. similar questionable practices that have come to light in silicosis lawsuits are also important for us asbestos claims. these developments indicate that the legal situation in the usa is moving in a positive direction. however, it is too early to say whether and to what extent this will have favourable implications for future loss development in the insurance industry, particularly as plaintiff attorneys are trying hard to repel the tort reform initiatives. We are currently still being affected by late-reported claims – in some cases for high amounts – for asbestos-related diseases and similar liability complexes. though the total number of asbestos claims is declining, the number of severe cases of mesothelioma and other types of cancer has remained relatively constant in recent years.
Summary in accordance with the prescribed processes, munich re’s Board committees explicitly defined the risk appetite for significant risk categories in the year under review and quantified it by means of specific figures. We determined and documented the risk appetite across the group hierarchy and communicated it throughout munich re. During the whole of 2010, risk exposures were regularly quantified and compared with the risk appetite. We assess munich re’s risk situation as manageable and under control.
Economic environment economic development is likely to be somewhat less dynamic in 2011. although private consumer spending and investment have increased recently, doubts remain as to whether they can fully replace expiring government support measures. We therefore expect slightly weaker growth for the global economy than in the previous year, and this is likely to have a dampening effect on demand for insurance. it may also be assumed that the continued uncertainties regarding the stability of the financial system and public finances will determine the investment environment.
// reinsurance continues to offer promise for the future // ergo drives sales with new brand strategy // expected return on investment of below 4% // unchanged long-term result target of 15% on risk-adjusted capital (rorac)
after tax over the cycle // consolidated result of around €2.4bn envisaged for 2011 // continuation of share buy-back with half the volume // proposed dividend for 2010: €6.25 per share prospects
management report // prospects munich re group annual report 2010 in the emerging economies, particularly china and india, growth should again be much stronger than in the industrial countries, some of which are likely to be adversely impacted by depressed private consumption owing to high unemployment and an elevated level of household debt. on top of this, many countries are planning to cut public expenditure in order to consolidate their budgets. We are proceeding on the assumption that inflation will remain low in most industrial countries and only reach a higher level in a few emerging economies.
While growth momentum should remain high in many emerging economies, including the insurance sector, most developed markets are expected to see only moderate expansion in premium income. in property-casualty primary insurance, we expect premium development to be subdued. Demand for life insurance cover should remain stable: while the need for private provision is huge, growth in disposable incomes and the readiness to purchase suitable products is at best sluggish. however, other lines such as credit and surety business should benefit from the stable economy and show lower losses.
in property-casualty reinsurance, which traditionally moves more in cycles, munich re will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions.
the insurance of facilities for generating renewable energy presents us with growing business potential in property-casualty reinsurance. By 2020, for example, we anticipate premium volume in the mid three-digit million euro range for the german insurance market, or more than double the current figure. munich re offers its clients suit able products, ranging from traditional coverage for industrial facilities to complex solutions such as performance guarantee covers for technical innovations enabling capital providers to reduce their investment risks.
in the health insurance segment, we are aiming for an increase in gross premiums written to just under €6bn. We should be able to achieve premium growth in comprehensive health insurance and supplementary health cover. health primary insurance business written outside germany is reported in the munich health segment.
management report // prospects munich re group annual report 2010 the result for the primary insurance segment is likely to continue developing favour­ ably in 2011 and show growth compared with the previous year. For the ergo sub­ group, we project a figure of between €450m and €550m.
We are thus focusing in all the markets in which we are present on the sustained profit­ ability of the segment and on business models that are attractive in the long term. polit­ ical conditions permitting, we intend to apply the successful business model of the joint venture Daman, which we partnered with the government of abu Dhabi, to neigh­ bouring regions as well. in recent years, we have also posted very satisfying growth in health reinsurance business from large­volume multi­year capital substitute solutions. We constantly subject our portfolio to close scrutiny in order to consolidate and, where necessary, to improve its earnings strength.
Gross premiums written by munich health are likely to amount to around €6bn in 2011.
For 2011 and 2012, we are expecting only a relatively small positive result contribution from this young field of business, due to ongoing start­up investments in several units and adverse effects from the recession.
We are responding to the economic uncertainties by continuing to strongly diversify our portfolio. this enables us to keep our options open in various scenarios and to share in capital market developments. to this end, we propose to moderately increase in our equities and commodities portfolio. We will also continue to prudently expand our credit exposure. By contrast, we will marginally reduce our large portfolio of govern­ ment bonds.
in the area of alternative investments, we intend to invest more strongly in renewable energy and new technologies, given appropriate profitability prospects. as at 1 January 2011, we acquired 100% of the voting shares in 11 wind park companies for a provisional purchase price of around €40m.
We would like to maintain our real estate portfolio at the same level in 2011. our cur­ rent real estate investments serve as a stabilising element in the portfolio. to diversify even more strongly, we are considering investing in real estate in emerging markets and in projects with a high running yield.
For the group as a whole, we are proceeding on the assumption that gross premiums written for 2011 will be in the range of €46–48bn (total consolidated premium), provided that exchange rates remain stable compared with those at the end of 2010.
after concluding the 2009/2010 buy-back programme as planned, we launched a share buy-back programme for 2010/2011 in may 2010. By the next annual general meeting on 20 april 2011, we intend to buy back shares for a maximum total purchase price of €1bn. By 25 February 2011, we had bought back a total of 7.7 million munich re shares with a volume of €844m. in the following 12-month period, up to the annual general meeting in 2012, a buy-back volume of up to €500m is planned. the full execution of these share buy-back programmes remains subject to developments in the capital markets and the general economic environment.
Notes to the consolidated balance sheet – Equity and liabilities 19 // subordinated liabilities 211 20 // unearned premiums 212 21 // Provision for future policy benefits 213 22 // Provision for outstanding claims 214 23 // other technical provisions 218 24 // Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 219 25 // other accrued liabilities 220 26 // Bonds and notes issued 224 27 // deposits retained on ceded business 224 28 // other liabilities 224
List of shareholdings as at 31 December 2010 in accordance with Section 313 para. 2 of the German Commercial Code 269 munich Re GRouP annual RePoRt 2010
consolidated financial statements // consolidated Balance sheet munich Re GRouP annual RePoRt 2010
B. Investments i. land and buildings, including buildings on third-party land (3) 4,247 4,086 161 3.9 thereof: investment property held for sale (17) – 90 –90 –100.0 ii. investments in affiliated companies and associates (4) 1,091 1,001 90 9.0 thereof: associates accounted for using the equity method 870 796 74 9.3 iV. other securities 3. at fair value through profit or loss (9) 1,612 1,613 –1 –0.1
V. deposits retained on assumed reinsurance (10) 6,902 6,798 104 1.5
C. Investments for the benefit of life insurance policyholders who bear the investment risk 4,957 4,026 931 23.1 D. Ceded share of technical provisions (12) 5,490 4,983 507 10.2 E. Receivables i. current tax receivables 492 700 –208 –29.7
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (24) 5,210 4,117 1,093 26.5
F. Liabilities i. Bonds and notes issued (26) 290 276 14 5.1 ii. deposits retained on ceded business (27) 2,762 2,176 586 26.9 iii. current tax liabilities 3,253 3,134 119 3.8 iV. other liabilities (28) 13,103 10,114 2,989 29.6
Total equity and liabilities 236,358 223,412 12,946 5.8 1 Previous year’s figures adjusted owing to recognition of munich health as a separate segment (see “Recognition and measurement”).
Gains (losses) recognised in equity 645 –51 included in the income statement – –
munich Re GRouP annual RePoRt 2010 consolidated financial statements // GRouP statement of chanGes in equity
income and expense recognised directly in equity – – –73 – 490 –51 –2 – 7 371 currency translation – – – – – –51 – – – –51 unrealised gains and losses on investments – – – – 477 – – – 38 515 change resulting from valuation at equity – – 2 – 13 – – – – 15 change resulting from cash flow hedges – – – – – – –2 – – –2 actuarial gains and losses on defined benefit plans – – –72 – – – – – –6 –78 other changes – – –3 – – – – – –25 –28 total recognised income and expense – – –73 – 490 –51 –2 2,521 50 2,935 change in shareholdings in subsidiaries – – –198 – – – – – –164 –362 change in consolidated group – – 12 – – – – – 61 73 dividend – – – – – – – –1,073 –3 –1,076 share buy-backs – – – –399 – – – – – –399 Retirement of own shares – – –1,000 1,000 – – – – – – Status at 31.12.2009 588 6,800 11,247 –580 2,717 –1,245 1 2,521 229 22,278 allocation to retained earnings – – 1,449 – – – – –1,449 – – consolidated result – – – – – – – 2,422 8 2,430 income and expense recognised directly in equity – – –93 – 133 635 –3 – 22 694 unrealised gains and losses on investments – – – – 131 – – – –1 130 change resulting from valuation at equity – – –10 – 2 – – – – –8 change resulting from cash flow hedges – – – – – – –3 – – –3 actuarial gains and losses on defined benefit plans – – –52 – – – – – 2 –50 other changes – – –31 – – – – – 11 –20 total recognised income and expense – – –93 – 133 635 –3 2,422 30 3,124 change in shareholdings in subsidiaries – – –20 – – – – – –10 –30 change in consolidated group – – – – – – – – – – dividend – – – – – – – –1,072 –4 –1,076 share buy-backs – – – –1,268 – – – – – –1,268 Retirement of own shares – – –1,002 1,002 – – – – – –
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 art icles 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 (€). amounts are rounded to million euros, with figures in brackets referring to the previous year.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 consolidation
special purpose entities, e.g. special funds, are consolidated in munich Re’s financial statements in accordance with sic 12 if, from an economic point of view, they are controlled by munich Re.
on 1 november 2010, through its subsidiary sterling life insurance company, Bellingham, Washington, munich Re acquired certain assets and assumed certain risks of guardian healthcare inc. (guardian), greenville, south carolina. guardian offers various government-sponsored health plans throughout south carolina. the purchase price of us$ 4m (€2.9m) in cash was fully financed from munich Re’s own resources. this transaction provides sterling life insurance company, Bellingham, Washington, with an established network of medical service providers and an extended client base.
on 24 november 2010, through its subsidiary euRopÄische Reiseversicherung ag (eRV), munich Re acquired, for a price of €2.5m, a further 75.0% in the subsidiary cJsic “european travel insurance”, moscow, which had hitherto been accounted for using the equity method. munich Re now holds 99.95% of the subsidiary’s shares.
furthermore, on 25 november 2010, euRopÄische Reiseversicherung ag, munich, increased its shares in geschlossene aktiengesellschaft europäische Reiseversicherung, Kiev, which had hitherto also been accounted for using the equity method, by 70.1% for a price of €0.9m. munich Re now holds 95.22% of the subsidiary’s shares.
the aim of the two last-mentioned acquisitions is to expand eRV’s travel insurance business in Russia and the ukraine.
Consolidation principles the annual financial statements of the consolidated subsidiaries and special purpose entities are subject to uniform accounting policies. the balance sheet date of the consolidated companies is generally 31 december. some of the special funds have other balance sheet dates. these funds are consolidated on the basis of interim accounts as at 31 december.
Use of judgements and estimates in recognition and measurement in the course of preparing the consolidated financial statements, we have to use our judgement in applying accounting policies and to make estimates and assumptions that affect the year-end items shown in the consolidated balance sheet, the consolidated income statement and the disclosures on contingent assets and liabilities.
our internal processes are geared to determining amounts as accurately as possible, taking into account all the relevant information. the basis for determining amounts is management’s best knowledge regarding the items concerned at the reporting date. nevertheless, it is in the nature of these items that estimates may have to be adjusted in the course of time to take account of new knowledge.
Changes in accounting policies application of the recognition, measurement and disclosure methods follows the principle of consistency.
in the financial year 2010, the following new or amended ifRss had to be applied for the first time: the change to IFRS 2 (rev. 06/2009), Share-based Payment, clarifies the recognition of cash-settled share-based payment transactions. the new rules mainly concern the question of how individual subsidiaries in a group recognise (cash-settled) share-based payment agreements in their own financial statements. under these agreements, the subsidiary receives goods or services from employees or suppliers which the parent or another group company pays for. the new rules have had no implications for munich Re.
the change in IAS 39 (rev. 07/2008), Financial Instruments: Recognition and Measurement, Eligible Hedged Items, provides guidance on designating a portion of cash flows or a risk as a hedged item and the extent to which inflation risks may be designated hedged items. the new rules have no impact for munich Re.
in december 2010, the iasB published guidelines on the preparation of management commentaries. this publication is not an ifRs but a non-mandatory conceptual framework for preparing reports that supplement and explain the ifRs financial statements. the guidelines may be applied voluntarily as from december 2010. the regulations for preparing a management report under the german commercial code are comparable to those of this document. as munich Re is obliged to prepare a management report on the basis of section 315a para. 1 of the german commercial code, its management reporting is already comparable to that required by the guidelines.
in september 2010, the iasB also concluded the first phase of its project to revise the conceptual framework for preparing and presenting financial statements, publishing the new chapter 1 “objective of general purpose financial Reporting” and chapter 3 “Qualitative characteristics of useful financial information” within the existing conceptual framework. the objective of the overall project is to create a sound foundation for future ifRss that are principles-based and internally consistent . With their publication, the revised chapters thus constitute the valid basis for reporting in accordance with ifRs.
the amendments published as part of the iasB’s annual improvement process in may 2010 concern 11 ifRss and the interpretation ifRic 13. With the exception of the change to ias 34, interim financial Reporting, these are not significant for munich Re. some of the amendments are to be applied for financial years beginning on or after 1 July 2010.
the amendments to ifRs 7 (rev.10/2010), financial instruments: disclosures, improving disclosures about financial instruments, contain more extensive disclosure requirements regarding the transfer of financial assets, with a view to making more transparent the influence of such transactions on the entity’s risk exposure and hence its financial situation.
the amendments to ias 12 (rev. 12/2010), taxes on income, deferred tax: Recovery of underlying assets, addresses the issue that the measurement of deferred taxes depends on whether the carrying amount of an asset is expected to be recovered through use or sale. in practice, this is often difficult to assess. the amendment provides a solution through the introduction of a refutable presumption that recovery of the carrying amount will normally be through sale.
the other intangible assets mainly comprise acquired insurance portfolios and purchased and self-developed software. 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 software is carried at cost less straight-line amortisation. the useful life assumed is generally three to five years, and in exceptional cases up to ten years. the other intangible assets are tested for impairment at each balance sheet date and write-downs made if required. Write-downs of acquired insurance portfolios are recognised under operating expenses. 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 non- operating expenses”. Write-ups of software and other intangible assets are allocated to “other non-operating income”.
Fixed-interest securities held to maturity are measured at amortised cost in accordance with the effective interest method.
Securities at fair value through profit or loss comprise securities held for trading and securities designated as at fair value through profit or loss. securities held for trading are all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments with positive fair values which we have acquired for hedging purposes but which do not meet the requirements of ias 39 for hedge accounting, and the positive fair values of the derivative components of vari able annuities. securities designated as at fair value through profit or loss comprise structured securities. this designation may only be made at the time of acquisition; reallocation to this category in later periods is not possible.
Repurchase agreements and securities lending under repurchase agreements we, as the lender, acquire securities with the obligation to sell them back to the borrower at a later date. as the risks and rewards from the securities remain with the borrower, they are not posted as such in our accounts but are shown as a receivable from the borrower under “other investments, deposits with banks”. interest income from these transactions is recognised in the investment result.
the allocation reflects which of the fair values derive from transactions in the market and where valuation is based on models because market transactions are lacking.
in the case of level 1, valuation is based on unadjusted quoted prices in active markets for identical financial assets which munich Re can refer to at the balance sheet date. a market is deemed active if transactions take place with sufficient frequency and in sufficient quantity for price information to be available on an ongoing basis. since a quoted price in an active market is the most reliable indicator of fair value, this should always be used if available. the financial instruments we have allocated to this level mainly comprise equities, investment funds and fixed-interest securities (bearer bonds) for which either a stock market price is available or prices are provided by a price quoter on the basis of actual market transactions. We have also allocated derivatives traded on the stock market to level 1.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 ments we have allocated to this level mainly comprise borrowers’ note loans, pfandbriefs, subordinated securities and derivatives not traded on the stock market.
Net investment result the net investment result comprises regular income, income from write-ups, gains and losses on the disposal of investments, other income, write-downs of investments, management expenses, interest charges and other expenses. Regular income and expenses from investments not measured at fair value through profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are deducted from or added to the acquisition costs, with impact on profit or loss, until maturity.
Impairment Regularly, at each balance sheet date, we assess whether there is any substantial object ive evidence of impairment in a financial asset or group of financial assets. in the case of all fixed-interest securities held to maturity or available for sale, as well as all non-fixed-interest securities, impairments in value – in contrast to temporary diminutions – are recognised as an expense in the income statement. ias 39.59 contains a list of factors providing substantial objective evidence of impairment of such financial assets. in addition, ias 39.61 states that for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. these rules are given more concrete form by means of internal guidelines. for equities quoted on the stock exchange, we assume a significant decline in fair value if the market value at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. in the case of fixed-interest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.