Large and very large losses (net) €m 1,799 5,048 2,228 1,157 1,507
To our shareholders 001 Letter to shareholders 003 Notable events in 2012 007 The Board of Management 008 Munich Re shares 010 Our strategy 015
Corporate governance 019 Report of the Supervisory Board 021 Corporate governance report 026
Management report 029 Munich Re 031 Business environment 064 Business performance 069 Financial position 099 Other success factors 107 Risk report 115 Opportunities report 137
General information 289 Glossary 290 Index of key terms 298 Important addresses 299 Imprint/Service Inside back cover
Letter to shareholders 003 Notable events in 2012 007 The Board of Management 008 Munich Re shares 010 Our strategy 015
We live in a world that has become more uncertain and thus less predictable, less calculable. This makes our job as pro­ viders of insurance and reinsurance more challenging, but at the same time it increases demand for insurance solutions.
Allow me to elaborate on these thoughts a little. What uncer­ tainty am I referring to, and where and how does this affect us?
It is the core business of insurers to assume risks from their clients and give them security – for us, therefore, uncertainty means not only risk but also opportunity.
Our task of assuming and covering risks has not been made any easier by the challenges I have described. It is imperative for our business that we understand the risks we take onto our balance sheet in insurance or reinsurance, and that we identify new trends in good time and respond appropriately. The uncer­ tainty in the financial markets also has a significant impact on the assets side of our balance sheet, on our investments. How do we cope with this high measure of uncertainty?
On this note, I am glad to report that against this background we achieved a very pleasing result in the past financial year, with a profit of €3.2bn. Besides our rigorous risk management, the foundation of this result was our disciplined underwriting policy and the realisation of profitable business opportunities, including in particular the provision of innovative solutions for
Hartford Steam Boiler (HSB) announces the launch of con­ tractors errors and omissions (E&O) coverage targeted spe­ cifically at small “artisan­type” contractors. Although small contracting projects face many of the same risks and liabilities as larger ones, contractors E&O coverage has not been widely and affordably available to small businesses.
ERGO enters the Chinese insurance market, launching a joint venture together with a local partner. The joint­venture company will mainly offer life insurance products for private clients in the economically attractive province of Shan­ dong.
MEAG invests in the German natural gas grid. The invest­ ment is part of the infrastruc­ tural investment programme with which Munich Re plans to place up to €1.5bn in this seg­ ment over the coming years.
Munich Re signs the “Principles for Sustainable Insurance” (PSI) of the United Nations Environmental Programme Finance Initiative. The PSI are intended to serve insurers as a guideline for considering sustainability criteria in con­ ducting their core business. As one of the initial signa­ tories, Munich Re commits itself to applying the principles consistently in planning and implementing its strategy of sustainable, long­term value creation.
ERGO signs a joint­venture agreement with the Avantha Group in India. The new com­ pany will offer life insurance products for private clients. ERGO thus strengthens its presence in the emerging Asian markets.
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
Nikolaus von Bomhard Chairman of the Board of Management, Chairman of the Group Committee Group Development; Group Investments; Group Communications; Group Compliance; Group Audit
Jörg Schneider Group Reporting; Group Controlling; Corporate Finance Mergers & Acquisitions; Integrated Risk Management; Group Legal; Group Taxation; Investor and Rating Agency Relations
Wolfgang Strassl Board member responsible for personnel and welfare matters, within the meaning of Section 33 of the German Co-Determination Act HealthCare; Human Resources
Compared with many other sectors, the insurance industry again showed itself to be robust and stable in the year under review: the DJ EURO STOXX Insurance performed significantly better than the DJ Euro STOXX 600 and even surpassed the DJ Euro STOXX Banks. Although falling interest rates increasingly exerted pressure on the run­ ning yield from investments, insurers were still able to realise substantial gains on disposals. Moreover, despite Windstorm Sandy, their overall bill from major losses was comparatively low.
Within the insurance sector, the persistently low interest­rate environment posed con­ siderable challenges, particularly for life primary insurers, which have to meet interest­ rate guarantees. By contrast, reinsurers benefited in 2012 from much lower expendi­ ture for natural catastrophes than in the previous year and from the lower interest­rate sensitivity of their risk and profitability profile. Given the reinsurance industry’s strong capitalisation, the prospect of rising dividends played a significant role in investment decisions. As a consequence, reinsurers’ stocks increased strongly in price.
— Financial markets impacted by sovereign debt and banking crisis — Munich Re shares prove an attractive investment: rise in share price of 43.5% and return of 51.6% including the dividend — Our shares clearly outperform the DAX 30 and the DJ Euro STOXX
Insurance — Board of Management and Supervisory Board to propose payment of an increased dividend of €7.00 per share at the Annual General Meeting
Against this background, Munich Re shares proved themselves to be a very attractive investment. We benefited primarily from the pleasing development of our core oper­ ational business. The exceptional accumulation of natural catastrophes in the previous year led to rising rates in property­casualty reinsurance. Additional positive factors were slightly below­average costs for major losses, and an investment result that was good in the light of the low interest­rate environment, thanks to our prudent investment decisions and active duration management. We succeeded in surpassing our original result target for the year by the end of the third quarter and were therefore able to announce the prospect of a dividend increase to our shareholders at an early stage.
Munich Re shares are no­par­value registered shares. First admitted for trading on the stock exchange in Munich on 21 March 1888, they are today traded on all the German stock exchanges, meanwhile almost exclusively on the Xetra electronic trading plat­ form.
The average daily turnover of Munich Re shares in Xetra and floor trading on the Ger­ man stock exchanges was €90.0m in the year under review, putting our shares in 14th place among the DAX stocks at year­end 2012. In terms of free­float market capitalisa­ tion, we ranked 13th with around €21bn.
DJ EURO STOXX 50 1.4 DJ EURO STOXX Insurance 12.1 MSCI EURO 1.2 FTSE EUROTOP 100 0.6 DJ Sustainability World 0.3
Share capital €m 587.7 587.7 Number of shares at 31 December m 179.3 179.3
Year­end closing price € 136.00 94.78 Annual performance (excluding dividend) % 43.5 –16.5 Beta 250 relative to DAX (daily, raw) % 0.9 0.9 Market capitalisation at 31 December €bn 24.4 17.0 Market value/equity at 31 December1 0.9 0.7 Average trading volume ’000 796 1,157 Earnings per share € 17.98 3.94 Dividend per share € 7.00 6.25 Dividend yield at 31 December % 5.2 6.6 Dividend payout (status at 26 Feb. 2013) €bn 1.3 1.1 1 Including minority interests.
Our largest shareholder at the end of 2012 continued to be Warren E. Buffett who, according to the voting rights notification of October 2010 and the information pub­ lished in the annual report of Berkshire Hathaway Inc., holds a stake of around 11.2% in Munich Reinsurance Company via several companies in his group, Berkshire Hathaway Inc., OBH Inc., National Indemnity Co. Warren E. Buffett and the aforementioned com­ panies in his group also informed us in October 2010 that the objective of their invest­ ment is to generate trading profits, not to implement strategic objectives. They do not seek to exercise an influence on the composition of Munich Re’s management or super­ visory boards or to fundamentally change the Company’s capital structure. Second­ largest shareholder is asset manager BlackRock with around 6.2%, followed by the People’s Republic of China, represented by the People’s Bank of China/SAFE, China, with around 3%.
Our corporate strategy geared to a sustained increase in value is accompanied by ongoing and open communication with all capital market participants. The main task of Investor and Rating Agency Relations at Munich Re is to cultivate contact with existing shareholders and attract new ones. At the same time, we ensure that due account is taken of our investors’ opinions and preferences in internal decision-making processes. We chiefly use roadshows and investor conferences to initiate and intensify dialogue with institutional investors, our main focus being on financial centres in Europe and the USA. We regularly supplement our investor relations activities with special events. Last September, for example, we gave a presentation on the divisional units of our Special and Financial Risks Division at an investor briefing in London.
For many years, Munich Re has been awarded consistently excellent ratings by the leading rating agencies. In the financial year 2012, the outlook for all Munich Re’s ratings remained stable at a high level.
The risks that we cover differ greatly in nature. Their partial non­correlation in terms of potential loss occurrence enables us to balance the risks over time, across regions and across fields of business – a diversification benefit that is key for our success. The size and mix of our risk portfolio mean we can cover comparatively more risks with the risk capital available.
Our risk management considers much more than just the risks from our insurance business. It includes investments, for example, and also models interactions between the different risks. It is firmly embedded Group­wide and actively practised. Our selection of investments takes into account the due dates, the currencies and the inflation intensity of our underwriting liabilities, thus reducing reinvestment, currency and inflation risks. With our active capital management, we ensure that Munich Re’s capitalisation is always appropriate. Our economic equity, calculated on a market­ consistent basis, covers the capital requirement derived from our internal risk model and takes into account the stipulations of regulators and rating agencies. Excess capital is returned to our shareholders in the form of dividends and share buy­backs.
An important success factor is the constant improvement of the value­based methods and processes we use to write, control and manage our business. Our most important performance indicator in this context is return on risk­adjusted capital (RORAC), which relates the profit earned to the required risk capital, allowing the management of all activities in the Group to be geared to economic value added.
New, previously unknown risks pose a particular challenge. We have to identify and evaluate these as swiftly as possible, with a view to maintaining our competitive advan­ tage. In so doing, we aim to expand the boundaries of insurability, correctly structure the conditions, and calculate technically adequate prices. Essential prerequisites for this are our broad risk knowledge, our experience in the markets, and intensive dia­ logue with our clients. With new insurance solutions, we aim to generate profitable growth, clearly set ourselves apart from the competition, and win our clients’ loyalty.
ERGO gears itself consistently to the needs and wants of its clients, and aims to con­ stantly improve through close communication with them. This encompasses needs­ oriented, customer­centric sales advice, clear and comprehensible communication, innovative services and rapid assistance in the event of a loss. In combination with its solid financial strength, this makes ERGO and its specialists reliable partners for insur­ ance and provision product needs.
Munich Re operates in virtually all classes of reinsurance. Our products range from trad itional reinsurance, extensive services and consultancy to complex individual solu­ tions for assuming risks and optimising our clients’ capital. In our business, we pursue an underwriting policy consistently based on risk­commensurate prices, terms and conditions. The transfer of risks to the capital markets is another service we offer to clients.
Our extensive knowledge in identifying and assessing risks and in structuring insur­ ance solutions enables us to create value in a highly dynamic and global environment and to stand out from our competitors. Thanks to our capital management expertise, we are also a sought­after partner for products geared to our clients’ balance­sheet, solvency and rating­capital requirements, as well as their risk models. Our reputation in the market and our global, client­focused set­up give us quick and direct access to all clients.
The common aim of all our activities is to create long­term value for our clients, share­ holders, employees and society as a whole. For us, a forward­looking and responsible approach is axiomatic. As one of the world’s leading insurance groups, we give our clients the promise that we will always fulfil the obligations we assume under insur­ ance contracts.
In the year under review, the Supervisory Board fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association and rules of procedure. We constantly and carefully monitored the management activities of the Board of Management, providing advice to the best of our knowledge and ability. Inspection measures in accordance with Section 111 para. 2 sen­ tence 1 of the German Stock Companies Act were at no time required.
In the year under review, the full Supervisory Board held six meetings, at which it dealt in detail with the orientation and development of business and matters concerning the Board of Management. We conferred with the Board of Man­ agement on all questions of importance for Munich Re, especially strategy, corporate planning, risk situation, risk management and compliance. We examined the information presented by the Board of Management and – where necessary – critically questioned it. The Board of Management participated in the meetings insofar as the topics discussed did not require its absence.
Between meetings, the Board of Management informed us promptly about important issues in the Group, including the first loss estimate for the Costa Concordia accident, a capital management transaction, and developments with regard to the incidents involving ERGO published in the media.
The Chairman of the Supervisory Board kept in regular contact with the Chair­ man of the Board of Management between meetings, the focus being on individual questions of strategic development and risk management, as well as Munich Re’s current business situation. Besides this, he was kept informed by the Chairman of the Board of Management about important events in the Group. Also between meetings, the Chairman of the Audit Committee, Professor Dr. Henning Kagermann, conferred with Dr. Jörg Schneider, member of the Board of Management responsible for Group reporting, about significant devel­ opments. In addition, the shareholder representatives and the employee rep­ resentatives regularly met separately before the meetings for separate discussions in which they considered important topics with the Chairman of the Board of Management.
The meeting in March 2012 focused on the Company and Group financial statements for 2011 and the motions for resolution by the 2012 Annual General Meeting. We gave details of this in our report for the financial year 2011. Besides this, we resolved to extend the appointments of two members of the Board of Management, including the Chairman. As a further point, we adopted resolutions to adapt pensions to take account of changes in the statutory age limits for company pension schemes. We also estab­ lished the individual objectives for the Board members’ variable remuneration compon­ ents for 2012 and took regular reports on compliance and anti­fraud management. And finally, we appointed the external auditors for the 2012 financial year.
Work of the committees The main tasks of the five committees established by the Supervisory Board include preparing items to be dealt with and resolved by the full Supervisory Board. At each Supervisory Board meeting, the Chairs of the committees reported to the full Board about the matters discussed by the committees and the outcome of their considerations.
The Audit Committee held six meetings in the period under review, two of which were attended by the external auditor. The committee closely considered 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 2011. It also concerned itself in detail with the quarterly financial reports in 2012 and – in the presence of the auditor – with the half­ year financial report for 2012.
The Head of Group Audit provided information on the result of the 2011 audits and the audit planning for 2012. As usual, the Compliance Officer also reported to the com­ mittee. The Audit Committee regularly dealt with compliance topics beyond this. In particular, it continued to monitor the measures taken in response to the allegations levelled against ERGO in the media and considered possible consequences in connec­ tion with a fraud case in the reinsurance business. The development of embedded values in life reinsurance business and in life and health primary insurance business was also an item of discussion.
Details of this can be found in the corporate governance report on page 26 f.
In November 2012, the Board of Management and Supervisory Board submitted their compulsory annual declaration of conformity with all the recommendations of the German Corporate Governance Code as per Section 161 of the German Stock Com­ panies Act and their intention to continue complying with it in future.
To fill the vacancy on the Supervisory Board, the Registration Court appointed Profes­ sor Dr. Dr. Ann­Kristin Achleitner as a new member of the Board on 3 January 2013.
The full Supervisory Board also checked the Company and Group financial statements and management reports and the proposal of the Board of Management for appropri­ ation of the net retained profits. On the basis of this examination and having heard the auditor’s report, the Supervisory Board had no objections and agreed to the outcome of the external audit. It approved the Company and Group financial statements on 11 March 2013. The financial statements were thus adopted. Having carefully weighed all the relevant aspects, the Supervisory Board agreed with the proposal of the Board of Management for appropriation of the net retained profits.
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. Beyond this, we have our own Munich Re Code of Conduct specifying high-level ethical and legal requirements that must be met by employees. Further information on Munich Re’s corporate governance can be obtained from the corporate governance statement. In accordance with Section 289a of the German Commercial Code, the corporate governance statement is part of Munich Reinsurance Company’s management report.
The corporate governance report and the corporate governance statement can also be found on our website at www.munichre.com/cg-en
Corporate governance report 1 In accordance with item 3.10 of the German Corporate Governance Code.
The German Corporate Governance Code contains the main legal rules to be observed by listed German companies. In addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. Every year, Munich Reinsurance Company’s Board of Management and Supervisory Board state how far the Code’s recommendations have been and will be complied with.
The Supervisory Board monitors the Board of Management and gives counsel where appropriate, but it is not authorised to take management action in place of the Board of Management. The Supervisory Board also appoints the external auditor for the Company and Group financial statements and for the half­year financial report.
In compliance with the Articles of Association, the Supervisory Board has 20 members. Half are representatives of the shareholders, elected by the Annual General Meeting. The other half are elected representatives of the Company employees in the European Economic Area (EEA).
The Articles of Association and the co­determination agreement can be viewed at www.munichre.com/cg­en
An overview of the composition of the Supervisory Board can be found on page 42 ff. More details of the Supervisory Board’s work are provided in the cor por­ ate governance statement and the report of the Supervisory Board on page 21 ff.
Objectives of the Supervisory Board for its composition, diversity and independence 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 composition: — The main criteria for selecting future members of the Supervisory Board are sus­ tained corporate profitability, personal abilities, talents, experience (especially of an international nature), independence, professional knowledge and enterprise of the nominated persons.
— The Supervisory Board should have at least 16 independent members within the meaning of item 5.4.2 of the German Corporate Governance Code, including at least eight shareholder representatives. All members of the Supervisory Board should be free of relevant conflicts of interest.
Munich Re 031 Structure 031 Important tools of corporate management 037 Governing bodies of Munich Re 042 Remuneration report 046
Business performance 069 Overview and key figures 069 Reinsurance – Life 072 Reinsurance – Property-casualty 075 Primary insurance – Life 080 Primary insurance – Health 083 Primary insurance – Property-casualty 085 Munich Health 087 Investment performance 090
Financial position 099 Financial strength 099 Analysis of our capital structure 099 Asset-liability management 101 Capital management 101 Information in accordance with Section 315 para. 4 of the German Commercial Code and explanatory report of the Board of Management 101 Group solvency 104 Analysis of the consolidated cash flow statement 105
Other success factors 107 Clients and client relationships 107 Research and development 109 Staff 110 Corporate responsibility 112
Munich Re combines primary insurance and reinsurance under one roof. This enables the Group to cover the entire value chain in the risk market. At the same time, the Group leverages synergies in revenue and costs, whilst reducing the risk-based capital required through better diversification. All reinsurance units operate worldwide under the uniform brand of Munich Re. The ERGO Insurance Group (ERGO) is active in nearly all lines of life, health and property-casualty insurance. Our international health reinsurance business and health primary insurance outside Germany are combined under the Munich Health brand. Munich Re is also active in the field of asset management.
The reinsurance companies of the Group operate globally and in virtually all classes of reinsurance. We offer a full range of products, from traditional reinsurance to innovative solutions for risk assumption. Our companies conduct their business from their re spective headquarters and via a large number of branches, subsidiaries and affiliated com panies. The reinsurance group also includes specialty primary insurers in niche segments, whose business requires special competence in finding appropriate solutions.
All Munich Re’s primary insurance business is combined in ERGO with the exception of health insurance business outside Germany, which is handled by Munich Health. ERGO is active in nearly all lines of life, health and property-casualty insurance. Some 77% of gross premiums written derive from Germany, and 23% from inter national business, mainly from central and eastern European countries. ERGO has also been looking to extend its activities to Asian markets such as India, China and Vietnam.
— Reinsurance offers the full range of products, from traditional reinsurance to innovative solutions
Reinsurance In reinsurance, we operate in life and property-casualty business. Under reinsurance, we include specialised primary insurance activities that are handled by the divisions of the reinsurance organisation, and business from managing general agencies (MGAs).
As reinsurers, we write our business in direct collaboration with primary insurers, but also via brokers and increasingly within the framework of exclusive, strategic partnerships. In addition to traditional reinsurance business, we participate via our operating field Risk Solutions in the primary insurance business of industrial clients, insurance pools, public-private partnerships, and business in specialist niche segments. Our risk expertise and solution-focused approach under the motto “NOT IF, BUT HOW” are key to our success.
The reinsurance divisions Our international life business is written in the Life Division.
Global Clients and North America handles our accounts with major international insurance groups and globally operating Lloyd’s syndicates as well as Bermuda companies. It also pools our know-how in the North American market. It is responsible for our property -casualty subsidiaries there and for international special lines business such as workers’ compensation, marine and our participating interests in the London Lloyd’s market via the Watkins Syndicate and MSF Pritchard.
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 Munich American Reassurance Company, Atlanta, Georgia Munich Re, Tokyo (Life Branch) Munich Re, Toronto (Life Branch) Munich Reinsurance Company of Australasia Limited – New Zealand Branch, Auckland Munich Reinsurance Company of Australasia Ltd., Sydney Munich Re, London (Life Branch)
Germany, Asia Pacific and Africa Great Lakes Australia Branch, Sydney Great Lakes Reinsurance (UK) PLC New Zealand Branch, Auckland Munich Re, Sydney Munich Holdings of Australasia Pty. Ltd., Sydney Munich Mauritius Reinsurance Co. Ltd., Port Louis Munich Re, Kuala Lumpur Munich Re, Kuala Lumpur (Retakaful Branch) Munich Re, Beijing3
Great Lakes Switzerland Branch, Zurich Great Lakes Reinsurance Ireland Branch, Dublin Great Lakes Reinsurance Italia Branch, Milan Munich Re of Malta p.l.c., Ta’ Xbiex3
Primary insurance Munich Re’s second pillar is primary insurance business, which is conducted by ERGO. Via ERGO, we offer products from all the main classes of insurance. These products, in combination with the provision of assistance, other services and individual consultancy, cover the needs of private and corporate clients. ERGO’s many different sales channels include not only its companies’ own successful intermediary organisations and direct selling but also broker relationships and marketing cooperations, such as the extensive collaboration with the UniCredit Group.
American Western Home Insurance Company, Oklahoma City, Oklahoma Beaufort Underwriting Agency Ltd., London First Marine Insurance Company, Amelia, Ohio Global Standards, LLC, Wilmington, Delaware Groves, John & Westrup Limited, London HSB Engineering Insurance Limited, London HSB Group, Inc., Hartford, Connecticut HSB Solomon Associates LLC, Wilmington, Delaware HSB Professional Loss Control, Inc., Tennessee MSP Underwriting Ltd., London Munich Re Capital Limited, London Munich Re Holding Company (UK) Ltd., London Munich Reinsurance America, Inc., Wilmington, Delaware3
Life Bank Austria Creditanstalt Versicherung AG, Vienna ERGO Direkt Lebensversicherung AG, Fürth ERGO Lebensversicherung AG, Hamburg ERGO Insurance N.V., Brussels ERGO Pensionskasse AG, Düsseldorf ERGO Previdenza S.p.A., Milan ERGO Versicherung AG, Vienna Hamburg-Mannheimer Pensionskasse AG, Hamburg Sopockie Towarzystwo Ubezpieczen na Zycie Ergo Hestia Spolka Akcyjna, Sopot VICTORIA Lebensversicherung Aktiengesellschaft, Düsseldorf Vorsorge Lebensversicherung AG, Düsseldorf Vorsorge Luxemburg Lebensversicherung S.A., Munsbach
Health DKV Deutsche Krankenversicherung AG, Cologne ERGO Direkt Krankenversicherung AG, Fürth EUROPÄISCHE Reiseversicherung AG, Munich Europaeiske Rejseforsikring A/S, Copenhagen
Asset management MEAG MUNICH ERGO AssetManagement GmbH (MEAG) handles the investment activities of Munich Re and ERGO. It also offers its comprehensive know-how to external institutional investors and private clients. MEAG is present in Europe, Asia and North America and manages all important asset classes such as fixed-interest securities, equities and real estate.
American Alternative Insurance Corporation, Wilmington, Delaware Great Lakes Reinsurance (UK) Plc., London Munich Re do Brasil Reseguradora S.A., São Paulo Munich Reinsurance Company, Munich Munich Re of Malta p.l.c., Ta’ Xbiex Munich Reinsurance America, Inc., Wilmington, Delaware New Reinsurance Company Ltd., Zurich
The framework for any business activity is our risk strategy, from which we derive various limitations and reporting thresholds. Besides value-based parameters, we observe a range of important additional conditions in managing our business. These conditions may even determine a unit’s short-term orientation in a particular situation. They include rules of local accounting systems, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
— With value-based performance indicators, we ensure an economic valuation and the comparability of alternative initiatives.
At Group level, we measure economic value added using a single metric: economic earnings. In our business segments, however, we use specific performance indicators such as value added (property-casualty insurance, health reinsurance) and Market Consistent Embedded Value (life insurance, the majority of our health primary insurance business), which take into consideration the specific features of the business concerned and factor in the effects of asset-liability management. In property-casualty business and health reinsurance we also take account of the combined ratio.
More details on our risk strategy are available on page 116 ff.
The combined ratio is regularly posted for property-casualty business and health reinsurance. Calculated as the percentage ratio of the sum of expenses for claims and benefits plus operating expenses to earned premiums (all of which net, i.e. after reinsurance cessions), the combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses – with relatively unimportant exceptions such as German fire brigade tax. Operating expenses chiefly comprise the costs arising in the acquisition of new business and for the ongoing administration of insurance contracts.
Information regarding the internal risk model can be found on page 124 ff.
We explain how the additional available economic equity is calculated on page 130 f.
— Another important distinguishing feature relates to the time-lag between premiums being received and claims being paid. The more extended this period is, 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.
Calculation of value added is used in our economic management system for propertycasualty business and health reinsurance. The respective value added (adjusted for random fluctuation for this purpose) is determined as follows: The adjusted result is derived from the income statement and consists primarily of the technical result , the normalised investment result and the remaining non-technical result. It contains value-based adjustments, including the smoothing of expenditure for major losses over time and the recognition of future claims expenses at their present value.
The products of life primary insurance and the bulk of our health primary insurance business are characterised by their long-term nature and the distribution of results over the duration of the policies. For valuing such long-term portfolios, whose performance cannot be reasonably measured on the basis of a single year, we follow the Principles of Market Consistent Embedded Value (MCEV) ©1, the current version of which was published by the European Insurance CFO Forum in October 2009.
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 97% of our life primary insurance and German 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. 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 2012. Assets that are traded on the capital markets are valued on the basis of the market values observed at the valuation date. Currently, we refrain from applying high interest margins, e.g. illiquidity premiums and adjustments in the value of assets, even after the occurrence of capital market upheavals, at least until the definitive stipulations for Solvency II are available, thus opting for a deliberately conservative methodology for valuing our primary insurance portfolio.
The development of the insurance portfolio is modelled by applying the current expectations for biometrics (e.g. mortality and morbidity), lapses and costs. In primary insurance, the participation of policyholders in surplus is modelled according to the current planning and in line with statutory regulations. For the individual companies, the tax rates and calculations used are based on national regulations; in addition, tax loss carryforwards are included in the calculation. Withholding taxes on dividends paid by Group companies are disregarded. The cost of capital includes not only the costs of investment management and taxes, but also the not explicitly modelled risks of the business and, for health primary insurance, the participation of policyholders in surplus from equitymatching investments.
In the notes to the consolidated financial statements, we provide information on the derivative financial instuments on page 204 ff.
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) (Chairman of the Group Committee) Group Development Group Investments Group Communications Group Compliance Group Audit
Dr. rer. pol. Ludger Arnoldussen Germany, Asia Pacific and Africa Services
Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (Chairman since 1 January 2013) Member since 17 April 2002, last re-elected 22 April 2009 Former Chairman of the Board of Management of Volkswagen AG
Herbert Bach Member since 9 December 1994, last re-elected 22 April 2009 Employee of Munich Reinsurance Company
Annika Falkengren Member since 20 April 2011 President and Chief Executive Officer of Skandinaviska Enskilda Banken AB (publ)
Frank Fassin Member since 22 April 2009 Regional Section Head Financial Ser vices, ver.di North Rhine-Westphalia
Dr. jur. Benita Ferrero-Waldner Member since 12 February 2010 Member of the Board of Governors and President of the EU-LAC Foundation
Peter Löscher Member since 22 April 2009 Chairman of the Board of Management of Siemens AG
Wolfgang Mayrhuber Member since 13 December 2002, last re-elected 22 April 2009 Former Chairman of the Board of Management of Deutsche Lufthansa AG
2 Own group company within the meaning of Section 18 of the German Stock Companies Act.
Dr. rer. pol. Thomas Blunck – Global Aerospace Underwriting Managers Ltd. (GAUM), United Kingdom (Chairman) New Reinsurance Company Ltd., Switzerland2 (Chairman)
Dr. jur. Hans-Jürgen Schinzler (Honorary Chairman, Chairman until 31 December 2012)
Dr. jur. Benita Ferrero-Waldner – Gamesa Corporación Tecnológica S.A., Spain Alpine Bau Holding GmbH, Austria
AUA Austrian Airlines, Austria Österreichische Luftverkehrsholding GmbH, Austria Heico Corporation, USA UBS AG, Switzerland
Andrés Ruiz Feger – – Richard Sommer ERGO Versicherungsgruppe AG2 – Dr. phil. Ron Sommer – JSFC Sistema, Russia
(until 30 June 2012) Sistema Shyam Teleservices Ltd., India Tata Consultancy Services Ltd., India
In conformity with the German Corporate Governance Code, we here present the principles of the remuneration system for Munich Reinsurance Company’s Board of Management and the structuring of the individual remuneration components.
The currently valid remuneration system for members of the Board of Management focuses strongly on long-term targets and thus creates a pronounced incentive for sustainable corporate development. No changes were made with effect from 1 January 2012.
Objectives for the business fields – reinsurance – primary insurance – Munich Health Individual objectives 0–200% (fully achieved = 100%)
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
1 For the variable remuneration, the share shown presupposes 100% achievement of the objectives. 2 Target overall direct remuneration comprises basic remuneration plus variable remuneration based on 100% achievement of objectives.
Variable remuneration The variable remuneration component is geared to the overall performance of the Group and defined organisational units and to the personal performance of the individual members of the Board of Management. Its amount depends on the degree to which annually set objectives for annual and multi-year performance are met.
Compliance with the processes laid down for specifying objectives and assessing their achievement is reviewed by the external auditor, who checks the criteria for measuring the envisaged financial objectives and whether their achievement has been assessed in accordance with the guidelines established by the Company. The outcome of this review is rendered transparent for the Supervisory Board.
Details of the assessment bases for the annual performance can be obtained from the following table: 1 The objectives are weighted individually according to the responsibilities of the individual Board members. 2 RORAC is explained on page 37 f. 3 Information on value added is provided on page 39.
4 The indicators are determined on the basis of Market Consistent Embedded Value (MCEV) Principles. A detailed presentation of MCEV, with information on the parameters “value of new business” and “change in value of in-force business” (including “assumption changes” and “experience variances” as components of operating embedded value earnings), is provided in the Market Consistent Embedded Value Report on Munich Re’s website.
Category of objective Share1 Assessment basis Parameters Collective contribution 35%–70% to corporate success Group objective Derived from key performance indicators Return on risk-adjusted capital (RORAC2) in external reporting and other important portfolio and performance data Company objective Value-based economic performance Value added3
Individual objectives Personal objectives per Board member Special focal points such as – Pricing and cycle management – Client management – Costs
Variable remuneration based on multi-year performance For the multi-year performance remuneration component, three-year targets based on the financial results of the reinsurance, Munich Health and primary insurance segments and on individual objectives are fixed every year. 70% of the overall target amount for variable remuneration can be earned in the event of full achievement (= 100%) of the objectives.
Full and pro-rata calculation of the variable remuneration for annual and multi-year performance The basis for the full and pro-rata calculation of the variable remuneration is the first year. Only the full “eligible” months in this year are taken into account (pro rata temporis ). In the case of retirement, occupational disability, death or premature departure from the Company for other reasons, the rules for the full and pro-rata calculation apply.
Munich Health Value-based economic performance Value added2 indicator Individual contribution to 25% corporate success Individual objectives Personal objectives per Board member Special focal points such as (three-year period) – Staff development, including diversity – Strategy development – Sustainable development, social tasks 1 The objectives are weighted individually according to the responsibilities of the individual Board members. 2 Information on value added is provided on page 39. 3 The indicators are determined on the basis of Market Consistent Embedded Value (MCEV) Principles. A detailed presentation of MCEV, with information on the parameters “value of new business” and “change in value of in-force business” (including “assumption changes” and “experience variances” as components of operating embedded value earnings), is provided in the Market Consistent Embedded Value Report on Munich Re’s website.
Share-based remuneration agreements in force during the reporting period Long-Term Incentive Plan This remuneration component, with a long-term perspective, is linked to the sustained appreciation of Munich Re’s share price. The Long-Term Incentive Plan, launched each year as from 1999, was set up for the last time in 2009 for members of the Board of Management and in 2010 for other eligible participants. The participants were granted a certain number of stock appreciation rights. These can only be exercised if, after a two-year vesting period, Munich Re’s share price has risen by at least 20% since inception of the plan and the shares have outperformed the EURO STOXX 50 at least twice over a three-month period during the term of the plan.
All in all, the remuneration system for members of the Board of Management was in conformity with the recommendations of the German Corporate Governance Code for 2012. In particular, it also complies with the German regulation of 6 October 2010 concerning the supervisory law requirements for remuneration schemes in the insurance sector (Insurance Compensation Regulation – VersVergV).
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, 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. If the employment contract is terminated for good cause on grounds within the Board member’s control, no payments are made to the Board member. 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 provide for special exercise options.
As of 2009, newly appointed members of the Board hence become members of a defined contribution plan. For this plan, the Company provides the Board members with a pension contribution, which in 2009 was related to basic remuneration and as of 2010 to target overall direct remuneration, for each calendar year (contribution year) during the term of their contract. The pension contribution is paid over to an external pension insurer. The insurer’s guaranteed interest rate is 2.25% (or 1.75% for Board members newly appointed as from 2012). The insurance benefits that result from the contribution payments to the external insurer constitute the Company’s pension commitment to the Board member. For Board members appointed as from 1 January 2009, a uniform pension contribution rate of 25.5% of the target overall direct remuneration is set.
Board members who had not reached the age of 55 by the end of 2008 retained 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, pension-fund 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.
— In the case of defined benefit plans: Defined benefit of between 30% and 60% of pensionable basic remuneration.
— For Board members transferred from the old system to the new: Vested pension from the defined benefit plan up to 2008 and 80% of the insured occupational pension benefit up to age 59, with subsequent occupational pension based on the defined contribution plan
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 non-extension 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.
— For Board members transferred from the old system to the new: Entitlement of between 30% and 60% of pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 65th birthday; the Company assumes payment of the difference between the monthly occupational pension and the monthly incremental pension from the external insurance.
Benefit amount: — 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 insured event occurs
— For members of the Board of Management transferred from the old system to the new: The entitlement under the vested pension is a proportion of the vested pension based on the ratio of actual service with the Company to the period the Board member would have worked for the Company altogether up to the fixed retirement age (Section 2 para. 1 of the German Employers’ Retirement Benefits Act). The entitlement from the incremental pension comprises the pension benefits fully financed under the insurance contract up to the occurrence of the insured event based on the pension contributions made up to the date of leaving the Company (Section 2 para. 5a of the German Employers’ Retirement Benefits Act). This entitlement is paid out as an annuity or a lump sum.
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.
The improved vested benefits do not apply to Board members appointed as from 2009. For Board members transferred from the old system to the new, the improved vested benefits apply only to that part of their pension resulting from the vested pension under the defined benefit plan.
Munich Re Group Annual Report 2012 1 At the time of preparation of this report, no Supervisory Board resolution had yet been adopted on the amounts to be paid for the 2012 annual performance. The amount shown for annual performance remuneration is based on estimates and the relevant provisions posted.
For the 2011 annual performance, a total of €542,129 more was paid out than had been reserved in the financial year 2011. The additional/reduced expenditure breaks down as follows: von Bomhard €51,870, Arnoldussen €86,593, Blunck €22,434, Daschner €48,464, Jeworrek €94,349, Röder €147,627, Schneider –€11,340, Strassl €4,574, Wenning €97,558. This results in the following actual bonus payments for 2011: von Bomhard €454,860, Arnoldussen €326,970, Blunck €415,800 €, Daschner €483,210, Jeworrek €584,220, Röder €392,364, Schneider €300,510, Strassl €257,040, Wenning €396,480.
The total expenditure recognised in 2012 (reserve allocations/releases due to the development in value of performance share units from the 2005–2009 plans) for the Long-Term Incentive Plans breaks down as follows: von Bomhard €556,542, Arnoldussen €104,454, Blunck €162,104, Daschner €597,881, Jeworrek €934,562, Röder €479,135, Schneider €1,120,157, Strassl €257,977, Wenning €326,388.
Total Annual Multi-year amounts Name performance1, 3 performance2, 3 payable 1 At the time of preparation of this report, no Supervisory Board resolution had yet been adopted on the amounts to be paid for 2012. The amount shown for annual performance remuneration is based on estimates and the relevant provisions posted in the table on page 56.
Outlook With effect from 1 January 2013, the Board of Management’s remuneration system has been adjusted with regard to the variable remuneration component. Particular attention was given to simplifying the incentivisation system while making sure that the systematic approach remained appropriate. In addition, the aim was to create the opportunity for the Supervisory Board to react flexibly to developments during the year.
Acting on the proposal of the Personnel Committee, the full Supervisory Board resolved that for the variable remuneration based on annual performance, the current Company objective (property-casualty reinsurance) be replaced as from 2013 with an overall object ive for the business field of reinsurance (including life reinsurance). Depending on the responsibilities of the individual members of the Board of Management, an objective is also set on an annual basis for the result of the business field of primary insurance.
In the agreement of individual personal objectives, there is a stronger focus on fewer, particularly relevant targets. A new component introduced is “overall performance evaluation”, which is relevant when assessing annual and multi-year performance. It allows the Supervisory Board greater discretionary scope, enabling more consideration
2 Expenses for defined benefit plan, including provision for continued payment of salary for surviving dependants. 3 Entitled to a reduced occupational pension on early retirement and to an occupational pension in the event of regular termination of employment. 4 Entitled to vested benefits under the German Employers’ Retirement Benefits Act in the event of premature termination of employment, and to a reduced occupational pension on early retirement in the event of regular termination of employment.
7 Entitled to a reduced occupational pension on early retirement in the event of premature or regular termination of employment. 8 Entitled to vested benefits under the German Employers’ Retirement Benefits Act in the event of premature termination of employment up to 2 January 2015, and to a reduced occupational pension on early retirement in the event of premature termination of employment as from 3 January 2015 or regular termination of employment. 9 Entitled to occupational pension in the event of termination of employment owing to incapacity to work. 10 Defined contribution plan within the meaning of IAS 19, Employee Benefits, so no present value shown.
The rules in place since the financial year 2009 provide for a fixed remuneration component of €50,000 for each member of the Supervisory Board, plus a variable resultrelated component and a component based on long-term corporate performance. The Chairman of the Supervisory Board receives two-and-a-half times and the Deputy Chairman one-and-a-half times the fixed remuneration and the variable remuneration.
The variable result-related remuneration is based on the undiluted earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs): each Supervisory Board member receives €4,000 for each full euro by which earnings per share exceed €12, but a maximum of €40,000. Based on earnings per share of €17.98, variable result-related remuneration of €20,000 is payable for the financial year 2012. The performance-related remuneration component with long-term incentivisation was introduced in accordance with the German Corporate Governance Code. It amounts to €10,000 and is paid out if earnings per share in the remuneration year exceed earnings per share in the third financial year preceding the remuneration year by at least 30%. This long-term remuneration component is payable for the remuneration year 2012.
Remuneration of Supervisory Board members in accordance with Article 15 of the Articles of Association1
Share trading and shares held by members of the Board of Management and the Supervisory Board
G3305Remuneration of Supervisory Board members for membership of supervisory boards at Munich Reinsurance Company subsidiaries, in accordance with the companies’ respective articles of association1¹
Our business environment is being shaped by a number of global trends with a longterm impact. Demographic shifts are posing enormous challenges for social security and healthcare systems, particularly in industrialised countries. By contrast, in many developing and emerging countries, we are witnessing not only rapid population growth but also a swift rise in prosperity among large sections of the population. As a result, the emerging economies in Asia especially are gaining in global economic and geopolitical importance. Technological progress and digitalisation are accelerating the globalisation of capital flows and supply chains, and increasing the complexity of the world economy.
In this environment, we are seeing a growing number of natural-catastrophe loss events in several regions, with a disproportionate rise in insured losses in relation to economic activity. The chief reasons for this are the growth in values in exposed areas and the increase in the density of in surance against natural catastrophes. It is also highly probable that climate change plays a certain role in weather-related natural catastrophes, as the frequency and intensity of weather extremes are changing in many regions. This is producing new risk potentials and accumulation risks that make it imperative to constantly refine our underwriting.
— Financial markets and real economy still unsettled by sovereign debt and banking crisis in the eurozone
Source: International Monetary Fund, national statistical institutes and European Statistical Office
The development of the capital markets over the course of the year reflected the ups and downs of the sovereign debt and banking crisis in the eurozone. In the first few months of the year, a number of crisis-management measures initially brought relief, e.g. the establishment of the European Stability Mechanism (ESM) as a permanent rescue fund, and the successful EU negotiations on the Fiscal Compact. In March, Greece’s private creditors approved a haircut of over €100bn. The European Central Bank (ECB) also again made liquidity available to European banks at low interest rates on a large scale in the first quarter of 2012.
Investor confidence diminished when, several weeks after the Greek elections in April, the coalition negotiations were declared a failure and new elections were announced. Furthermore, difficulties in the Spanish banking sector had again fostered doubts as to the sustainability of the debt position, and led to increased fears of contagion involving other countries. Major share price indices fell considerably, the euro lost ground against the majority of currencies, and investors fled back to US and German government bonds. In July, yields on securities with periods to maturity of ten years sank to below 1.4% (USA) and 1.2% (Germany).
The low interest-rate level also put pressure on margins in the liability and property segments and necessitated premium increases, especially in long-tail business.
The return on risk-adjusted capital (RORAC) totalled 13.2% for the 2012 financial year, compared with 3.2% in 2011. The RORAC for 2012 was therefore gratifyingly only marginally below the long-term target of 15% that we had first set for ourselves in 2006, when market interest rates were significantly higher. We clearly surpassed our profit target of €2.5bn for 2012, equivalent to a RORAC of around 10%.
Despite our strict profitability requirements, we achieved a rise in our gross premium income.
Comparability with the years 2008 to 2010 is thus limited. 3 The figure for 2011 is not adjusted for relief of 1.4 percentage points from economic risk transfer to the capital markets. 4 Excluding health insurance conducted like life insurance.
Further information can be found in the notes to the consolidated financial statements on page 185
Whereas in the reinsurance segments and Munich Health we operate on a global basis, in the primary insurance segments the bulk of our premium comes from the German market.
No events of material significance have occurred since the balance sheet date.
1 Previous-year figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
Reinsurance property-casualty 96 95 93 Primary insurance life 25 25 24 Primary insurance health 4 5 4 Primary insurance property-casualty 42 43 43
— Rise in premium income of 17.4% to €11.1bn, supported by growth in Asia — Very satisfactory technical result of €420m — Good investment result of €913m — Gratifying consolidated result totalling €495m — Strong increase in Market Consistent Embedded Value (MCEV) to €10,616m, influenced mainly by outstanding value added by new business totalling €573m
With a gross volume of €11,130m (9,481m), premium income in life reinsurance was up 17.4% on the previous year. This was in part due to the continuing dynamic expansion of the primary insurance markets in Asia, in which we participate thanks to our good market position as a reinsurer. The Asian life insurance markets will remain an important driver of our business development in future as well. The gratifying premium development in recent years was also attributable to large-volume treaties where reinsurance primarily serves as a capital substitute. As a financially strong partner and provider of customised solutions, we benefit from our long-term client relations in this regard. We cover biometric risks, thus improving our clients’ capital structure and providing them with solvency relief. On the other hand, the sluggish economy in many developed regions impacted our clients’ business development and hence reduced reinsurance business potential. In addition, our clients are retaining a higher proportion of the risks themselves, which is having a curbing effect on the growth of our traditional new business in many major markets, particularly North America and Europe.
We generate the bulk of our income outside the eurozone. The weakness of the euro during longer periods of 2012 had a favourable effect on the growth of premium expressed in euros. Approximately €9.9bn or 89% of premium was written in foreign currency, of which 43% was in Canadian dollars and 18% in US dollars. If exchange rates had remained unchanged, our premium income would have climbed by 9.6%.
In Germany, premium income decreased slightly to €346m (356m), mainly because some treaties were converted to purely risk-based forms of cover. Altogether, life insurance business in Germany has been stagnating for several years, but we continue to see growth opportunities in the area of biometric risk cover. This is a business field we would like to tap into further by developing innovative products that are viable for the future, for instance in the area of disability insurance. Reinsuring death and disability risks and assisting our clients with actuarial assumptions, risk assessment and claims management remain key aspects of our business. We are supplementing these with sustainable and tailor-made reinsurance solutions for enhancing insurers’ risk-bearing capacity. The technical result maintained its very satisfactory level.
In the USA, our subsidiary Munich American Reassurance Company posted an increase in gross premium income to €1.9bn (1.7bn), enabling us to retain our position among the leading life reinsurance companies in this important market. Despite the intense competition, we expect further good opportunities for moderate and profitable growth in the area of pure mortality covers to arise from the provision of reinsurance capacity tailored to our clients’ requirements. We also anticipate that the cooperation with our subsidiary Munich Re Automation Solutions Limited, which provides primary insurers with automated risk assessment services, will open up new business avenues. Claims expenditure in the year under review, although still within the normal range, was somewhat higher than we anticipated. Hence the technical result in the USA was below expectations.
2012 was another very successful year for our Canadian branch. Munich Re, Toronto (Life) is the market leader in all lines in which it conducts business: life, disability, health, critical illness and long-term care. Premium volume rose to €4.5bn (3.6bn). The still high level of new business and gratifying claims experience contributed to the outstanding technical result.
In Asia, the positive trend in new business continued. Premium income climbed to €1.2bn (1.0bn). The technical result was very satisfactory. We still consider Asia to be one of our most important growth regions.
On the African continent, our subsidiary Munich Reinsurance Company of Africa Ltd. kept its premium volume stable at €173m (175m), notwithstanding negative currency translation effects. Despite the keener competition, we thus retained our position among the leading reinsurance companies. The technical result developed well. In the medium term, we expect economic growth to accelerate and hence the demand for insurance to rise. We have geared our strategy accordingly and are focusing on the markets with the highest economic growth rates.
The renewal negotiations for reinsurance treaties produced very satisfactory outcomes overall. Thanks to our capital strength and our ability to develop complex and customised solutions for our clients, we were able to achieve good terms and conditions and significantly increase the profitability of our portfolio. In most lines and regions, capacity continues to be available in sufficient quantities. We adhered to our focused and disciplined underwriting policy, specifically reducing European property business, traditional marine business and selected subportfolios in non-proportional liability and motor business.
Fire reinsurance saw a rise in rates, especially in the loss-affected regions of Australia, Asia and Japan. Besides this, we achieved significant price increases for the insurance of natural catastrophe risks in the USA and Latin America. In aviation business, however, prices remained under pressure. Proceeding from a good level, credit and bond business also showed a moderate reduction in rates. In most other regions and classes of business, prices tended to move sideways.
Share of gross premiums written in reinsurance % 60.5 63.6 66.5 68.8
This division writes business in Germany, the Asia-Pacific region and Africa. In terms of the division’s premium income, approximately 10% is written in Germany, roughly 40% in Australia/New Zealand and Japan combined, and around 25% in Greater China. Whilst the focus in Australia/New Zealand and Japan is on natural hazards cover, the Greater China portfolio is largely made up of motor business.
Overall, the division’s premium volume was down to €3,508m (3,980m), mainly owing to the termination of large-volume treaties in China totalling around €700m and to portfolio reductions where it proved impossible to achieve adequate prices, terms and conditions. We were able to further optimise the portfolio through profitable new business and in some cases substantial rate increases for natural hazard covers, especially in loss-affected regions. We kept constant the capacity we provide for the coverage of natural hazards, particularly earthquake and typhoon, successfully defending our strong market position in Japan and Australia.
The division’s combined ratio improved significantly to 84.5% (201.3%) thanks to a moderate incidence of major losses, our rigorous portfolio optimisation, and the release of loss reserves.
Altogether, at €3,861m, the division’s premium volume was higher than in the previous year (€3,697m), especially due to organic growth in motor business as a result of our cooperation with a strategic partner and to the expansion of natural catastrophe covers, where we achieved not only organic growth but also another increase in rates. By contrast, the difficult economic environment in Europe and our strictly profit- oriented underwriting policy had a lowering effect on premium, above all in fire business and engineering reinsurance.
The Global Clients and North America Division writes the international business of defined global clients (20%), worldwide Lloyd’s business (20%) and property-casualty business in the USA and Canada (60%).
At the reporting date, the division’s premium volume amounted to €6,275m (5,750m). This growth resulted from new business and from price increases we were able to achieve for business with natural hazard exposure in view of the natural catastrophes in 2011. We recorded growth in premium income particularly from global clients, Lloyd’s Watkins Syndicate, and the primary insurance companies. The premium income of our primary insurance companies American Modern and Hartford Steam Boiler Group (HSB Group) totalled €889m (892m) and €687m (616m) respectively, thus contributing more than 40% of our premium volume in North America. In addition, €2,226m (2,183m) stems from Munich Reinsurance America. Our strategy of combining insurance and reinsurance activities again proved successful, and we intend to continue along this path in future.
The Special and Financial Risks Division writes business in the specialty classes of agriculture (around 30%), credit and bond (some 20%), and aviation and space (around 15%). Also assigned to this division are Corporate Insurance Partner (approximately 20%), the Risk Trading Unit (in which the retrocession cover for the whole of our reinsurance business is booked), and the Swiss subsidiary New Reinsurance Company Ltd. (New Re) (around 15%).
The division’s combined ratio normalised to 92.3% compared with the previous year’s figure (77.1%), which had benefited from exceptional reserve releases and high income from retrocession cover.
2 The figure for 2011 is not adjusted for relief of 6.6 percentage points from economic risk transfer to the capital markets.
In the market for aviation and space risks, pressure on rates persisted. Given falling prices, especially in aviation business, we continued to withdraw from selected segments. We were able to write profitable new business in space reinsurance thanks to our position as market leader. In spite of the difficult market environment, we posted a pleasing technical result due to our selective underwriting policy, also benefiting from below-average expenditure for major losses.
In our financial risks segment, credit and bond reinsurance is the most important class of business. It is closely linked to global economic development but also to regional economic trends. We maintained premium volume more or less unchanged compared with the previous year, with rates that were still good despite a marginal deterioration. Seen against the backdrop of the sovereign debt crisis, this business segment showed a generally pleasing development. However, the technical result normalised compared with 2011, which had benefited from exceptional reserve releases and an absence of major losses.
In our unit Corporate Insurance Partner, we offer our clients in industrial and major project business a wide range of insurance products, customised solutions and services based on our recognised industry- and risk-related knowledge. Benefiting from specific and successful portfolio measures, the unit posted a gratifying technical result in the 2012 financial year.
— Significant reduction in total premium income to €7.3bn (–7.9%), especially due to decline in single-premium business
Overall premium income in life insurance (including the savings premiums from unitlinked life insurance and capitalisation products) totalled €7.3bn (7.9bn) in 2012, a decline of 7.9% compared with the previous year. Gross premiums written amounted to €5.8bn (6.1bn), 5.6% less than in 2011. These developments were attributable to widespread economic uncertainty in Germany and abroad and to low interest rates, which in turn are reflected in the adjustment of policyholder bonuses paid by our life insurers.
Share of gross premiums written in primary insurance2 % 33.9 35.2 37.1 37.9 1 Total premium income includes not only gross premiums written but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the statutory accounting guidelines applicable in the insurer’s home country.
2 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years 2009 and 2010 is thus limited.
In previous years, the low-interest-rate phase had already substantially impacted our economic calculations for simulating shareholders’ future interests in the earnings distributable from in-force covered business over its entire duration. As in previous years, we applied the strict rules of a market-consistent valuation as at 31 December 2012 using swap interest rates without adjustments to calculate the MCEV in life primary insurance business. In the current environment, this represents a decidedly conservative evaluation approach. The MCEV amounted to €260m (–872m) at the end of the financial year, a significant contribution coming from the decline in risk spreads on fixed-interest securities, in particular for government bonds of the peripheral euro states, at the end of 2012. This effect was greater than the further slight reduction in
On 14 November 2012, the German Federal Court of Justice issued a judgement against ERGO Lebensversicherung AG declaring the invalidity of insurance terms and conditions relating to surrender values, lapse deductions and the offsetting of acquisition costs. Specifically, this can have implications for cash value life insurance and deferred or unit-linked annuity insurance in the event of cancellation or waiver of premium. We took the precaution of increasing the provisions we had established at an early stage to a total of €92m at the reporting date.
— Slight increase in premium income of 0.4% to €5.7bn — Reduced technical result of a good €389m — Gratifying investment result of €1,239m — Positive consolidated result of €87m — Increased Market Consistent Embedded Value (MCEV) of €2,468m
At €5.73bn (5.71bn), premium income in the health insurance segment was only marginally higher (+0.4%) than in the previous year. In supplementary health insurance, business grew year on year by 3.8%. By contrast, premium income in comprehensive health insurance remained stable (+0.5%), reflecting premium adjustments that were gratifyingly low for our clients. As expected, new business in comprehensive health insurance in 2012 was down (–28.5%) compared with the previous year, which had bene fited from the abolition as at 1 January 2011 of the three-year waiting period for switching to private health insurance. In travel insurance, which we account for in the health segment and operate in Germany and abroad, we registered a decline in premium volume of 5.2%.
The consolidated result in the health primary insurance segment improved significantly to €87m (23m). The impact of expenditure for restructuring sales in this segment totalled €6m. It should be noted that the change in the pre sentation of the segments on a fully consolidated basis has led to a particularly significant change in the previous year’s figure. An intra-Group transaction in the previous year had had a highly positive effect on the former consolidation result: At the end of 2011, ERGO had transferred its shares in the foreign health insurers of the DKV Group to Munich Health Holding. This effect is no longer visible owing to the adjustment of the previous year’s figures to the new consolidation method. The operating result also grew robustly in 2012 to €238m (94m). By contrast, the technical result fell to €389m (453m) owing to higher expenses for claims and benefits as a consequence of cost increases in healthcare and to lower income from technical interest. At €1,239m (1,011m), the investment result developed favourably. This segment also benefited from not having to absorb write-downs on Greek government bonds.
Share of gross premiums written in primary insurance1 % 33.6 32.7 31.5 31.2 1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years 2009 and 2010 is thus limited.
Further details on the sales restructuring can be found on page 71
The MCEV amounted to €2,468m (1,747m) at the end of the financial year. Significant factors included the first-time consideration of ERGO Direkt Krankenversicherung, our health primary insurance companies’ stable results, and various model refinements. No interest-rate guarantees are provided in health business. Figures for interest rates included in the calculations can be changed whenever price increases become necessary due to expenses for healthcare claims and benefits rising. That is why the interestrate environment has a different impact to that in life primary insurance. Total MCEV earnings increased to €410m (137m) and operating MCEV earnings amounted to €356m (547m). Value added by new business totalled €104m (50m), the strong rise due in part to the first-time consideration of ERGO Direkt Krankenversicherung.
— Consolidated result of –€4m burdened by restructuring costs and several major losses
Share of gross premiums written in primary insurance % 32.5 32.1 31.4 30.9 1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years 2009 and 2010 is thus limited.
Further details on the sales restructuring are available on page 71
Gross premiums by market region1 66% (66%) North America 16% (16%) Northern/Eastern/Central Europa 11% (13%) Southern Europe/Latin America 4% (3%) Middle East/Africa 3% (2%) Asia/Pacific
The consolidated result amounted to –€92m (36m), the year-on-year reduction being chiefly attributable to losses in US Medicare business (private health insurance for seni ors) at Windsor Health Group (WHG). WHG contributed an IFRS result of –€86m to the segment result. The deterioration of WHG’s medium-term earnings situation triggered write-downs of €166m for impairments of goodwill and other intangible assets of the segment. The operating result decreased to €108m (159m), and the investment result showed a marginal decline of 3.4% to €115m (119m). The technical result totalled €36m (59m).
The combined ratio was 100.2% (99.5%). This ratio relates only to short-term health business, not to business conducted like life insurance, the figure for the latter amounting to 7.3% (7.9%) of gross premiums written in the year under review.
Deposits retained on assumed reinsurance 7,240 7,784 1,181 1,196 147 165 1 1 4 4 394 280 – – 8,967 9,430
Distribution of investments by type 59% (58%) Fixed-interest securities 25% (26%) Loans 10% (11%) Other investments 3% (2%) Shares and equity funds 2% (2%) Real estate 1% (1%) Participating interests
We gear the selection of our investments, based on economic criteria, to the characteristics of our technical provisions and liabilities. In addition, we use derivative financial instruments for portfolio management and hedging against fluctuations on the interest-rate, equity and currency markets. Volatilities on the markets result in changes in the values of derivatives, which under IFRS accounting we recognise in profit or loss.
Our on- and off-balance-sheet unrealised gains and losses (excluding owner-occupied property), which could be turned into realised gains upon disposal of the relevant investments, climbed from €11.2bn to €22.5bn.
At the reporting date, our investment portfolio continued to be dominated by fixedinterest securities, loans and short-term fixed-interest investments. Some 48% of these are government bonds or government-guaranteed securities, of which 54% are from eurozone countries.
We again increased our portfolio of US government bonds. New investments in government bonds from emerging markets are also part of our balanced investment strategy.
Off-balance-sheet Fair values unrealised gains and losses Carrying amounts €m 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year
Additionally, in the interests of optimising the structure of our portfolio, we hold a small quantity of credit default swaps from France and the Netherlands, thus increasing our total government bond exposure by €12m.
We generally base fair values on quoted prices in an active market (Level 1). In cases where these are not available, and for our loans, the fair value is based on recognised valuation methods in accordance with the present-value principle (Level 2).
1 Presentation based on approximation and not fully comparable with IFRS figures. 2 Listed are all those eurozone countries where our holdings of government bonds and state-guaranteed securities total more than €1bn in terms of carrying amounts. 3 Concerns unrecognised unrealised gains and losses in the case of “loans” and recognised unrealised gains and losses in the case of “available for sale” .
Rating of eurozone government bonds and government-guaranteed securities according to carrying amounts1 €m AAA AA A BBB Lower No rating Total 4115 Period to maturity of eurozone government bonds and government-guaranteed securities according to carrying amounts1 €m Carrying amounts Up to one year 2,890 Over one year and up to two years 2,781 Over two years and up to three years 3,776 Over three years and up to four years 2,697 Over four years and up to five years 2,097 Over five years and up to ten years 9,763 Over ten years 22,597 Total 46,601 1 Presentation based on approximation and not fully comparable with IFRS figures.
4120Period to maturity of government bonds and government-guaranteed securities of Irish, Italian, and Spanish issuers according to carrying amounts1 €m Ireland Italy Spain Total Up to one year 16 146 217 379 Over one year and up to two years – 54 49 103 Over two years and up to three years 23 91 44 158 Over three years and up to four years 168 119 113 400 Over four years and up to five years – 160 5 165 Over five years and up to ten years 684 595 198 1,477 1 Presentation based on approximation and not fully comparable with IFRS figures.
1 Presentation essentially shows fixed-interest securities and loans, including deposits and cash at banks, at market value. The approximation is not fully comparable with IFRS figures.
Senior bonds 82 82 Loss-bearing bonds 6 7 Subordinated bonds 12 11 1 Presentation essentially shows fixed-interest securities and loans at market value. The approximation is not fully comparable with the IFRS figures.
We further reduced our limited investments in bank bonds to 3% (4%) of our portfolio of fixed-interest securities. At the reporting date, our proportion of bank bonds from southern European states and Ireland totalled only 5% of our bank bond holdings. Overall, senior bonds dominated, i.e. bonds that are not subordinated or subject to loss participation. Subordinated bonds and loss-bearing bonds made up only 1% of our fixed-interest portfolio. Nearly half our total receivables from banks related to deposits.
Our portfolio of structured credit products (which are chiefly held by our reinsurers) grew by €1.3bn to €7.5bn. This asset class refers to securitised receiv ables (assetbacked securities or mortgage-backed securities), e.g. securitisations of real estate finance, consumer credit or student loans. Around 62% of our portfolio of asset- and mortgage-backed securities have a rating of AAA.
In the financial year 2012, we recorded net gains on disposal of €652m (1,244m), primarily from gains realised on switching investments in equities, government bonds, covered bonds and corporate bonds. We posted losses on the disposal of the bulk of our portfolio of equity derivatives with which we hedge our equity portfolio against price setbacks.
Write-ups/write-downs 8 0.0 –1,625 –0.8 Net realised capital gains 652 0.3 1,244 0.6 Other income/expenses 21 0.0 –902 –0.4
Investments in affiliated companies –21 251 – Investments in associates 81 101 –19.8 Mortgage loans and other loans 2,300 2,207 4.2
MEAG MUNICH ERGO AssetManagement GmbH (MEAG) is the asset manager of Munich Re. In addition to its asset management function for the Group, MEAG also offers its expertise to private and institutional clients. For non-Group investors, we manage a total of €11.5bn (10.4bn), €2.2bn (1.9bn) of this in our investment funds, which are particularly popular with private savers. 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 €45.1bn (39.8bn).
4135 Assets under management for third parties 31.12.2012 Prev. year Change €bn €bn % Third-party investments 11.5 10.4 10.6
Thereof: External institutional investors 9.3 8.5 9.4 Thereof: Private-client business 2.2 1.9 15.8 2012 Prev. year Change €m €m % Group asset management result – 18 –100.0
Munich Re’s financial strength continues to be assigned the second-highest rating category by each of the leading rating agencies.
Our primary insurance and reinsurance operations have a significant influence on our balance sheet: as we have consistently geared our Group toward value creation in its core business, investments on the assets side of the balance sheet serve to cover technical provisions (74.3% of the balance sheet total). Equity (10.6% 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.
Consolidated result attributable to equity holders of Munich Reinsurance Company 3,195 702 2,422 Non-controlling interests 242 247 245
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.
In the 2012 financial year, Munich Reinsurance Company generated net retained profits of €1,255m according to German Commercial Code accounting. Including these net retained profits, the Company’s revenue reserves amounted to €3,629m (2,436m) as at the balance sheet date. The shareholders’ equity of Munich Reinsurance Company as determined under German Commercial Code accounting is protected effectively against the risk of loss arising from a random accumulation of losses by a claims equalisation provision totalling €6.6bn. Given this robust capitalisation according to all calculation methods, we intend – subject to the approval of the Annual General Meeting – to pay our shareholders a dividend of €7.00 per share, or a total of €1.3bn, from Munich Reinsurance Company’s net retained profits for the financial year 2012.
As at 31 December 2012, Munich Reinsurance Company’s share capital of €587,725,396.48 was divided into 179,341,212 registered, no-par-value, fully paid shares. The rights and obligations deriving from them follow from the pertinent statutory requirements and the Company’s Articles of Association. The shares are endowed with
The listed registered shares are subject to transfer restrictions. The issuing of restrictedly transferable registered shares by Munich Reinsurance Company dates back to the Company’s foundation in 1880 and is a very common phenomenon in the insurance industry. Restricted transferability means that these shares may be transferred to another holder only with the Company’s consent, which, according to Article 3 para. 2 of Munich Reinsurance Company’s Articles of Association, is granted at the Company’s discretion. Since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. In recent decades, it has been granted without exception.
Most recently as at 12 October 2010, Warren E. Buffett and companies in his group notified us in accordance with Section 21 of the German Securities Trading Act of the following direct or indirect shareholdings in Munich Reinsurance Company exceeding 10% of the voting rights: 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.
In a letter to shareholders in March 2013, Berkshire Hathaway Inc. reported that its participation in Munich Reinsurance Company as at 31 December 2012 was around 20 million shares, equivalent to an 11.2% share of the voting rights. We have not been notified, nor have we otherwise learned, of any further changes.
Statutory regulations and provisions of the Articles of Association regarding appointment and dismissal of members of the Board of Management and concerning amendments to the Articles of Association
The legal parameters for the appointment and dismissal of members of the Board of Management are specified in the Company’s co-determination agreement, Articles 13 and 16 of the Articles of Association, Sections 84 and 85 of the German Stock Companies Act, and Sections 121a (para. 1) and 7a of the German Insurance Control Act. Munich Re’s co-determination agreement and Articles of Association have taken over the legal tenets of the German Co-Determination Act. The Supervisory Board appoints the members of the Board of Management and may dismiss them at any time for good cause. On initial appointment, members of the Board of Management are usually given contracts for a term of between three and five years. Extensions of up to five years are possible and – in exceptional cases – members of the Board of Management may also be appointed by a court of law.
The German Stock Companies Act contains general provisions governing amendments to the Articles of Association (Sections 124 para. 2 sentence 2, and 179–181 of the Act). These state that only the Annual General Meeting can make resolutions on changes to the Articles of Association. In order to be carried, a resolution must receive at least three-quarters of the votes cast by the share capital represented in the vote. The Articles of Association may stipulate a different capital majority (higher or lower) or other requirements, but the Company’s Articles of Association do not provide for any such special features.
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 76–94 of the German Stock Companies Act. The Board of Management has the following powers to issue and buy back shares: — The Annual General Meeting of 20 April 2011 authorised the Company, pursuant to Section 71 para. 1 item 8 of the German Stock Companies Act, to buy back shares until 19 April 2016 up to a total amount of 10% of the share capital. 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
Munich Re Group Annual Report 2012 is empowered under Section 71 para. 1 item 8 of the German Stock Companies Act to retire the shares without requiring further approval from the Annual General Meeting.
— The Annual General Meeting of 28 April 2010 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.
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 gible capital is more than 2.7 times higher than the legal requirement.
In the consolidated cash flow statement, the consolidated profit of €3,211m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is adjusted by €2,528m to take account of the higher technical provisions. 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 and to derivatives.
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 €4,217m. In the 2012 financial year, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in a photovoltaic keIn exCel Bereinigte SolvabilitätAdjusted solvency 31.12.2012 Prev. year Change % Eligible capital of the Group €bn 27.1 22.8 18.9 Adjusted solvency ratio % 277.8 245.3 5015Consolidated cash flow statement 2012 Prev. year Change €m €m % Cash flows from operating activities 5,535 6,075 –8.9 Cash flows from investing activities –4,733 –3,525 –34.3 Cash flows from financing activities –466 –2,974 84.3 Cash flows for the financial year 336 –424 –
The cash outflows for financing activities stem mainly from the dividend payment in 2012.
Overall in the year under review, cash – which encompasses cash with banks, cheques and cash in hand – rose by €370m (including currency effects) to €2,860m; there were items pledged as security and other restrictions on title amounting to €44m (45m).
“To insure is to understand” — Ongoing development of innovative coverage concepts for new and complex risks — Corporate responsibility for employees, society and the environment
Munich Re has different client bases in reinsurance and primary insurance. In reinsurance, we do business with over 4,000 corporate clients from more than 160 countries. Our primary insurers in the ERGO Group serve over 35 million (mainly private) clients in over 30 countries with the focus on Europe and Asia. The Munich Health business segment has over six million clients in primary insurance and 400 in reinsurance.
To constantly improve its range of products, ERGO counts on feedback from clients and consumers, such as the members of the ERGO customer advisory board or visitors to ERGO’s “client workshop” on the internet. If clients are not satisfied with the response to a complaint, they can contact ERGO’s customer advocate, who will try to clarify the matter within ERGO and act as a mediator. ERGO’s first-ever customer report, published in May 2012, traces the implementation of the brand proposition in a range of areas. Taking the many suggestions, ideas and criticisms it received from consumers in letters, discussions, e-mails, and feedback forms on its website or Facebook page, ERGO formulated the report as a series of questions, to which it provides clear and straightforward answers.
MEAG handles the investment activities of Munich Re and ERGO. Its particular competence lies in investing for the companies of our Group in accordance with their needs, closely gearing investments to the Group’s payment obligations (liability-driven investments). MEAG thus minimises our investment risks and underpins the sustained profitability of our core business. It also offers its comprehensive know-how to external institutional investors and private clients. MEAG is present in Europe, Asia and North America and manages all important asset classes such as fixed-interest securities, equities and real estate. Our investment experts adopt a stringent, risk-based approach with the aim of achieving above-average performance over the long term. 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 long-standing experience in handling investment risks. MEAG is demon-
An in-depth understanding of risks is the basis of our business. That is why we analyse known risks on an ongoing basis to determine whether there have been any changes in their structure or occurrence probability. We focus on identifying new risks at an early stage and offer solutions for known risks that have hitherto been uninsurable.
Besides this, Munich Re uses various units – such as its Special Enterprise Risk Unit or the product developers of American Modern and Hartford Steam Boiler – as innovation platforms that develop new coverage concepts on an ongoing basis in strategic partnerships with their industrial and primary insurance clients. An example of this is a new reputational damage insurance product that provides companies with loss protection if their reputation is significantly harmed by an unforeseen event. The precondition is that the damage has led to a measurable decline in business performance. Following the introduction of unisex pricing in the European Union and the related abolition of gender-based rating distinctions, Munich Re is supporting its life insurance clients in the application of new differentiation criteria such as “occupational group” or “health awareness”.
Our staff are a crucial factor for our success, driving our business forward with their expertise, openness to innovation and dedication. We create the necessary conditions for nurturing and enhancing their personal development and motivation. Central to these conditions are managers who lead by example and provide their staff with the necessary scope and incentives. In 2012, we extended our Leadership Monitoring survey, conducted every two years in reinsurance and Munich Health, to include all units worldwide. 10,436 staff gave 1,758 managers very positive feedback on average regarding their leadership behaviour, and provided a solid basis for the systematic further development of our leadership culture. In primary insurance, our employee survey in Germany focused on the “guiding principles of leadership”, which were launched in 2011 and are continuing to be implemented in primary insurance. For the top managers in the Group, we have formulated clear expectations of management conduct and personal qualities in newly framed leadership values. We actively incor porated and embedded these values in our first-ever conference for this specific target group, which centred on the discussion of strategic issues.
In reinsurance and Munich Health, we have held international workshops to sensitise managers to the significance of diversity management and have systematically determined the requirements deriving from our business in this connection. Numerous initiatives are now building on the outcome. One example is the introduction of our global
Munich Re Group Annual Report 2012 trainee programme, in which the international diversity of participants is specifically enhanced. The same goal is served by Emerge International, a programme that prepares employees from our international organisation for the assumption of their first managerial positions outside their home countries. Career opportunities for women are improved by a mentoring scheme for the female participants of our development programmes and by independent career counselling for female staff. Besides this, we are continuing to expand our long-standing initiatives for furthering the compatibility of job and family. The internal company agreement “Family and Career”, which was significantly extended in 2011, has now also been adjusted for all senior executive staff. Given the breadth of the topic and its cultural embedding, diversity management is not a short-term issue. Appreciation and specific promotion of different mindsets, mentalities, experience and specialist knowledge will remain an important focal point of our human resources work.
Staff by region 30.9% (30.8%) Rest of Europe 1.5% (3.2%) Asia and Australasia 1.3% (1.2 %) Africa, Near and Middle East
Munich Re Group Annual Report 2012 1 Based on the main Group companies in Germany.
Investments in training1 2012 Prev. year Investments in training €m 22.4 25.7 Investments in training per staff member € 946 1,096
Corporate responsibility Corporate responsibility (CR), by which we understand a forward-looking and responsible approach in all activities, is an integral part of our corporate strategy. Besides the responsibility of every single employee, we have defined three thematic focal points for the Group: — The enhanced integration of ecological and social aspects in both our investment and our insurance business, coupled with transparent and responsible corporate governance
— Efforts to protect natural resources through our environmental management system and achieve carbon neutrality for the whole Group by 2015
We have underscored our approach to corporate responsibility by signing up to international guidelines. First and foremost among these is the UN Global Compact, which we joined in 2007. Its ten principles provide the fundamental framework for our corporate responsibility strategy. Guidelines for investments geared to sustainability criteria are provided by the Principles for Responsible Investment (PRI), which we
Munich Re Group Annual Report 2012 implement via our asset manager MEAG. At least 80% of our holdings in equities, cor­ porate and government bonds, and real estate (constructed since 2010) should meet sustainability criteria. Since 2010, our socially responsible investment strategy has also included investments in renewable energy and new technologies (RENT). MEAG has invested around €1bn for us in this area. In the medium term, we plan to expand our commitment up to €2.5bn. On top of this, we seek to invest a total of around €1.5bn in infrastructure projects such as power supply, transport and telecommunications. By the end of 2012, we had already invested €500m in this sector.
Our social commitment at Munich Re’s different business locations will be structured even more systematically in future. We have devised a corporate citizenship concept in which we underpin this commitment with expertise from our operational activities. Last year, for instance, we launched a two­year project for earthquake disaster preven­ tion in India. The local measures include training people how to behave when earth­ quakes occur, and the structural consolidation of state buildings like schools, hospitals and other important infrastructure. This project­based approach is supplemented by the work of our three corporate foundations. The Munich Re Foundation, for example, is supporting a project in Mozambique for developing effective flood prevention measures. It again staged its annual International Microinsurance Conference in 2012, with more than 400 participants from 50 countries, making it the world’s largest platform for this topic. ERGO’s Youth & Future Foundation has the objective of enhancing personal and career opportunities for young people. The Dr. Hans­Jürgen Schinzler Foundation, set up in 2004, encourages the social commitment of Munich Re employees and coordi­ nates corporate volunteering activities at our Munich site where, for example, more than 1,500 hours of voluntary charity work were “donated” in 2012.
DKV Seguros is the first European insurer to have its products certified as carbon­neutral
More details of our Group­wide activities in the field of corporate responsibility are provided at www.munichre.com/cr/en
In order to make our corporate responsibility approach transparent, Munich Re maintains active contact with socially responsible investment rating agencies and interested investors, and provides detailed information on its activities not only through our Group-wide corporate responsibility portal but also, since 2012, in a separate ERGO sustainability report. Our improved results in several ratings and our regular inclusion in internationally renowned sustainability indices confirm that we are on the right track. Thus, for example, Munich Re has been an ever-present in the FTSE4Good and Dow Jones Sustainability Index since 2001. Since signing the UN Global Compact in 2007, we also report annually on our progress in implementing the principles: our Communication on Progress is prepared in accordance with the guidelines of the Global Reporting Initiative.
Organisational structure To ensure that our risk management operates efficiently and effectively, we have established specific risk management functions and committees. Our Integrated Risk Management Division (IRM) supervises risk management Group-wide with the support of decentralised structures in all units of the Group. It is headed by the Chief Risk Officer (CRO), who, like the local CROs at individual companies, is supported by interdisciplinary teams of highly qualified staff. Our extensive documentation, guidelines and instructions ensure that staff in our risk management structure and the Group as a whole are kept informed of our risk strategy, organisation and processes, enabling the risks incurred to be actively managed.
Risk governance Munich Re’s risk governance fosters the development and maintenance of an effective risk and control culture, which encompasses all significant risk categories. It is supported by committees at Group and business-segment level: Group level The CRO is a permanent member of the Group Committee, the central committee responsible for Group-wide issues, the development and management of strategy, financial control, and risk management and investment matters.
Besides this, the Group Committee meets quarterly together with members of senior management responsible for investments in our business segments as the Group Investment Committee. This committee is the central management committee for major Group-wide issues affecting the Group’s investments, including specific investment risks.
— Munich Re’s risk situation in 2012 manageable and under control — Solvency ratio still comfortable — Integrated worldwide system for managing risks
Munich Re Group Annual Report 2012 abstract level and with the Group’s positioning on these, the GCC focuses on concrete reputational risks that arise from one or more specific cases or are the subject of enquiries from the business units.
The Remuneration Committee, in accordance with the German statutory order on remuneration schemes in the insurance industry (VersVergV), has responsibility for designing, reviewing and enhancing the staff remuneration system, with a particular focus on variable incentive components.
Segment level The Global Underwriting and Risk Committee (GURC), which comprises members of the Reinsurance Committee, was created to function as a special risk committee for reinsurance.
Risk management for primary insurance is mainly decentralised to ERGO IRM, and supported by risk management structures in all areas of ERGO. The ERGO Board of Management has established the ERGO Risk Committee as a decision-making body.
The Munich Health Risk Committee is responsible for risk matters in the Munich Health segment.
Determining the risk strategy The assumption of risks is an essential part of our business strategy. The risk strategy defines the extent to which we are prepared to incur risks for our clients and shareholders; the development of our risk strategy is part of the annual planning cycle and thus embedded in our business strategy. It is approved by the Board of Management and discussed regularly with the Supervisory Board. Its objectives are: The risk strategy is determined by a risk appetite defined for a series of risk criteria. The criteria are based on the capital and liquidity available and on our earnings target within specified volatility limits, and provide a frame of reference for the Group’s operating divisions: — Whole portfolio criteria, relating to Munich Re’s entire portfolio of risks, designed to protect our capital and limit the likelihood of an economic loss for the year. Particularly worth mentioning in this respect is the criterion “economic earnings at risk” (EEaR), which we use to manage the Group’s risk profile in such a way that our riskbearing capacity does not fall below a defined threshold in the event of adverse business experience of the type that occurs statistically around every ten years. As at 31 December 2012, economic earnings at risk stood at €4.8bn.
Maintain our financial strength, thereby ensuring that our liabilities to our clients can be met
— Other criteria, aimed at preserving Munich Re’s reputation and thus protecting its future business potential. They encompass limits for individual risks that, though they would not threaten Munich Re’s existence, could cause lasting damage to the confidence of clients, shareholders and staff were they to materialise.
Implementation of strategy and the risk management cycle The risk appetite defined by the Board of Management is reflected in our business planning and integrated into the management of our operations. In the event of capacity shortages or conflicts with the systems of limits and rules, there are fixed escalation and decision-making processes which ensure that business interests and risk management aspects are reconciled. If necessary, risks are ceded or hedged by means of reinsurance, derivatives or other forms of risk relief.
Risk analysis and assessment are carried out at the highest level in IRM, in the form of a consolidated Group view, taking into account limitations on capital fungibility. They are based on the analyses prepared by the risk management units of our reinsurance, ERGO, Munich Health and asset management operations. Besides this, IRM is responsible for checking and validating the analyses of upstream units, working closely with
Quantitative risk monitoring based on indicators is carried out both centrally and within units, for example at MEAG for investments and at ERGO IRM, and then collated centrally. We monitor risks that cannot be expressed as an amount either centrally or in our units depending on their materiality and allocation.
Our main risks are controlled at a number of levels. We rely primarily on automated, system-based checks of the content of our defined processes.
In the period from March to November 2012, Munich Re’s consolidated financial statements and the Group management report for the 2011 financial year were subjected to an audit by the German Financial Reporting Enforcement Panel (DPR). There were no findings.
Internal risk reporting provides all members of the Board of Management with regular information on the risk situation, as regards both the individual risk categories (on going ) and the entire Group (quarterly). The Audit Committee of the Supervisory Board and BaFin also receive the quarterly internal risk report. Early-warning mechanisms thus ensure that negative trends are identified in sufficient time for countermeasures to be taken.
Premium risk Line management has primary responsibility for controlling the premium risk. Line managers grant underwriting authorities and lay down internal processes aimed at ensuring that a high level of quality is maintained; in doing so, they take account of both the specific exposures in their business and the knowledge and experience of each member of staff. In particularly critical areas, the underwriting authorities granted to the operating units are restricted by mandatory Group-wide instructions or limited capacity budgets.
Reserve risk The estimation of reserves is subject to uncertainty due to the fact that the settlement of claims that have arisen before the balance sheet date is dependent on future events and developments. Unforeseen loss trends resulting from court rulings, changes in the law, differences in loss adjustment practice, medical and long-term care, and economic factors such as inflation can have a considerable impact on run-off results.
Further information on risks in property-casualty insurance can be found on page 258 ff. in the notes to the consolidated financial statements
The remarks on underwriting guidelines and limits in respect of property-casualty business also apply to life and health reinsurance business. In primary insurance, regular reviews of the actuarial assumptions by actuaries and the requisite amendment of rating rules ensure that risks and processes are effectively controlled. If there is a lasting change in the actuarial assumptions applied in health primary insurance, it is generally possible to adjust the premiums for long-term contracts.
Our investments must comply with Group-wide minimum standards as defined in our General Investment Guidelines. We also take account of risk-relevant restrictions on investments resulting from our risk strategy.
In addition to credit risks arising out of investments and payment transactions with clients, we actively assume credit risk through the writing of insurance and reinsurance business, for example in credit and financial reinsurance.
Information on our ICS can be found on page 118 f.
We also optimise the availability of liquidity in the Group by means of internal funding and a cash pool fed by Group companies. Through stringent requirements regarding the availability of liquidity, which also comply with supervisory rules, we ensure that every unit is able to meet its payment obligations.
Strategic risk Munich Re defines strategic risk as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment. The existing and new potential for success in the Group and the segments in which it operates creates strategic risks, which can lead to an appreciable long-term reduction in corporate value.
We monitor reputational risk through processes we have established in various internal units to identify it. These processes range from the general recording of risks for the purposes of our ICS to whistleblower procedures and our ad-hoc reporting process. Actual cases that could involve reputation issues are evaluated in the business segments either by a Reputational Risk Committee (RRC) or through a comparable procedure in which a coordinating unit ensures that appropriate experts are consulted. The respective unit’s Compliance Officer can always be consulted on matters relating to the assessment of reputational risks. In the Group Compliance Committee (GCC), reputational risks are also considered at Group level in order to ensure uniform analysis
On pages 120 ff., we provide examples of the above-mentioned risks and how we deal with them
A key figure calculated using the internal model is our economic risk capital (ERC). By economic risk capital, we mean the amount of capital that Munich Re needs to have available, with a given risk appetite, to cover unexpected losses in the following year. 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 setting its own capital requirement at 1.75 times this risk tolerance, our Group follows a conservative approach, offering its 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 taken into account.
Prev. year Change Segment Primary Munich diversifi- €bn Group Reinsurance insurance Health cation Group
— The economic risk capital for market risks grew by €2.6bn due both to increased equities and foreign-currency exposure and to lower interest rates, which have led to a rise in risk capital in life primary insurance in particular. An improvement in the way the spread risks in life and health primary insurance are depicted also caused risk capital to increase.
— As the composition of the portfolio remained stable, the economic risk capital for credit risks remained at approximately the same level as for the previous year.
— The diversification effect between the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risk” grew by €0.7bn, due primarily to a €3.6bn rise to €39.0bn in the sum of the economic risk capital requirements for the individual risk categories.
A separate analysis as at the end of 2012 showed that all the changes to the model increased the Group’s economic risk capital by a total of approximately 5%.
The exposures in the reinsurance segment are updated for the quarterly ERC calculations, and we use the data to adjust the stochastic models for natural hazards. The economic risk capital (eRC) – Property-casualty 31.12.2012 Prev. year Change Segment Segment Re- Primary diversi- Re- Primary diversi- €bn Group insurance insurance fication Group insurance insurance fication Group
Diversification effect –4.1 –3.9 –0.2 – –3.4 –3.4 –0.1 – –0.7
The diagrams show our estimated exposure to these peak scenarios for a return period of 200 years.
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 parts of our business.
In addition to the simple risk of random fluctuations resulting in higher claims expenditure in a particular year, the countervailing 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.
However, particularly life primary insurance products, and a large part of our health primary insurance business, are long-term in nature, and the results they produce are spread over the entire duration of the policies. We show the value of business in force and value sensitivities for such long-term portfolios in the notes to the consolidated financial statements. The countervailing development of risk drivers with a long-term impact, such as changes in the forecast mortality and disablement trends, can cause the value of the insured portfolio to fall (trend risks). The risk modelling then attributes probabilities to each modified assumption and produces a complete profit and loss distribution.
Equity risk The market value of our investments in equities, including participating interests, was €8.4bn (€6.7bn) as at 31 December 2012. As at that date, on a market-value basis the ratio of equities to total investments was 3.7% (3.2%) before taking derivatives into account, and 3.4% (2.0%) after derivatives. The rise on the previous year is the reason for the higher risk capital for equities.
Further information on the value of business in force and on value sensitivities is provided in the notes to the consolidated financial statements under ”Risks from life and health insurance business ” on page 251 ff.
The modified duration in primary insurance is 8.1 for fixed-interest investments and 9.2 for liabilities. This exposure to falling interest rates arises mainly out of the long-term options and guarantees in life insurance business. These risks were reduced substantially by the extensive interest-rate-risk hedging programme first implemented in 2005. The sensitivity of available financial resources to a parallel shift of one basis point in all interest-rate curves (DV01) amounts to €16.1m.
Currency risk The currency risk increased in relation to the end of the previous year due to somewhat higher foreign-currency exposure in the reinsurance portfolio.
Our provisions ceded to reinsurers and retrocessionaires were assignable to the following rating categories as at 31 December 2012: The shifts are mainly due to the change in rating of a small number of reinsurers/ retrocessionaires.
We compare the economic risk capital, which equates to Munich Re’s capital requirement, with the available financial resources that can be used to cover losses that exceed expectations. The available financial resources are calculated as the sum of the economic equity and the available hybrid capital. The economic equity is based essentially on Munich Re’s IFRS equity with various appropriate economic adjustments.
The valuation reserves include adjustments to items in the property-casualty seg ment and for Munich Health that are not accounted for at fair value under IFRS, in par ticular to land and buildings and loans. We perform various valuation adjustments for
Information on the ratings of our fixed- interest securities and loans can be found on page 199 ff.
Munich Re Group Annual Report 2012 property-casualty and life and health. In property-casualty reinsurance, we project future claims payments using actuarial methods. We discount estimated cash flows in property-casualty and for Munich Health, and add a risk margin derived in accordance with strict economic principles. In the case of business for which we show a MarketConsistent Embedded Value (MCEV), we regard the embedded value as capital available to cushion risks and take into account the portion not already included in IFRS equity. Capitalised goodwill and other intangible assets on the other hand are included in the Group’s IFRS equity, but we deduct them when calculating economic equity, as they might not retain their value in crisis situations. 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 company concerned or in the US tax group.
Hybrid capital comprises subordinated liabilities and the funds financing new business of German life primary insurance companies. In line with the future Solvency II regulations and market practice, the latter were taken into account for the first time as at 31 December 2012. Attributable neither to shareholders nor to policyholders, they are available for the preliminary financing of future new business by business in force.
Available financial resources €bn 31.12.2012 Prev. year Change IFRS equity 27.4 23.3 4.1
Value adjustments for property-casualty and life and health 5.3 4.0 1.3 Goodwill and other intangible assets –4.1 –4.2 0.1 Tax effects and other1 –0.1 –0.4 0.3
The economic solvency ratio of 129% is 18 percentage points higher than for the previous year (111%) and 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 according to our internal risk model. Were we not to apply the safety cushion of 75% to the value at risk with a confidence level of 99.5% and merely to comply with the Solvency II standard, the economic solvency ratio would be 225% (195%).
In calculating RORAC, the factor “additional available economic equity” is also relevant. It is the difference between the economic equity and the economic risk capital and amounted to €2.4bn (–€0.8bn) as at 31 December 2012.
The effects of the sovereign debt crisis As an insurer and reinsurer, we manage not only our own financial assets, but also those of our clients. This applies in particular to insurances of the person. When we invest, we have to accept certain credit risks (the risks of deteriorations in creditworthiness and debtors defaulting), in addition to market risks. This is clearly the case for corporate bonds, but there are also considerable risks in government bonds, which were considered safe in the past. The eurozone is our home market and we thus have substantial investments in euros. These are broadly diversified and are natural assets to hold to cover the euro liabilities arising out of our insurance businesses. We use government bonds to match the currencies of our underwriting liabilities, especially for life and health primary insurance.
Notwithstanding appreciably improved sentiment on the capital markets in the second half of 2012, the euro debt crisis can be expected to continue in 2013 regardless of a growing arsenal of political countermeasures, with the ECB also introducing new instruments. For example, on 6 September 2012, the ECB Governing Council specified the modalities for “outright monetary transactions”, i.e. the buying and selling of government bonds by the ECB on the secondary markets. Despite these measures, the fundamental public finance situation in several countries remains critical. The need for budget consolidation and expansion of austerity measures even in the face of recession and high unemployment present real challenges – particularly for politicians at national level. Bond yields from low-credit-risk countries are still at a historical low. This applies most notably to German and US issues. Ongoing low interest-rate levels in the eurozone in particular are a major test for life insurance companies especially. It is becoming increasingly difficult to generate the returns on investment guaranteed to or at least expected by insurance clients. The fluctuations on the capital markets give rise to considerable volatility in our investments and liabilities on the valuation dates. We monitor these risks closely and counter them with various risk management measures.
Pandemic Another example of an overarching accumulation is a serious pandemic, which would expose Munich Re, like other companies in the insurance industry, to risks resulting from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk with a detailed analysis of our overall exposure (scenario analysis), defining suitable limits.
Whilst we are in a position to adequately assess the known risks in our portfolio on the basis of current climate research, 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 evaluation of new and changing 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. If new findings in climate research or actual claims development necessitate adjustments in risk assessment, we are able to make these changes promptly because the contractual periods of most of our natural hazards covers are only one year.
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”. This group of experts investigates the possible impact of emerging risks on Munich Re, also looking at interconnections and interdependencies between different risks and other consequences related directly or indirectly to emerging risks. Cooperation with external partners complements our internal early-warning system, for example the CRO Forum’s Emerging Risks Initiative.
As a consequence of increasing global dependencies and the rapid spread of technological innovations, events which are difficult to identify using traditional scenariobased risk management are occurring with greater frequency. Both the occurrence of an event and its potential consequences are more and more difficult to foresee, recent examples being the earthquake in Japan and the floods in Thailand in 2011. Not only did both natural catastrophes have a devastating impact on the population, infrastructure and economy in the regions affected, but worldwide supply chains were also hit, with industrial production being interrupted in far-away countries. Such chains of events will take on greater importance in future. We therefore adopt a system-based approach to analyse dependencies in complex risks, for which Munich Re has developed its Complex Accumulation Risk Explorer software (CARE). Using this method, risks and their interaction can be made more transparent and at least partially quantified. With CARE, we can improve the identification and structuring of complex accumulation risks for our own risk management and provide support for our clients, placing us in a position to meet the rising demand for reinsurance of these risks.
Munich Re Group Annual Report 2012 sation (approx. 237,000) and the upper end of the scale within which the corporate value of ERGO Versicherungsgruppe AG as at the date of valuation can be set. We estimate the risk to be a single-digit million euro amount.
There are legal disputes between several former insurance intermediaries and ERGO Lebensversicherung AG, most of which have now been concluded. In connection with far-reaching claims by the former intermediaries, serious allegations have been levelled in the media since May 2011, including reports of misconduct on incentive trips and errors in the sale of insurance products at ERGO. These cases have been extensively investigated by Group Audit and ERGO’s internal audit function. ERGO has initiated the rectification of errors and has established reserves for any liabilities arising. In relation to all these events, add itional claims for damages against ERGO and Munich Re have been announced. Financial burdens and reputational damage for Group companies as a result of these allegations cannot be ruled out in future either.
There are currently a number of lawsuits pending against various Ideenkapital companies. The plaintiffs are fund investors, who for the main part are asserting defects in prospectuses and products. The claims filed so far amount to a total of around €6m. Ideenkapital is defending itself against these claims. The possibility of further suits cannot be excluded.
Supervisory risks In the American Modern Insurance Group (American Modern), it was discovered that agents appointed by American Modern for its Financial Institutions Division had been quoting and charging insureds rates that were partly under but predominately over the rates approved by the regulators. Group Audit is currently investigating the processes and controls installed for the products concerned. American Modern has self-reported the rate variances to its responsible insurance supervisor in Ohio and is working with them on a Corrective Action Plan.
At national level, implementation of the Solvency II Directive will bring about changes in German supervisory law. But this national legislative process has been delayed by unresolved questions at a European level in the ongoing Solvency II project. In the second quarter of 2012, the European Commission published a proposal for a revision of the Insurance Mediation Directive (IMD 2). Key elements which could also affect our business models include the proposals on remuneration, namely a ban on insurance companies remunerating intermediaries who offer clients independent advice on insurance investment products, comprehensive information requirements for the remuneration of insurance intermediaries and their employees, and new rules on conflicts of interest, on assessing suitability and fitness for purpose, and on reporting obligations with regard to the marketing of insurance products. At present, we anticipate that IMD 2 will enter into force in 2015.
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 with specific figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout Munich Re. During the whole of 2012, risk exposures were regularly quantified and compared with the risk appetite. We assess Munich Re’s risk situation as manageable and under control.
It is clear, for example, that enhanced business opportunities will result for us if important macroeconomic parameters develop better than expected. A stronger economic recovery in the USA or rapid stabilisation of the situation in the eurozone, accompanied by sustained growth in the emerging countries, would trigger a demand surge and increase premium income in most classes of insurance. Besides this, such a development could lead to a gradual normalisation of the bond markets and thus to a slow rise in yields on US and German government bonds. This would result in burdens on our investment result in the short term, but also bring higher returns in the long run, thus benefiting our long-term insurance business.
Information on current developments is provided in our press releases on our website at www.munichre.com/press
— Power generation from alternative energy sources triggers additional cover requirements in property business
Successful new developments for covering hitherto uninsured economic risks are another option for generating additional profitable business. We are constantly working together with our clients on pushing back the limits of insurability.
The rapid development of emerging countries also provides opportunities for expanding profitably and further diversifying our business portfolio. In many Asian and Latin American growth markets, Munich Re is the leading reinsurer and increasingly also present as a primary insurer with promising ventures.
In the present economic environment, life insurance presents challenges and opportunities in view of the demand for old-age provision resulting from greater life expectancy, against the backdrop of increasingly volatile capital markets. As a reinsurer,
Munich Re is a competent partner for life primary insurance companies thanks to its tailored offering of asset protection solutions. The reinsurance of longevity risks also offers measured growth potential.
In primary insurance, ERGO stands out positively in the market with its brand proposition “To insure is to understand”. In this complex industry for clients, ERGO can consolidate and expand its market position in terms of consultancy, service and products. Consumers often feel their insurance issues are not taken seriously. Surveys show that they bemoan the lack of transparency in products and services. With its clear and easyto -understand communication, which includes shortened policy wordings, ERGO is creating the basis for a partnership-based approach.
Turbulent capital markets and low interest rates are causing clients to seek greater investment security. Given the low-interest-rate environment, we will meet our customers ’ need for guaranteed benefits through the creation of new products by our life primary insurers. These will offer not only a certain participation in capital market performance but also the necessary guarantees, which we can hedge on the capital markets.
Further information on segment reporting can be found on page 185 ff. in the notes to the consolidated financial statements
Gross premiums written €bn 48–50 52.0 Consolidated result €bn Around 2.5 3.2 Return on investment % Around 3.5 3.9 Return on risk-adjusted capital (RORAC) % 15 13.2
— Dividend proposal for 2012: €7.00 per share — Challenges remaining for the Group owing to uncertain economic environment, but also opportunities thanks to financial strength and solution competence
— Expected return on investment of around 3.3% for 2013 — Unchanged long-term result target of 15% on risk-adjusted capital
Our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets is difficult to achieve in the current low-interest-rate environment. In 2012, the RORAC of 13.2% came gratifyingly close to our long-term target.
Reinsurance performed very favourably in 2012: gross premiums totalling €28.2bn clearly surpassed our target range of €25–27bn and our consolidated result, at €3.1bn, was also significantly above the €1.9–2.1bn mark.
The increase in gross premiums was attributable to both segments. Gross premiums in life reinsurance grew particularly strongly to €11.1bn, mainly owing to large-volume treaties. The target for 2012 had been around €10bn.
The consolidated result improved considerably to €3.1bn, benefiting primarily from the increased investment result and better technical result.
Our total premium income in primary insurance amounted to €18.6bn – below our 2012 target of just over €19bn – mainly on account of the decrease in German life primary insurance. At €17.1bn, gross premiums written were within the envisaged target corridor of €17–18bn.
We posted a consolidated result of €247m for the primary insurance segment and €289m for the ERGO Group. At the beginning of the year, our projected result for the ERGO Group was approximately €400m. The deviation from the target figure is chiefly due to restructuring expenses for the sales reorganisation programme, which reduced the result by around €128m.
The combined ratio – 100.2% – was higher than our target figure of around 99%, largely owing to increased medical costs in the USA.
The economic outlook is clouded by great uncertainty. A sharp downturn or even an extended period of stagnation cannot be completely excluded in a number of industrialised countries. A sustained low-interest-rate environment would substantially impair the situation of life insurance companies and appreciably impact that of insurers operating in other lines of business. The high levels of debt in many countries, an escalation of the US budgetary dispute, or upheavals in the eurozone could further destabilise the global financial system and the world economy to the detriment of the insurance industry.
If there was a surprisingly strong economic recovery, the substantial interventions of the central banks and related expansion of the money supply might result in higher inflation, with corresponding inflation in claims costs for insurers.
Potential geopolitical conflicts, for instance in the Middle or Far East, remain a significant risk for the global economy and thus the insurance industry.
Insurance industry In the European Union, state supervision for primary insurers and reinsurers is set to undergo profound changes with the new rules planned under Solvency II. The first-time application of the new supervisory regulations, which will impose greater requirements on insurance companies in terms of capital, risk management and reporting, was initially postponed to 1 January 2014, and there is now the prospect of further delays. The European Union has commissioned a study to assess the impact of various measures for valuing long-term guarantees in insurance contracts (Long Term Guarantee Assessment ). Given the scope of this study, the European supervisory authority EIOPA will not be able to submit its report on the outcome until sometime in 2013. This is likely to delay the first-time application of Solvency II capital requirements by at least two further years to 2016. In view of the delay until Solvency II is finally adopted, EIOPA and national supervisory authorities are currently considering introducing individual aspects of the Solvency II regime prior to 2016. Irrespective of this, Solvency II can be expected to influence insurance supply and demand even before its legal implementation. New opportunities will emerge for Munich Re in both primary insurance and reinsurance, and these will exceed the challenges from the many different additional demands.
The projected moderate growth in the global economy will lead to a solid increase in worldwide demand for insurance, albeit subject to considerable differences between individual regions and segments. Overall, we predict a growth rate for global premium in property-casualty insurance that is at least equivalent to that of global economic growth. We are proceeding on the assumption that demand for life insurance cover is likely to recover in 2013.
Nevertheless, the extremely low yields on German and US government bonds in particular present a challenge for insurers because of the significant reduction in interest earned on investments in the period between premiums being received and policy bene fits being paid out. In long-tail business in particular, this intensifies the need to increase prices. Conversely, subdued economic growth is limiting demand for insurance protection and with it the scope for higher prices.
Reinsurance Reinsurance continues to hold considerable promise for the future, with a wide variety of earnings opportunities. Munich Re offers its cedants specialist consulting services and extensive solutions, also for tasks such as balance sheet management, risk modelling and asset-liability management. Reinsurance is an efficient and flexible option for protecting primary insurers against major claims and accumulation losses, or strengthening their capital base. In addition to this, we devise innovative coverage concepts that go beyond the scope of traditional reinsurance. And we partner our clients in the often challenging task of adjusting to changes in regulatory requirements, which will be altered significantly in many countries in the coming years.
We see further good growth opportunities in life reinsurance. Opportunities will derive in particular from the dynamic expansion of the Asian life insurance markets and from the ongoing privatisation trends in provision for old age, long-term care and disability. Here, we analyse in detail how the related product features tie in with our risk strategy.
In addition,we see increasing demand for the management of investment risks in life insurance products. We provide our clients with comprehensive solutions for hedging options and guarantees dependent on the capital markets.
Target 2013 Gross premiums written €bn 50–52 Consolidated result €bn Close to 3 Return on investment % Around 3.3 Return on risk-adjusted capital (RORAC) % 15
Information on the special features of IFRS accounting is provided on page 41
In 2010, we set ourselves the objective of achieving value added by new business of €450m a year by 2015 based on Market Consistent Embedded Value (MCEV) Principles. Given the further very good result posted in the past year, we see ourselves as well positioned to achieve this goal.
A premium volume of €9.2bn of our treaty business was up for renewal in January. We recorded a slight decrease of around €135m. In accordance with our profit-oriented underwriting policy, we again refrained from renewing business that did not meet our pricing requirements this year. For example, we continued to reduce European property -casualty business for cycle-related reasons. Overall, we managed to increase prices for our natural catastrophe business moderately, with the persistently low interest -rate-environment leading to price increases in casualty business. Altogether, we were able to improve the profitability of our portfolio by around 0.5% in a competitive market environment.
For 2013, we anticipate gross premiums written of around €17bn in property-casualty business. We aim for a combined ratio of approximately 94% of net earned premiums. The uncertainties involved in the estimate derive in part from the random incidence of major individual losses.
In property-casualty insurance, we project that gross premiums written will total slightly more than €5.5bn, some €3.3bn of this deriving from German business, where we aim to achieve moderate growth. We continue to attach great importance to riskcommensurate prices, which in our business with commercial and industrial clients are not always attainable in the current market environment. We see potential for improvement in motor business. In international business, we are aiming to return to growth in the current year. However, there will be no premium income from ERGO Daum in South Korea in 2013, as we sold this company in the year under review. The combined ratio is likely to be around 95%.
For the primary insurance segment, we project a consolidated result of €400–500m, and some €350–450m for the ERGO Group. The difference between the two figures is mainly attributable to intra-Group business between primary insurance and reinsurance.
Munich Health The burdens from US Medicare business transacted by Windsor Health Group (WHG) and the write-downs due to the deterioration of the medium-term earnings situation at WHG had a significantly negative impact on the consolidated result for 2012. In view of the restructuring costs and investments incurred for improving managed care business, WHG is likely to again post a loss for 2013.
We expect that gross premiums written will amount to somewhat more than €6.5bn in 2013. The combined ratio should be around 100%. Given the difficult situation at WHG, a further loss for Munich Health in 2013 cannot be ruled out. Altogether, notwithstanding the developments in the USA, we remain convinced that, owing to medical advances and improved life expectancy, there is a wide range of growth avenues for Munich Health in the international healthcare markets. And we intend to utilise these opportunities.
Investments The 2012 financial year was characterised by political uncertainties and resultant volatilities in the capital markets. We are proceeding on the assumption that the situ ation in 2013 will be unstable as well. The main risks lie in the further development of the sovereign debt and banking crisis. A collapse of the European financial system, especially major banks defaulting chaotically, or a sustained low interest-rate level with simultaneously rising inflation would hit the whole insurance industry hard, as it would all major investors. We systematically limit our risks and strive for a balanced exposure, so regard ourselves as well prepared. Given our broad diversification, every scenario involves losses in individual assets, but as a rule these would entail asset gains elsewhere, because diversification effects and our Group-wide asset-liability management are designed to effectively dampen any potentially negative effect economically. Our diversifying investment strategy during the past year proved its worth in this environment and will therefore be pursued in 2013. We are planning, for instance, to further reduce our portfolio of government bonds in developed countries and to moderately build up investments in corporate bonds and emerging-market bonds. In 2012, the proportion of equities in our portfolio increased marginally. If suitable opportunities present themselves in the market, we may expand the proportion of investments in equities further to a very measured extent.
We are adhering to our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets. However, this target will be difficult to achieve given the currently low level of interest rates on low-risk investments.
Provided that prices in reinsurance are stable and loss experience is average, our assumption for 2013 is that Munich Re will post a technical result of the same level as in 2012.
We are aiming for a consolidated result for 2013 of close to €3bn. For 2014, we expect to be able to achieve an even higher consolidated result. This profit guidance is subject to claims experience with regard to major losses being within normal bounds and to our income statement not being impacted by severe currency or capital market movements, significant changes in fiscal parameters, or other special factors.
Our shareholders can look forward to a dividend for 2012 which – subject to approval by the Annual General Meeting – will rise by 75 cents to €7.00 per share.
Assets A intangible assets 171 b investments 172 C investments for the benefit of life insurance policyholders who bear the investment risk 177 D Ceded share of technical provisions 177 e Receivables 177 F Cash at banks, cheques and cash in hand 177 g Deferred acquisition costs 177 h Deferred tax assets 178 i other assets 178 equity and liabilities A equity 179 b subordinated liabilities 179 C gross technical provisions 179 D gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 182 e other accrued liabilities 182 F Liabilities 183 g Deferred tax liabilities 183
Foreign currency translation 184 segment reporting segment assets 186 segment equity and liabilities 186 segment income statement 188 non-current assets by country 190 investments in long-term assets per segment 190 gross premiums written 191 notes to the consolidated balance sheet – Assets 02 other intangible assets 195 03 Land and buildings, including buildings on third-party land 197 04 investments in affiliated companies and associates 198 06 other securities held to maturity 199 07 hierarchy for the fair value measurement of investments 200 08 other securities available for sale 202 09 other securities at fair value through profit or loss 204 10 Deposits retained on assumed reinsurance 208 11 other investments 208 12 Ceded share of technical provisions 209 13 other receivables 209
Disclosures on risks from insurance contracts and financial instruments 37 Risks from life and health insurance business 251 38 Risks from property-casualty insurance business 258 39 Credit risks from ceded reinsurance business 263 40 Market risks from financing instruments – sensitivity analysis 264 other information 42 Related parties 266 43 Personnel expenses 266 44 Long-term incentive Plan 267 45 Mid-term incentive Plan 270 46 Remuneration report 271 47 number of staff 272 48 Auditor’s fees 272 49 Contingent liabilities, other financial commitments 272 50 Restrictions regarding transfer of capital 273 52 events after the balance sheet date 275 53 earnings per share 275 54 Proposal for appropriation of profit 275
Notes 31.12.2012 Prev. year Change €m €m €m €m % A. Equity (18) i. issued capital and capital reserve 7,390 7,388 2 0.0 ii. Retained earnings 10,946 11,588 –642 –5.5 iV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,195 702 2,493 355.1 V. non-controlling interests 242 247 –5 –2.0
C. Gross technical provisions i. unearned premiums (20) 8,134 8,391 –257 –3.1 thereof: held for sale – 24 –24 –100.0 ii. Provision for future policy benefits (21) 109,769 108,477 1,292 1.2 iii. Provision for outstanding claims (22) 53,751 54,392 –641 –1.2 thereof: held for sale – 16 –16 –100.0
Notes 2012 Prev. year Change €m €m €m €m €m %
unrealised gains and losses on investments gains (losses) recognised in equity 2,936 1,942 included in the income statement –589 –1,192
Actuarial gains and losses on defined benefit plans –382 –135 other changes 16 –3 Income and expense recognised directly in equity 1,941 1,013 Total recognised income and expense 5,152 1,725 thereof: Attributable to Munich Reinsurance Company equity holders 5,121 1,713 Attributable to non-controlling interests 31 12 statement of recognised income and expense
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Issued Consolidated capital Capital reserve Retained earnings Other reserves result Retained earnings before Unrealised Reserve from Valuation result deduction of Own shares gains and currency from cash flow €m own shares held losses translation hedges Status at 31.12.2010 588 6,800 11,581 –846 2,850 –610 –2 2,422 245 23,028 Allocation to retained earnings – – 1,312 – – – – –1,312 – –
Unrealised gains and losses on investments – – – – 750 – – – – 750 Change resulting from valuation at equity – – 2 – 3 – – – – 5 Change resulting from cash flow hedges – – – – – – 6 – – 6 Actuarial gains and losses on defined benefit plans – – –137 – – – – – 2 –135 Other changes – – – – – – – – –3 –3
In preparing the consolidated financial statements, we have to use our judgement in applying accounting policies and to make estimates and assumptions that affect the year­end items shown in the consolidated balance sheet, the consolidated income statement and the disclosures on contingent assets and liabilities.
Particularly in insurance and reinsurance, the use of estimates for measuring technical provisions is of substantial significance, given that measurement is invariably based on models and the development of future cash flows from insurance contracts cannot be conclusively predicted. But judgements and estimates play a significant role in the case of other items as well.
Non­current assets and disposal groups classified as “held for sale“ are recognised at the lower of carrying amount or fair value less sales cost and shown separately in the consolidated balance sheet.
Changes in accordance with the rules of IAS 8 necessitated the retrospective adjust­ ment of the figures from the income statement for the financial year 2011 and the rele­ vant items of the notes to the consolidated financial statements (see section “Changes in accounting policies and other adjustments”). In addition, our segment reporting has been modified and no longer has a consolidation column. This is described in the sec­ tion “Segment reporting”. The other previous­year figures have been calculated on the same basis as the figures for the financial year 2012.
Application of the recognition, measurement and disclosure methods follows the principle of consistency.
In the financial year 2012, the following new IFRSs had to be applied for the first time: The amendments to IFRS 7 (rev. 10/2010), Financial Instruments: Disclosures, Improving Disclosures about Financial Instruments, contain more extensive disclos­ ure requirements regarding the transfer of financial assets. These apply to circum­ stances in which a company transfers a financial asset to a contractual party but still retains contractual rights or obligations inherent in that asset. The aim of these amend­ ments is to make more transparent the influence of such transactions on the entity’s risk exposure and hence its financial situation. This change currently has no practical rele­ vance for Munich Re.
Our method of calculating technical interest has been modified in the primary insur­ ance segments since the first quarter of 2012. This particularly affects the life primary insurance segment. In addition to the components used hitherto, the deposits retained on ceded business are now also taken into account as a basis for the technical interest. Thus the portion of investment income that corresponds to the deposit interest expense is included as a new component in the calculation of the technical interest and reallo­ cated to the technical result. This change provides for a more accurate presentation of the technical result. As a result of the change, the income from technical interest in the life primary insurance segment in the financial year 2012 is higher than it would have been under the previous method. It is impracticable to determine the exact increase for the current period, but there was an increase of €55m for the same period last year, which includes the effect from the retroactive adjustment of a consolidated entry. Besides this, the income from technical interest in the health primary insurance seg­ ment was reduced by €155m for the prior period. This was due to an adjustment in posting logic for interest on technical provisions in connection with elimination of inter­ company profits, based on the complete elimination of intra­Group transactions in segment reporting. Pursuant to IAS 8.22, the modification has been applied with retro­ active effect and the previous year’s figures have been adjusted accordingly. In addition, the estimate for policyholders’ bonuses has been refined and has been used pursuant to IAS 8.32 as from the first quarter of 2012 for future periods.
Under the amendment to IAS 1 (rev. 06/2011), Presentation of Financial Statements, Presentation of Items of Other Comprehensive Income, “other comprehensive income” must now be divided into items that will be reclassified to profit or loss at a later date and items that will not. The purpose of this amendment is to improve the presentation of these items and align the approaches under IFRS and US GAAP. The amendments are mandatory for financial years beginning on or after 1 July 2012, and were adopted into EU law in June 2012.
IFRS 9 (11/2009 and rev. 10/2010), Financial Instruments, replaces the current requirements of IAS 39 relating to recognition and measurement of financial instru­ ments. Given its complexity, the overall project has been subdivided into three phases. The new rules in IFRS 9 that have thus far been adopted from the first phase of the project mainly concern the classification and measurement of financial instruments. Under these rules, financial assets will in future be divided into only two primary meas­ urement categories: amortised cost and fair value through profit or loss. The distinction is to be made on the basis of the reporting entity’s business model and the contractual cash flows of the assets. In addition, for equity instruments there will be the option of measurement at fair value without affecting the income statement, although then it will not be permissible for value changes recognised in other comprehensive income to be subsequently transferred to profit or loss. There also remains the possibility of volun­ tary measurement at fair value (fair value option). For financial liabilities, there are no changes in the measurement rules except that if the fair value option is applied, value changes attributable to a change in the entity’s credit risk must be recognised without impact on profit or loss in future.
The two other phases of the project are concerned with rules for recognising impair­ ments and for hedge accounting. While the discussion regarding hedge accounting has practically been concluded and the new rules are to be integrated into IFRS 9 in the short term, the IASB will first be publishing another exposure draft for the rules regard­ ing recognition of impairments.
Besides this, in November 2012, the IASB published an exposure draft providing for a further change in the new measurement rules. This is designed to make it possible to continue measuring certain debt instruments at fair value without impact on profit or loss, depending on the contractual cash flows and an additionally defined business model that contains an intention to sell.
IFRS 11 (05/2011), Joint Arrangements, defines joint operations and joint ventures and specifies how they are to be recognised in the balance sheet. The changes compared with IAS 31, Interest in Joint Ventures, mainly concern the elimination of the option of proportionate consolidation for joint ventures, the amended definition of joint control, and the extended scope of application of joint operations. These may now include arrangements structured through a separate vehicle. The elimination of the option of proportionate consolidation will have no impact on Munich Re, as we do not avail our­ selves of this option and already apply the equity method. The effects of the two other changes are currently being analysed.
IFRS 12 (05/2011), Disclosure of Interests in Other Entities, combines the disclosures regarding facts and circumstances governed by IFRS 10, 11 and IAS 28. The objective of the standard is to provide information on the type and risk of interests in other entities and their implication for the consolidated financial statements. As a consequence, the information provided needs to be more comprehensive than hitherto. In particular, IFRS 12 requires disclosures relating to unconsolidated structured entities, non­ controlling interests, discretionary judgements and assumptions in evaluating the nature of interests in other entities, as well as detailed information on each significant joint arrangement. The precise extent to which Munich Re is affected by the extended disclosure requirements is currently being examined.
In June 2012, the IASB adopted IFRS Consolidated Financial Statements, Joint Arrangements, and Disclosure of Interests in Other Entities – Transition Guidance (Amendments to IFRS 10, IFRS 11 and IFRS 12) (06/2012), which clarifies that the requirement to provide adjusted comparative information on first­time application is limited to the preceding comparative period only. Insofar as first­time application does not result in any change in the need to consolidate an entity at the date of first­time application, no adjusted comparative information for prior periods is necessary. In add­ ition, the requirement to provide adjusted comparative information for prior periods is removed for unconsolidated structured entities. The effects of the changes on Munich Re are currently being analysed. The amendments are generally mandatory for financial years beginning on or after 1 January 2013. However, we expect that when they are adopted into European law, the mandatory effective date in the European Union will be deferred by one year for these amendments as well.
The IFRS Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (10/2012) introduces a definition of the term “investment entities” and specifies that such entities are generally excepted from the requirement to consolidate their subsidiaries in future. Rather, they are required to measure them at fair value through profit or loss. The exception from the consolidation requirement does not apply to parents of investment entities that are not themselves investment entities. Besides this, additional disclosure requirements for investment entities are provided for. The amendments, whose appli­ cation is mandatory for financial years beginning on or after 1 January 2014, are not relevant for Munich Re.
Munich Re Group Annual Report 2012 instruments under IFRS 7 has now been extended to include all items measured at fair value. On the basis of IFRS 13, we have verified whether Munich Re’s fair value meas­ urement is in compliance with the new provisions, and we will make any adjustments in measurement necessary. The new disclosures in the notes also need to be imple­ mented.
The amendments published as part of the IFRS Annual Improvement Process in May 2012 concern IFRS 1, First­time Adoption of International Financial Reporting Stand­ ards, which as such is not relevant for Munich Re, as well as IAS 1, Presentation of Finan­ cial Statements, IAS 16, Property, Plant and Equipment, IAS 32, Financial Instruments: Presentation, and IAS 34, Interim Financial Reporting, and the knock­on change in the interpretation IFRIC 2, Members’ Shares in Co­operative Entities and Similar Instru­ ments. Only the amendment to IAS 1, Presentation of Financial Statements, is of prac­ tical significance for Munich Re, and this simplifies the rules currently in place. Where a retrospective change in accounting policies or a retrospective adjustment or realloca­ tion of items under IAS 8 requires publication of a binding third comparative balance sheet, it is no longer necessary to make the relevant disclosures in the notes.
As a result of the amendments to IAS 19 (rev. 06/2011), Employee Benefits, the option for deferring the recognition of actuarial gains and losses, in particular the “corridor approach”, has been eliminated. These gains and losses must now be recognised in equity with no effect on profit or loss. Furthermore, the past service cost for retroactive changes in a defined benefit plan is to be immediately recognised in the income state­ ment. The return on plan assets is now to be determined on the basis of the rate used to discount the present value of defined benefit obligations. The administrative costs and taxes payable by the plan are to be deducted from the return. The requirements regarding the asset ceiling have been integrated and further specified. Moreover, add­ itional disclosures in the notes are required, e.g. analysing pension obligations in terms of their risks and sensitivities for the actuarial assumptions. The amendments will not have any major effects on Munich Re. The extended disclosures in the notes need to be implemented.
Consolidated companies In accordance with IAS 27, the consolidated financial statements include Munich Re insurance Company (the parent) and all the entities in which Munich Reinsurance Company owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries). Structured 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.
Other assets 41 80 Technical provisions (net) – 29 Other liabilities –243 –70
On 6 June 2012, via its subsidiary MR RENT­Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the solar park operating company Magaz Foto­ voltaica, S.L.U. (Magaz), Alcobendas, Spain, from BP Solar España (BP Solar), S.A.U., Alcobendas, Spain, and the BP Solar photovoltaic plant. The transaction makes the photovoltaic plant part of Magaz’s assets.
On 29 June 2012, via its subsidiary MR RENT­Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the solar park company Sun Energy & Partners S.r.l. (SunEnergy), Brindisi, Italy, from SunEdison Solar B.V., Amsterdam, Netherlands. SunEnergy operates a photovoltaic plant on the outskirts of the town of Brindisi (near
Net assets lost €m 2012 Prev. year Goodwill – – Other intangible assets 2 6
On 6 July 2012, via its subsidiary MR RENT­Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in six wind park companies. The wind park portfolio comprises wind parks already operating in various regions of Germany with a total of 19 wind turbines and an installed capacity of 48 megawatts.
Through a purchase and share­transfer contract and an agreement on the change of general partner, MR RENT­Investment GmbH, Munich, acquired from wpd onshore GmbH & Co. KG, Bremen, all the limited partner shares in each of the following wind park companies (wpd): — Windpark Borghorst­Laer GmbH & Co. KG, Bremen — Windpark Westeregeln GmbH & Co. KG, Bremen — Windpark Markee 6 GmbH & Co. KG, Bremen — Windpark Dargelütz GmbH & Co. KG, Bremen — Windpark Kladrum­Zölkow GmbH & Co. KG, Schwerin — Einzelanlage Frauenmark I GmbH & Co. KG, Bremen
The provisional purchase price for the wind park companies is €27.3m and was settled in cash. The purchase price comprises various forms of conditional consideration. The goodwill of €1.4m arithmetically resulting from the transaction was written off in full after we carried out an impairment test.
The wind park portfolio (Bagmoor/Scout Moor/Tir Mostyn) consists of the following companies: — Bagmoor Wind Limited, Bristol — Scout Moor Group Limited, Manchester — Scout Moor Wind Farm Limited, Manchester — Scout Moor Holdings (No.1) Limited, Manchester — Scout Moor Holdings (No.2) Limited, Manchester — Scout Moor Wind Farm (No.2) Limited, Manchester — UK Wind Holdings Limited, London — Tir Mostyn and Foel Goch Limited, London
A purchase price of £114.3m (€145.6m) in cash was paid for acquisition of the wind parks. It was fully financed from Munich Re’s own resources. No contingent purchase price adjustments were agreed. The goodwill of €17.6m arithmetically resulting from the transaction was written off in full after we carried out an impairment test.
The acquisitions are part of the RENT programme (Renewable Energy and New Technologies), through which Munich Re invests in renewable energies and new environmental technologies.
The IFRS fair values of the assets and liabilities of the companies at the time of acquisition are as follows:
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 con­ solidated 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. Acquisitions are accounted for by the purchase method. In order to determine the equity capital at the time of acquisition, we measure the acquired identi­ fiable assets and liabilities of the subsidiary or special purpose entity at fair value. The consideration transferred in exchange for the acquired shares is netted against the equity capital apportionable to the Group at the time of acquisition. Any residual posi­ tive amount is capitalised as goodwill. Profits earned by the subsidiaries or special purpose entities after their first consolidation are included in Group equity. Amounts relating to intra­Group transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as not being material.
Pursuant to IAS 28, associates are generally all entities which are not subsidiaries but on whose financial and operating policies the investors can exercise a significant influence. In the case of shareholdings amounting to between 20% and 50% of the voting power, the entities in question are deemed to be associates unless it can be clearly demonstrated that there is no significant influence.
Revenue included in the consolidated income statement since the acquisition date 2 6 3 8 Result included in the consolidated income statement since the acquisition date – 2 –2 –4 Contributions to the consolidated revenues as if the acquisition date for the business combination had been 1 January 20123 4 11 7 22
Information on the measurement of investments in associates can be found in the notes on assets, under B – Investments.
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 acquired insurance portfolios are amortised in accordance with the realisa­ tion of the profits from the insurance portfolios underlying the PVFP calculation. They are regularly tested for impairment in accordance with IFRS 4 (liability adequacy test); cf. notes on liabilities item C. Write­downs are recognised under operating expenses.
Self­developed and other software, acquired sales networks, client bases and brand names are carried at cost. Self­developed and other software is amortised on a straight­ line basis at a rate of 20–33% over its useful life – three to five years – or in exceptional circumstances at a rate of 10% over a period of up to ten years. The useful lives and depreciation rates of the acquired sales networks and client bases are 2–17 years or 6–50%, and those of the brand names 1–30 years or 3–100%; the items in question are amortised consistently in accordance with the straight­line method. Write­downs or write­ups are made if required. Write­downs and write­ups are distributed in the con­ solidated income statement between investment expenses, expenses for claims and benefits and operating expenses. If it is not possible to allocate the write­downs and write­ups to the functional areas, they are shown under other non­operating expenses or income.
Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are gen erally assessed with regard to whether they have to be capitalised. Buildings are depreciated on a straight­line basis in accordance with the component approach, depending on the weighted useful life for their specific building class. The underlying useful lives mainly range between 40 and 55 years. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recover able amount. Impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income.
Investments in affiliated companies that we do not consolidate because they are not material are generally carried at their fair values. If the investments are quoted on a stock exchange, we use the share prices at the balance sheet date; for unquoted invest­ ments, the fair value is measured using the discounted earnings or net asset value method. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
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 fixed­interest and non­fixed­interest securities that we have acquired for trading purposes to earn short­term profits from price changes and differences. In addition, they include all derivative financial instruments with positive fair values which we have acquired to manage and hedge risks but which do not meet the requirements of IAS 39 for hedge accounting, and the positive fair values of insurance derivatives and of deriva tive components separated from the underlying insurance contract. 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.
Securities that we lend by way of securities lending continue to be recognised in our balance sheet, as the main risks and rewards remain with Munich Re; securities that we have borrowed are accounted for by the lender. Interest income from these transactions is recognised in the investment result.
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 (except property funds) and fixed­interest 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.
Assets allocated to Level 2 are valued using models based on observable market data. For this, we use inputs directly or indirectly observable in the market, other than quoted prices. If the financial instrument concerned has a fixed contract period, the inputs
Munich Re Group Annual Report 2012 used for valuation must be observable for the whole of this period. The financial instru­ ments we have allocated to this level mainly comprise borrowers’ note loans, covered bonds, subordinated securities and derivatives not traded on the stock market.
Impairment At each balance sheet date, we assess whether there is any substantial objective evi­ dence of impairment in a financial asset or group of financial assets. Impairments in value are recognised as an expense in the income statement. IAS 39.59 contains a list of factors providing 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 impair­ ment. 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 fixed­interest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.
We determine acquisition cost on the basis of the average purchase price. In the case of an impairment, a write­down is made to the fair value at the balance sheet date, i.e. generally the publicly quoted market price. If there is a further fall in the fair value of equity investments that have already been written down once, a further write­down recognised in the income statement is made again immediately. Such impairments
Munich Re Group Annual Report 2012 recognised in profit or loss may not be reversed through profit or loss. If, in a subsequent period, the reasons for the impairment of fixed­interest securities or loans cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
These are investments for policyholders under unit­linked life insurances. They are measured at fair value. Unrealised gains or losses from changes in fair value are included in the investment result. These are matched by corresponding changes in the technical provisions (equity and liabilities item D), which are included in the techni­ cal result. The change in technical provisions also includes changes from additional premium components. Recognising these investments at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding provisions.
Current tax receivables are accounted for in accordance with local tax regulations and other receivables at amortised cost. In impairment tests of our receivables, we gener­ ally first assess whether objective evidence of impairment exists for items that are in dividually significant. If this is not the case, and also in the case of individually insig­ nificant items, the impairment test is carried out collectively on the basis of groups of similar receivables. Receivables that are individually assessed for impairment are not included in the collective assessment. The amount of the probable loss is measured as the difference between the amortised cost and the present value of estimated future cash flows. The impairment thus determined is recognised as an expense. We generally deduct impairments directly from the items concerned on the assets side, without using a value adjustment account. If, in a subsequent period, the reasons for the impair­ ment cease to apply, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the original amortised cost.
Munich Re Group Annual Report 2012 income (FAS 60) or proportionally to the respective contracts’ expected gross profit margins calculated for the relevant year of the contract term (FAS 97, 120). The alloca­ tion of individual contracts to the FASs concerned is shown in the notes on equity and liabil ities item C. In determining the amount of amortisation, we take into account an actuarial interest rate and changes resulting from the disposal or withdrawal of con­ tracts from the portfolio. In property­casualty business, short­term health primary insurance and health reinsurance, the deferred acquisition costs are amortised on a straight­line basis over the average term of the policies, from one to five years. Deferred acquisition costs are regularly tested for impairment using a liability adequacy test as per IFRS 4; cf. notes on equity and liabilities item C.
Under retained earnings, we show the profits which consolidated companies have earned and retained since becoming part of Munich Re, and income and expenses resulting from changes in the consolidated group. In addition, the adjustment amount resulting from changes in accounting policies for earlier periods not included in the consolidated financial statements is recognised in the opening balance of the retained earnings for the earliest prior period reported.
The technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; cf. the explanatory remarks on assets item D. The ceded share is calculated and accounted for on the basis of the individual reinsurance agree­ ments. Acquisition costs for insurance contracts are capitalised and amortised over the terms of the contracts; cf. notes on assets item G. The measurement of technical provi­ sions is based on US GAAP FAS 60, FAS 97 and FAS 120. Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
Unearned premiums are accrued premiums already written for future risk periods. For primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. The posting of unearned premiums is restricted to short­term underwriting business. i.e. property­casualty busi­ ness and parts of accident and health business. In the case of long­term business, a provision for future policy benefits is established,
In reinsurance, measurement is carried out partly individually for each risk and partly collectively for reinsured portfolios, using biometric actuarial assumptions based on the tables of the national actuarial associations. These are adjusted for the respect­ ive reinsured portfolio, in line with the probabilities observed for the occurrence of an insured event. Discount rates are chosen that reflect the best estimate of expected investment income, less a safety margin. For the major part of the portfolio, these assumptions are fixed at the beginning of the contract and not changed over its duration.
The actuarial assumptions are adjusted if this is shown to be necessary by a liability adequacy test in accordance with IFRS 4.
For contracts in accordance with FAS 60, the provision for future policy benefits is calculated from the present value of estimated future policy benefits (including claims adjustment expenses) less the present value of future net level premiums. Net level pre­ mium is that part of the gross premium that is needed to finance future policy benefits. Life primary insurance contracts with limited premium payment are generally valued in accordance with FAS 97.
For all other contracts as per FAS 97, an account is kept to which net level premiums and interest earnings are credited and from which risk premiums and administration expenses are debited, not all credits and debits being contractually fixed at the time the contracts are concluded. The provision for future policy benefits for life primary insur­ ance where policyholders bear the investment risk themselves (unit­linked life insurance) is shown separately under equity and liabilities item D.
The provision for outstanding claims is for payment obligations arising from insurance contracts in primary insurance and reinsurance where the size of the claim or the tim­ ing of the payment is still uncertain. Part of the provision is for known claims for which individually calculated provisions are posted. Another part is for expenses for claims whose occurrence is not yet known (e.g. because they have not been reported yet or have not yet manifested themselves). A third class of provisions covers claims which are known but whose extent has turned out to be greater than originally foreseen. All these provisions include expenses for internal and external loss adjustment expenses. The provision for outstanding claims is based on estimates: the actual payments may be higher or lower. The amounts posted are the realistically estimated future amounts to be paid; they are calculated on the basis of past experience and assumptions about future developments (e.g. social, economic or technological factors). Future payment obligations are generally not discounted; exceptions are some provisions for occupa­ tional disability pensions and annuities in workers’ compensation and other lines of property­casualty business, which we discount. For determining the provision for out­ standing claims, Munich Re uses a range of actuarial projection methods, including the chain ladder and the Bornhuetter­Ferguson method. In applying the statistical methods, we regard large exposures separately. The standard actuarial methods we use are applied both to the run­off triangles for the payments and to the run­off tri angles for the reported claims, so that we obtain a range of estimates for the ultimate loss. Within this range, a realistic estimated value for the ultimate loss is determined.
For life insurance companies, health insurance companies and pension funds subject to supervision by the German Federal Financial Supervisory Authority, the supervisory rules in accordance with the German Insurance Control Act and with the respective statutory orders have to be observed.
Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the valuation differences between IFRS and local GAAP on the basis of the expected future participation quotas. For unrealised gains and losses on investments available for sale, which are recognised directly in equity (see assets item B), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in this provi­ sion are recognised in the income statement.
All technical provisions are regularly subjected to a liability adequacy test in accordance with IFRS 4. If current experience shows that the provisions posted on the basis of the original assumptions – less the related deferred acquisition costs and the present value of the related premiums – are inadequate to cover the expected future benefits, we adjust the relevant technical provisions with recognition in profit or loss and dis­ close this under impairment losses/unscheduled changes in the notes to the consoli­ dated balance sheet; see (2) Other intangible assets, (14) Deferred acquisition costs and (21) Provision for future policy benefits. The appropriateness of unearned pre miums and of the provision for outstanding claims is assessed in relation to the realistic ally esti­ mated future amount to be paid. The appropriateness of the provision for future policy benefits is assessed on the basis of realistic estimates of the actuarial assumptions, the proportional investment result and, for contracts with participation in surplus, the future profit sharing.
D Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders
This item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit­linked life insurance). The value of the provision for future policy benefits essentially corresponds to the mar­ ket value of the relevant investments shown under assets item C. Besides this, as with the provision for future policy benefits in accordance with FAS 97, they may include additional premium components; cf. the notes on assets item C. Changes in this provi­ sion are fully recognised in the technical result. Insofar as these changes derive from unrealised gains and losses from alterations in the fair values of the related invest­ ments, they are matched by opposite changes of the same amount in the investment result. Recognising these provisions at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding investments.
The interest rate at which the pension obligations are discounted is based on the yields for long­term high­quality bonds (e.g. commercial or government bonds). Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognised directly in equity, without impact on profit or loss.
Under IAS 12, deferred tax liabilities must be recognised if asset items have to be val­ ued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); cf. notes on assets item H.
Munich Re’s presentation currency is the euro (€). The balance sheets of foreign sub­ sidiaries whose national currency is not the euro are translated in accordance with the functional currency principle using the year­end exchange rates, and their income statements using quarterly average exchange rates. Any exchange differences arising in the process are recognised in equity (reserve for currency translation adjustments).
Beyond this, the impact of changes in exchange rates is reflected in period­to­period comparisons of all items in the income statement.
— Asset management (management of assets for the Group and for external investors)
The conventions for the allocation of provisions for premium refunds have been defined Group-wide. In the case of intra-Group sales of assets where a provision for premium refunds has to be posted, the latter always has to be shown by the selling segment. When the international DKV companies were transferred to Munich Health Holding in 2011, a provision for deferred premium refunds totalling €50m was posted in the acquiring segment, i.e. Munich Health. This reserve has been allocated retroactively to health primary insurance and the figure for 2011 adjusted accordingly.
Intra-Group loans are completely eliminated in the balance sheet through consolidation. By contrast, the expenditure for the borrowers and income for the lenders is shown unconsolidated in the item “other non-operating result, impairment losses of goodwill and net finance costs” for the segments concerned. All intra-Group shareholdings are consolidated, and all earnings and expenditure of the subsidiaries are shown in their segments.
Reinsurance Primary insurance Munich Health Asset management Total Life Property-casualty Life Health Property-casualty 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. €m 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year
Thereof: Held for sale – – – 52 – – – – – – – – – – – 52 3. At fair value through profit or loss 605 549 1,042 909 1,174 989 155 70 22 9 17 10 – – 3,015 2,536
C. Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 5,957 5,092 – – – – 1 1 – – 5,958 5,093 D. Ceded share of technical provisions 1,140 929 2,186 2,517 1,862 1,816 22 11 340 310 180 51 – – 5,730 5,634 Thereof: Held for sale – – – 13 – – – – – – – – – – – 13
IV. Other securities 1. Held to maturity – – – – 7 13 – – – – – – – – 7 13
Thereof: Interest and similar income 95 19 39 34 6 35 17 2 2 5 21 14 3 9 183 118 Write-ups of other operating assets 11 23 27 53 33 2 6 1 10 2 9 14 – – 96 95
Thereof: Interest charges and similar expenses 38 12 49 16 14 20 20 28 59 53 26 6 1 1 207 136 Write-downs of other operating assets 4 5 13 11 10 18 6 10 33 41 4 4 – 1 70 90 9. Deduction of income from technical interest –658 –647 –1,323 –1,385 –3,289 –2,250 –1,372 –1,314 –224 –158 –52 –43 – – –6,918 –5,797 12. Other non-operating result, net finance costs and impairment losses of goodwill –126 –148 –344 –383 –128 –36 –101 –39 –344 –313 –222 –79 –8 –22 –1,273 –1,020
Thereof: Amortisation and impairment losses of acquired insurance portfolios 3 6 – – 43 45 5 5 – 1 – – – – 51 57
1 The non-current assets mainly comprise intangible assets (especially goodwill) and our owner-occupied and investment property, as well as investments in renewable energy (RENT).
Reinsurance Primary insurance Munich Health Total €m 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year Europe
Africa, Near and Middle East 1 The premiums are generally allocated according to the location of the risks insured. 2 Previous year’s figures adjusted pursuant to IAS 8; see “Changes in accounting policies and other adjustments”.
Carrying amount at 31 Dec. financial year 1,062 408 1,754 173 114 3,511 Accumulated impairment losses at 31 Dec. financial year – 27 – 381 40 448 Gross carrying amount at 31 Dec. financial year 1,062 435 1,754 554 154 3,959
The goodwill from the acquisition of Munich Re America has been allocated to the cash-generating unit “reinsurance property-casualty segment.” The carrying amount shown includes other goodwill that is impairment-tested on the basis of cash-generating units at the level of divisions or groups of divisions within the segment, with the goodwill allocated to each unit not being significant in comparison with the total carrying amount of goodwill. As a rule, the recoverable amounts of these cash-generating units are based on the same key assumptions as those given for the reinsurance property -casualty segment in the following table. The goodwill from the acquisition of shares in the ERGO Insurance Group has been allocated to the cash generating unit “ERGO”.
Reinsurance Cash-generating unit or group of property-casualty cash-generating units segment ERGO Method for calculating the Value in use Value in use recoverable amount Key assumptions regarding In the detailed planning phase (two years), we For the detailed planning (three years), cash flow planning (at the time of expect a slight rise in premium income growth in results is expected. the planning) with an improvement in the loss ratios.
Our general assumption was that there will Our general assumption was that there will be moderate upward movement on the equity be moderate upward movement on the markets and a stable interest-rate level. equity markets and a stable interest-rate level Growth rates used for extrapolating 0.5% 0.5% beyond the cash flow planning based on financial plans/forecasts Discount rates 9.6% 10.0%
The calculation of these values in use is based on cash flow forecasts derived from the current market environment and the latest corporate planning approved by management. Prepared in an interactive process involving the operational units, the controlling units responsible and the Board of Management, the corporate plans are reviewed and updated at least every quarter. After the detailed planning phase, we estimate the growth achievable long term by extrapolating the adjusted cash flows of the last plan year.
Amount of impairment losses recognised in profit or loss during the period In the financial year 2012, our impairment testing of goodwill identified an impairment of €140m. This has been recognised in the item “impairment losses of goodwill” in the income statement and is attributable in particular to the following: In the case of the cash-generating unit Munich Health, which corresponds to the reporting segment, the goodwill was completely written off in the fourth quarter of 2012. This was due both to the deterioration of the earnings situation in the US primary insurance market and to the generally low interest-rate environment. The impairment was identified by determining the value in use, with a pre-tax discount rate of 9.6% (9.3%). The impairment loss of €116m was recognised in the Munich Health segment.
After impairment testing, we have completely written off the goodwill of €24m arithmetically resulting from our acquisitions in the RENT programme.
Munich Re Group Annual Report 2012 2 Other intangible assets 8006 A
Acquired Acquired distribution Acquired licences/ brand names networks/client bases patents €m 2012 Prev. year 2012 Prev. year 2012 Prev. year Gross carrying amount at 31 Dec. previous year 286 272 744 997 122 41 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 201 185 311 524 12 8 Carrying amount at 31 Dec. previous year 85 87 433 473 110 33 Currency translation differences – 2 –1 7 – 1 Additions
Reclassifications – – – 6 – – Impairment losses reversed – – – – – – Amortisation and impairment losses
Carrying amount at 31 Dec. financial year 41 85 343 433 272 110 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 242 201 367 311 19 12 Gross carrying amount at 31 Dec. financial year 283 286 710 744 291 122
Carrying amount at 31 Dec. financial year – – 55 53 1,518 1,581 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year – 5 28 29 2,399 2,173 Gross carrying amount at 31 Dec. financial year – 5 83 82 3,917 3,754 8006 C
Munich Re Group Annual Report 2012 3 Land and buildings, including buildings on third-party land
The impairment losses are mainly due to vacancies, falling market rents and risk pre miums on real-estate returns.
Carrying amount at 31 Dec. financial year 3,831 3,889 Accumulated depreciation and accumulated impairment losses at 31 Dec. financial year 1,081 1,014 Gross carrying amount at 31 Dec. financial year 4,912 4,903
Munich Re Group Annual Report 2012 4 Investments in affiliated companies and associates
The fair value of investments in associates accounted for using the equity method amounted to €1,621m (1,250m) at the balance sheet date. In the financial year, shares of losses of associates amounting to €4m (11m) were not recognised in the balance sheet. Altogether, the losses not recognised in the balance sheet totalled €30m (26m).