The impairment losses largely result from market value adjustments to the special funds of Victoria Lebensversicherung AG amounting to €18m and of DKV AG amounting to €6m. They are distributed between the different Group segments as follows: In the reinsurance segment, – (€13m) is apportionable to life and health and €1m (46m) to property-casualty; in the primary insurance segment, €44m (252m) is apportionable to life and health and – (€8m) to propertycasualty.
Property pledged as security and other restrictions on title amount to €556m (522m). Expenditures recognised in the carrying amount for assets in the course of construction total €60m (39m) at the balance sheet date, and contractual commitments to acquire property amount to €32m (25m).
Carrying amounts Fair values All figures in €m 31.12.2006 Prev. year 31.12.2006 Prev. year
Over two years and up to three years 40 61 41 65
Munich Re Group Annual Report 2006 Notes_Notes to the consolidated balance sheet – Assets
Carrying amounts Amortised cost All figures in €m 31.12.2006 Prev. year 31.12.2006 Prev. year
Over two years and up to three years 8,964 9,922 8,706 9,855
Over five years and up to ten years 31,307 28,564 30,586 27,528
(8) Other securities held for trading The securities held for trading include fixed-interest securities totalling €836m (900m), non-fixed-interest securities totalling €13m (9m) and derivatives held for trading amounting to €494m (970m).
All figures in €m Qualifying for Fair value hedge accounting Balance sheet item 31.12.2006 Prev. year
Fair values –1 – – – – – –1 –1 Notional principal amounts 463 – – – – – 463 130
The following table shows the fair values and the related notional principal amounts of all our open positions, broken down according to risk types. Positive and negative fair values have been netted. At 31 December 2006, the open positions amounted to €272m (908m), i.e. less than 1% (1%) of the balance sheet total.
Although the derivatives in the Munich Re Group essentially serve to hedge against risks, only an amount of –€18m (60m) meets the requirements of IAS 39 for hedge accounting.
Fair value hedges In the case of fair value hedges, the change in the fair value of the hedging instrument and the change in the fair value of the hedged instrument are recognised in profit or loss under the items “investment income” and “investment expenses” in the income statement. In the Munich Re Group, hedging relationships in the form of fair value hedges are used to selectively and efficiently reduce currency risks of parts of the portfolio and to mitigate other market-price risks.
The main types of transaction employed for hedging are currency forwards and options. The fair value of the derivatives used for this amounted to –€33m (19m) at the balance sheet date. In 2006, the following changes in value were recognised in the consolidated income statement: –€33m for the hedging instruments and €36m for the relevant underlyings.
Cash flow hedges Cash flow hedges play a role in countering fluctuations that may be caused, for example, by variable interest payments. In the Munich Re Group, cash flow hedges are used chiefly to hedge against interestrate risks, with interest-rate swaps the main instruments employed. Changes in the fair value of the hedging instrument are recognised directly in equity for this purpose. Only when the actual cash inflow or outflow takes place, as a result of the hedged circumstance, is the relevant equity item reversed with recognition in profit or loss.
At the balance sheet date, there is an equity item of €14m (6m) from cash flow hedges. The net fair value of the derivatives falling into this category amounted to €15m (41m) at the balance sheet date.
All figures in €m year years years years years years 31.12.2006 Prev. year
(10) Other investments This item includes deposits with banks totalling €3,060m (2,479m).
Other receivables 776 1,854 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
The “other receivables” contain receivables of €243m (210m) resulting from contracts without significant risk transfer, which do not fall within the scope of IFRS 4.
Amortisation includes accrued interest as well as write-downs. The impairment losses comprise write-ups and write-downs stemming from changes in the assumptions underlying the calculations, which require a retrospective adjustment in the measurement.
Over ten years 32 16 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Of the carrying amount of deferred tax assets totalling €5,370m at 31 December 2006, €16m (–) concerns disposal groups held for sale. Of the carrying amount of deferred tax liabilities totalling €8,156m, €65m (–) relates the such disposal groups; cf. (16) “Non-current assets and disposal groups held for sale”.
The additions from the change in the consolidated group derive primarily from the acquisition of the I
The fair value of the property at the balance sheet date amounted to €2,790m. Of this, €126m is for owner-occupied property classified as “held for sale”. The expenditures recognised in the carrying amount for assets in the course of construction totalled €7m for property and €11m for plant and equipment at the balance sheet date. Commitments to acquire property totalled €1m at the balance sheet date and commitments to acquire plant and equipment €10m.
(16) Non-current assets and disposal groups held for sale At the end of November 2006 – upon conclusion of a bidding process – the Munich Re Group contractually committed to sell both investment and owner-occupied property in Germany with a total book value of €918m. The assets concerned, and the share of the provision for deferred premium refund and the deferred taxes apportionable to them, have been classified in disposal groups as “held for sale”. The items involved are commercial and residential buildings located mainly in large cities but also in medium-sized centres.
At the time of classification, no income or expense was recognised because the sale prices less the costs to sell of the items were higher than the Group’s carrying amounts. Subsequent valuation at the balance sheet date did not give rise to any recognised income or expense either.
A large proportion of the contractually committed items are still recognised in the Group balance sheet at the reporting date, because the transfer of ownership did not or will not take place until the financial year 2007.
Besides this transaction, the Munich Re adopted a plan in 2006 to sell its majority stake in the closed-end real estate fund OIK Mediclin. The fund is the owner of 21 hospital properties, which are recognised in the consolidated balance sheet as investment property with a carrying amount of €444m. The active marketing of the stake began in the fourth quarter of 2006. Thereupon, the assets and liabilities of the fund were combined in a disposal group and classified as “held for sale”. Neither the first-time valuation of the disposal group at the date of classification nor its subsequent valuation at the balance sheet date gave rise to any recognised income or expense. Our shares in the fund are expected to be sold in the business year 2007.
In the segment reporting, the disposal groups are recognised in the segments life and health and property-casualty.
In December 2005, ERGO Versicherungsgruppe AG signed agreements with GFKL Financial Services AG under which the latter would acquire its majority stake in the ADA-HAS Group, an IT systems specialist. The governing bodies and cartel authorities have given the formal approvals still outstanding when the agreements were signed, so that the sale was completed in the first quarter of 2006.
Balance sheet items relating to disposal groups at the reporting date
B. Investments I. Land and buildings, including buildings on third-party land 4,720 5,798
H. Deferred tax assets 5,370 5,213 Thereof: – Deferred tax assets relating to disposal groups 16 –
– Acquisition of shares to safeguard stock appreciation rights under long-term incentive plans 355,559 513,050
Europäische Reiseversicherung AG acquired no further Munich Re shares in 2006 to safeguard its long-term incentive plans and sold 16,872 shares at an average price of €112.36. At 31 December 2006, it had no Munich Re shares remaining in its portfolio.
Munich Re Group Annual Report 2006 Notes_Notes to the consolidated balance sheet – Equity and liabilities
Further adjustments pursuant to IAS 8 increased retained earnings by €13m.
First-time application of the option to recognise actuarial gains and losses in equity outside profit or loss, pursuant to IAS 19 (rev. 2004), reduced the revenue reserves by €23m.
The “other reserves” include –€629m (–34m) unrealised gains and losses from currency translation and €14m (6m) resulting from valuation of cash flow hedges. In addition, “other reserves” contains unrealised gains and losses distributed between various items as follows: Composition of equity
These are mainly minority interests in the ERGO Insurance Group. We disclose direct minority interests in special funds under “other liabilities”.
Less: – Provision for deferred premium refunds recognised in equity 2,718 4,083
– Consolidation and currency translation effects –76 –64 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Other equity 333 293 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Gross provision for future policy benefits according to type of insurance cover
– Contracts with combination of more than one risk 66 47
The provision for future policy benefits in life reinsurance largely involves contracts where the mortality or morbidity risk predominates. In reinsurance, annuity contracts have a significantly lower weight than in primary insurance.
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 respective reinsured portfolio, in line with the probabilities observed for the occurrence of an insured event. A discount rate is chosen that is based on a conservative capital-market scenario.
In primary insurance, measurement is generally carried out individually for each risk. For German life and health primary insurance, to which approx. 91% of the provision for future policy benefits in primary insurance is apportionable, biometric actuarial assumptions based on the tables of the German Association of Actuaries are used. We also largely use the tables of the national actuarial associations for the rest of the primary insurance business. The actuarial interest rate employed for discounting is limited by the respective maximum actuarial interest rate prescribed by the supervisory authorities.
Essentially the same actuarial assumptions have been used as in the previous year for measuring the provisions for future policy benefits for business in force.
Further information on the underwriting risks and discount rates can be found in Note (36) “Risks from insurance contracts in the life and health segment”.
The item “Change/Other” concerns portfolio entries and withdrawals totalling –€1,290m. Scheduled changes in the provisions for future policy benefits contain the changes deriving from prospective calculation as a result of premium payments, benefit cases and the unwinding of discount in the year under review.
– Provision for other benefit cases 2,061 2,300 1,451 1,242 3,512 3,542
Claims expenses – For the year under review 11,165 588 10,577 14,321 1,499 12,822
Less payments – For the year under review 3,493 163 3,330 3734 106 3,628
Status at 31 Dec. financial year 40,462 3,906 36,556 42,016 4,324 37,692
Portions of the reserves associated with short-tail property lines of business for the accident years after 2001 were reduced. This action was in response to the consistently favourable development in lines of business where the risk of change was deemed to be minimal. The estimated ultimate losses associated with parts of the motor quota share business were also reduced owing to continued favourable experience.
The ceded share of “other technical provisions” amounts to €105m (43m), of which €2m (3m) is apportionable to the ceded share of the provision for premium refunds based on national regulations.
All figures in €m* 31.12.2006 Prev. year 31.12.2006 Prev. year** 31.12.2006 Prev. year**
Provision for deferred premium refunds – – 5,391 6,475 5,391 6,475
– Thereof resulting from other revaluations (recognised in profit or loss) – – 2,674 2,393 2,674 2,393
Change resulting from other revaluations (recognised in profit or loss) 289 52
Status at 31 Dec. financial year 5,391 6,475 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
The provision for deferred premium refunds has to be established if the future participation of policyholders in realised gains is provided for in the case of valuation differences between local GAAP and IFRS basis. The above change resulting from unrealised gains and losses on investments reflects the proportional allocation to expected future policyholders’ bonuses of the change in fair values that has occurred in the past year. Changes in the provision for deferred premium refunds are only recognised in the income statement to the extent that they result from valuation differences recognised in profit or loss. To determine the portion of the valuation differences allocable to the provision for deferred premium refunds, rates of between 85.0% and 92.5% after tax were generally used.
Of the carrying amount of the gross provision for deferred premium refunds totalling €5,391m at 31 December 2006, –€169m (–) concerns disposal groups held for sale; cf. (16) “Non-current assets and disposal groups held for sale”.
Expenses for defined contribution plans in the year under review totalled €28m (29m).
Change in the present value of defined benefit obligations under defined benefit plans
In 2003, Munich Reinsurance Company established a contractual trust agreement in the form of a two-way trust for its unfunded company pension obligations. To finance these obligations, it is necessary for the trust assets to correspond to the present value of pension obligations. In the process, however, account has to be taken of the difference between the actuarial interest rate relevant for measuring the obligations and the return attainable on the investments. Therefore, the present value of the pension obligations is calculated using an actuarial interest rate equivalent to the expected investment return. Based on studies of Munich Reinsurance Company’s portfolio of pensioners, moreover, the mortalities of the currently used Heubeck 2005 G tables were also modified. These adjustments result in an increase of €119m in the present value of the defined benefit obligations.
Status at 31 Dec. financial year 1,298 1,305 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
The other changes mainly result from reclassifications of other balance sheet items.
The actual return on plan assets amounts to €24m, and the actual return on reimbursements to €4m.
The expenses are shown mainly under “operating expenses” and “expenses for claims and benefits” in the consolidated income statement.
Included in the recognised income and expenses are actuarial losses of €18m (175m) for the financial year and €463m (445m) cumulative, taking currency fluctuations into account.
The consolidated companies used the following actuarial assumptions (weighted average values) for calculating their pension obligations: All figures in % 31.12.2006 Prev. year
A change in the medical cost trend rate by one percentage point would have the following effects on the amount of defined benefit obligations and pension expenses: Tax provisions Tax provisions comprise the provisions for current taxes on income and other taxes of the individual companies, based on their respective national taxation. Deferred tax obligations are shown under “deferred tax liabilities”.
Increae by one Reduction by one All figures in €m percentage point percentage point
The provisions for early-retirement benefits/semi-retirement, anniversary benefits and long-term incentive plans are mainly long term, whereas the provisions for earned commission, outstanding invoices, bonuses, holiday and overtime pay, and miscellaneous are essentially short term.
With- Other All figures in €m Prev. year Additions drawals Reversal changes 31.12.2006
(26) Deposits retained on ceded business Deposits retained on ceded business are collateral for technical provisions covering business ceded to reinsurers and retrocessionaires. The changes in deposits retained on ceded business generally derive from the changes in the relevant technical provisions covering ceded business. Except for an amount of €23m (21m), the contractual period to maturity of the deposits retained on ceded business is up to
Prev. Prev. Prev. Prev. Prev. All figures in €m* 2006 year 2006 year 2006 year 2006 year 2006 year
The result for land and buildings includes rental income of €443m (514m). The expenses for the management of investments include running costs and expenses for repair and maintenance of property totalling €72m (78m). We earned interest income of €1,180m (1,081m) on loans, €17m (29m) on other securities held to maturity, and €5,183m (4,929m) on securities available for sale.
Prev. Prev. Prev. Prev. Prev. Prev. All figures in €m* 2006 year 2006 year 2006 year 2006 year 2006 year 2006 year
Land and buildings, including buildings on third-party land 17 6 80 29 248 67 15 – – 1 360 103
Other securities held to maturity – – – – 16 28 1 1 – – 17 29
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 100 170 – – – – 100 170
(30) Other income In addition to foreign currency exchange gains of €901m (696m), the other income mainly includes income from services rendered of €297m (266m), interest and similar income of €152m (157m), income from the release/reduction of miscellaneous provisions and adjustments of values for receivables of €82m (69m), and income from owner-occupied property that is sometimes leased out amounting to €137m (107m).
Gains on the disposal of investments 357 581 1,560 2,141 1,674 2,006 255 448 3 6 3,849 5,182 *After elimination of intra-Group transactions across segments.
Losses on the disposal of investments 131 58 550 264 558 279 51 56 – 14 1,290 671
Management expenses, interest charges and other *After elimination of intra-Group transactions across segments.
Change in technical provisions – Provision for future policy benefits 211 574 36 60 1,442 2,439 35 37 1,724 3,110
Gross expenses for claims and benefits 5,241 5,511 9,120 11,943 13,580 14,670 2,857 3,436 30,798 35,560
– Provision for deferred premium refunds – – – – – – – 1 – 1
– Provision for deferred premium refunds – –9 1 4 2,152 1,891 23 16 2,176 1,902
Net expenses for claims and benefits 5,035 5,158 8,546 10,797 13,398 14,453 2,688 2,944 29,667 33,352 *After elimination of intra-Group transactions across segments. **Adjusted owing to first-time application of IAS 19 (rev. 2004).
Reinsurance commission and profit commission 1,791 1,683 2,958 2,989 19 20 11 12 4,779 4,704
Ceded share of acquisition costs –16 10 –12 1 20 16 – – –8 27
Operating expenses *After elimination of intra-Group transactions across segments. **Adjusted owing to first-time application of IAS 19 (rev. 2004).
(33) Other expenses In addition to foreign currency exchange losses of €1,176m (511m), “other expenses” mainly include expenses for services rendered of €298m (278m), interest and similar expenses of €203m (144m), other write-downs of €119m (70m), and other tax of €22m (32m). They also contain expenses of €78m (101m) for owner-occupied property, some of which is also leased out.
The current tax is derived from the tax results of the financial year, to which the local tax rates of the respective subsidiaries are applied. Deferred tax is also calculated using the local tax rates. Sometimes for simplicity’s sake we use uniform tax rates for individual circumstances or subsidiaries. Changes in tax rates and tax legislation that have already been adopted by the government at the balance sheet date are generally taken into account..
Deferred tax assets are recognised for unused loss carry-forwards to the extent that, on the basis of tax result planning, it is sufficiently probable that they will be utilised. The following table shows the reconciliation between the expected taxes on income and the tax on income actually shown. The expected tax expenses are calculated by multiplying the operating result before taxes on income (after “other tax”) by the Group tax rate. The Group tax rate amounts to 40%. This takes into account corporation tax including solidarity surcharge, and a mixed trade-tax rate.
Deferred tax resulting from the occurrence or reversal of temporary differences 288 –220
The decrease in finance costs compared with the previous year is due on the one hand to the redemption of Munich Reinsurance Company ´s exchangeable bond in the previous year. On the other hand, the finance costs were reduced owing to the redemption of ERGO International AG´s exchangeable bonds and repayment of ERGO AG´s bank borrowing. Information on the Group’s strategic debt can be found in the management report on page 100 f. and under (18) “Subordinated liabilities” and (25) “Bonds and notes issued”.
Disclosures on the uncertainties of future cash flows from insurance contracts
Biometric risks Our portfolios’ degree of exposure to biometric risks depends on the type of insurance contracts: Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts
Life primary insurance – Endowment and – Long-term contracts with a death benefit Mortality (short term): term life insurance – In most cases, a lump-sum payment on termination – Increase in claims expenditure due to exceptional, – Actuarial assumptions fixed when contract is concluded; one-off circumstances premium adjustments not possible Mortality (long term): – Increase in expected expenditure due to sustained rise in mortality in the portfolio
– Annuity insurance – In most cases, guaranteed lifetime annuity payment Longevity: – Actuarial assumptions mainly fixed when contract is – Increase in expenditure for annuities due to concluded; premium adjustments not possible sustained rise in life expectancy in the portfolio
– Disability insurance – Long-term contracts with a guaranteed limited Disablement: annuity in the event of disablement – Increased expenditure due to rise in the number of cases
Mortality (long term): – Increase in claims expenditure due to sustained rise in mortality in cedants’ portfolios
Health primary insurance – Largely long-term contracts guaranteeing assumption Morbidity (primarily short term): of costs for medical treatment. Provisions are established – Increase in medical costs that cannot be absorbed for covering increased costs on ageing through premium adjustments
– Variable actuarial assumptions; premium adjustment – Increase in claims expenditure due to exceptional, possible if there are sustained changes in the cost structure one-off events
In the health segment, we are proceeding on the assumption that there will be further advances in medical treatment, potentially giving rise to higher costs. If it is foreseeable that the assumptions behind the calculation are permanently inadequate to cover expenses for claims, it is possible to adjust premiums for long-term contracts, thus limiting the financial and balance-sheet effects of permanent changes in morbidity.
In reinsurance, such an interest-rate risk can frequently be ruled out through suitable treaty design. For many treaties, the interest on technical provisions is secured by an inflow of investment income from deposits retained that is guaranteed by the ceding company. For the remaining portion of the €16,534m (19,281m) total provision for future policy benefits and provision for outstanding claims, we use the following discount rates: Discount rates used for provisions – Reinsurance (gross)
In life primary insurance, an implicit or explicit interest-rate guarantee is granted for the majority of contracts, based on an actuarial interest rate applying at the time the contract is concluded. An appropriate minimum return needs to be earned in the long term from the investment result (possibly also with assistance from the underwriting result) for the contractually guaranteed benefits. In health primary insurance, an actuarial interest rate is also used for calculating the provision for future policy benefits, but this rate can generally be altered by way of premium adjustment.
In primary insurance, the risks to be considered in this context – besides the interest-rate guarantee – are particularly risks from unitlinked life insurance and the lump-sum option in the case of deferred pension policies. Other embedded derivates are financially insignificant.
For the unit-linked insurance contracts in our portfolios, the investment risk lies completely with the policyholder, meaning that there is no direct market risk. Appropriate product design ensures that the necessary premium portions for payment of a guaranteed minimum benefit on occurrence of death are always based on the current fund assets. Hence, this guaranteed minimum benefit does not represent an embedded derivative in the accounting sense.
The lump-sum option in the case of deferred annuities is an embedded derivative which, however, is itself an insurance contract for accounting purposes. There is no direct interest-rate sensitivity or market sensitivity here, since the exercise of the option by the policyholder is always determined to a crucial extent by individual factors and relates to the insurance components. In addition, the exercise of the option can be influenced by the way the insurer structures bonuses. This option is specifically taken into account when applying the liability adequacy test prescribed by IFRS 4 to underwriting liabilities.
In life primary insurance, the reported provision for future policy benefits in the case of contracts with a surrender option is generally at least as high as the relevant surrender value. Therefore, lapse rates are not included in the calculation of the technical provisions. Surrender values are taken into account in the amortisation of deferred acquisition costs and the calculation of provisions in health primary insurance. The underlying assumptions are regularly checked. The policyholder’s right in some contracts to maintain the contract with a waiver of premium and an adjustment of the guaranteed benefits constitutes a partial lapse and is taken into account in the calculations analogously.
Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts
No guaranteed interest rate 4,633 835 5,468 5,854 *After elimination of intra-Group transactions across segments.
Risk minimisation measures In reinsurance, biometric risks are controlled by means of a risk-adequate underwriting policy. Risks are restricted through appropriate treaty design, specifically by limiting the coverage in the case of nonproportional business. In particular, the underwriting of longevity risks from reinsured portfolios is strictly limited. Interest-rate and other market risks are frequently ruled out by depositing the provisions with the cedant, with a guaranteed rate of interest from the deposit. In individual cases, these risks are also hedged by means of suitable capital market instruments.
(37) Risks from insurance contracts in the property-casualty segment Of particular importance in this segment is the estimation risk with regard to the amount of the expected claims expenditure for future claims from current insurance contracts (premium risk) and for claims already incurred (reserve risk). In estimating claims expenditure, we also take cost increases into account. Besides this, there is an interest-rate risk for parts of the portfolio.
Premium risks The degree of exposure to estimation risks differs according to class of business and also between primary insurance and reinsurance. On the basis of the loss ratios and combined ratios of recent years, conclusions can be drawn about the historical volatilities in the different classes of business and about possible interdependencies. The differences in volatility are due equally to fluctuations in claims burdens and fluctuations in the respective market price level for the covers granted.
Reserve risks Provisions for outstanding claims are subject to the risk that actual claims settlement may be less than or exceed the amount reserved (reserve risk). Particular attention is given to those situations where the funds dedicated to future claim payments may be inadequate.
The development of our claims reserves in the past and the corresponding run-off results are shown under (21) “Provisions for outstanding claims”.
A particular sensitivity exists in classes of business with long runoff periods. This characteristic applies especially to casualty insurance, where liabilities often manifest themselves with a considerable time-lag. In addition, changes in court verdicts, new loss categories, medical inflation and modifications in general life expectancy can alter the valuation of reserves. The following section discusses the main areas in the current reserve portfolio where management has identified the uncertainty to be the greatest.
In the course of 2006, we saw rapidly emerging evidence that the surge in asbestos claims filings that the US industry has experienced in recent years will impact our Munich Re America book of business. Therefore, we have reallocated €465m to asbestos claims reserves from previously held unallocated risk margins at Munich Re Group level. Altogether, the provisions concerned are as follows: Provisions for asbestos and environmental claims 31.12.2006 Prev. year
Other loss scenarios which are highly influenced by the continuously evolving practice of jurisprudence under tort law currently include toxic mould, sexual misconduct and construction defects. We will continue to monitor trends and to respond to the emergence of new information as appropriate. Given the unpredictable nature of court decisions and other loss-affecting factors in the markets concerned, however, it will continue to be difficult to make accurate estimates of future development.
In the area of bodily injury losses, the Group carries a significant amount of reserves for individual claims where the claimant is severely injured and is in need of a high degree of individual, specialised medical treatment and care. US workers´ compensation business and motor liability business in some European countries are particularly affected by such claims. In both cases, coverage is provided for permanent disability cases where the claimant is expected to live for a considerable length of time and requires significant medical attention. Accordingly, the loss provisions are highly sensitive to inflation in the medical sector and to general life expectancy. Historical loss development data still embed past coverage and benefit/inflation levels. As such, historical loss patterns that are relied upon for traditional actuarial analysis may not be truly reflective of future emergence; future reported and paid loss amounts are compared to projected amounts to check the appropriateness of current and future loss development patterns.
Risk minimisation measures With our underwriting policy geared to systematic diversification, i.e. the greatest possible mix and spread of individual risks, we substantially reduce the volatility for our insurance portfolio as a whole.
(41) Personnel expenses The following personnel expenses are included in the operating expenses, in the expenses for claims and benefits (for claims adjustment ) and in the investment result:
Since 1 July 2002, ERGO Versicherungsgruppe AG and some of its subsidiaries, as well as Europäische Reiseversicherung AG and MEAG MUNICH ERGO AssetManagement GmbH, have also set up long-term incentive plans at yearly intervals and with terms of seven years each. The persons entitled to participate – Board of Management members, managing directors and, in individual cases, also top executives – are granted a defined number of stock appreciation rights in respect of Munich Re shares. The design of the plans is identical to that of Munich Re’s long-term incentive plans and they are accounted for in the same way. In the year under review, a total of 173,682 (212,028) stock appreciation rights were granted, 131,040 (184,310) of these to Board of Management members. The future obligations arising from the long-term incentive plans are covered by Munich Re shares. In the year under review, related provisions of €20.4m (14.4m) had to be posted for the primary insurers and asset managers in the Munich Re Group; the personnel expenses totalled €6.4m (13.3m). The weighted average share price for the stock appreciation rights exercised in 2006 was €119.46 for plan year 2003 and €124.50 for plan year 2004. The intrinsic value of the exercisable stock appreciation rights amounted to €4.9m at the balance sheet date.
Incentive Incentive Incentive Incentive Incentive Incentive Incentive Incentive Plan 1999 Plan 2000 Plan 2001 Plan 2002 Plan 2003 Plan 2004 Plan 2005 Plan 2006
New initial share price after 2003 capital increase €173.67 €303.72 €304.80 €247.64 €82.02 €88.65 €88.10 €108.87
Intrinsic value 2006 for one right – – – – €46.60 €39.97 €40.52 €19.75
Number of rights on 31 Dec. 2001 85,645 80,582 109,474 – – – – –
Number of rights on 31 Dec. 2003 78,981 77,855 107,428 135,200 439,581 – – –
Number of rights on 31 Dec. 2004 78,981 77,417 106,828 134,452 437,227 456,336 – –
Each stock appreciation right entitles the holder to draw in cash the difference between the Munich Re share price at the time when the right is exercised and the initial share price. The stock appreciation rights may only be exercised after a two-year vesting period and then only if the share price is at least 20% higher than the initial price. In addition, Munich Re shares must have outperformed the DAX 30 (Plan 1999) or the EURO STOXX 50 (from Plan 2000 onwards) twice at the end of a three-month period during the term of the plan. The gross amount that may be obtained from the exercising of the stock appreciation rights is limited to an increase of 150% of the initial share price.
When the stock appreciation rights are exercised, the cash payment is made (in the respective national currency) by the company that granted the rights. Stock appreciation rights not exercised on the last trading day of the plan term are exercised on the participant’s behalf insofar as the prerequisites for this are met. If the prerequisites are not met, the stock appreciation rights are forfeited. If another company acquires control of Munich Re or the company’s group of shareholders changes significantly due to a merger or comparable transaction or intended business combination (”change of control”), all plan participants from the Munich Re Group may exercise their stock appreciation rights within 60 days after the change of control becomes effective, even if the prerequisites for exercising the rights are not yet met at that juncture.
(44) Employee share-ownership programmes In 2006, Munich Reinsurance Company staff were given the opportunity to acquire up to five employee shares at preferential conditions. The purchase price per share was €91.90, resulting in a benefit of €27.00 per share based on the share price applicable at the time the programme was granted. Altogether, 2,493 staff took advantage of the offer and acquired 12,355 shares; personnel expenses totalled T€334. In addition, staff of MEAG MUNICH ERGO AssetManagement GmbH or one of its subsidiaries had the opportunity to acquire up to five employee shares at preferential conditions. The purchase price per share was €82.84, resulting in a benefit of €27.00 per share based on the share price applicable at the time the programme was granted. Altogether, 469 staff took advantage of the offer and
Incentive Incentive Incentive Incentive Incentive Plan 2002 Plan 2003 Plan 2004 Plan 2005 Plan 2006
Intrinsic value 2006 for one right – €46.60 €39.97 €40.52 €19.75
Fair value 2006 for one right €1.09 €47.40 €44.36 €46.03 €37.35
Number of rights on 31 Dec. 2002 45,476 – – – –
Number of rights on 31 Dec. 2006 42,892 28,081 90,669 184,458 173,682
acquired 2,293 shares; personnel expenses totalled T€67. Both programmes were carried out using own shares acquired in the financial year 2006 and, to a small extent, residual holdings of own shares acquired prior to the financial year. Differences between the cost of own shares and the personnel expenses have been recognised in retained earnings.
(47) Contingent liabilities, other financial commitments The Munich Re Group enters into contingent liabilities in connection with its normal business operations. Commitments under rental, work and service contracts amount to €189m (147m). Investment obligations total €376m (214m). These figures represent undiscounted nominal amounts. Beyond this, there are other financial commitments of €48m (4m) and obligations from guarantees totalling €279m (227m). In connection with a sale of shares, a liability towards the purchaser totalling a maximum of £2m has been assumed. There are contingent liabilities of €91m (100m) from a lease transaction with property.
(46) Auditor’s fees For services rendered to the parent and consolidated subsidiaries by the Group auditor (KPMG Bayerische Treuhandgesellschaft AG Wirtschaftsprüfungsgesellschaft, Munich, and its affiliated companies within the meaning of Section 271 para. 2 of the German Commercial Code), the following fees have been recognised as an expense in the financial year: 31.12.2006 Prev. year
KPMG has supported Munich Re in connection with the Gloria project, primarily with assurance and appraisal services, e.g. in relation to data migration and the examination of control concepts. The expenses for this work are shown under “other services”.
Later than one year and not later than five years 201 230
Consolidated result attributable to Munich Re equity holders €m 3,440 2,679
(49) Events after the balance sheet date On 18/19 January 2007, Winter Storm Kyrill crossed central Europe with wind speeds of well over 100 km/h on a widespread scale. The countries hardest hit by the storm were Germany and the UK, but it also affected the Benelux countries, Austria, Poland, the Czech Republic, and to a lesser degree Switzerland. The Munich Re Group expects its claims costs in primary insurance and reinsurance to be significantly lower than the €600m before tax anticipated on the basis of an initial estimate.
Of the owner-occupied and investment property recognised in the consolidated balance sheet as “held for sale”, ownership of items with a carrying amount of €215m had been transferred by the end of February 2007, realising a gain on disposal of €294m; cf. Note (16) “Non-current assets and disposal groups held for sale”.
Munich Reinsurance Company Life Reinsurance Eastern Europe / Central Asia, Moscow 100.00% 9 0
Unión Médica la Fuencisla, S. A., Compañia de Seguros, Saragossa 94.69% 6,594 341
ERGO Generales Seguros y Reaseguros, S. A., Madrid 94.69% 13,468 3,039
ERGO I . sviçre Hayat Sigorta A.Ş., Istanbul 71.01% 7,982 –860
ERGO I . sviçre Sigorta A. Ş., Istanbul 71.01% 50,303 6,659
Sopockie Towarzystwo Ubezpieczen na Zycie Ergo Hestia Spolka Akcyjna, Sopot 94.69% 14,046 3,133
Sopockie Towarzystwo Ubezpieczeniowe Ergo Hestia Spolka Akcyjna, Sopot 94.69% 186,529 18,077
D.A.S. Difesa Automobilistica Sinistri, S. p. A. di Assicurazione, Verona 47.34% 9,593 2,192
They have been translated using the exchange rates applicable on 31 December 2006. ***Result for the year after profit transfer.
Actuary Qualified expert who analyses problems from the area of insurance, home loans, investments and pensions using methods of probability theory and financial mathematics, and develops solutions with due regard to legal and economic parameters.
Asset management Management of an investment portfolio on the basis of risk and return considerations. It covers both the preparation and implementation of investment decisions regarding assets and the management of special funds.
Cash flow statement Statement disclosing the origin and utilisation of cash during the financial year. It shows the change in liquid funds separately according to cash flows from operating activities, cash flows from investing activities and cash flows from financing activities.
Catastrophe bond Also referred to as “cat bonds” and “act of God bonds”, catastrophe bonds are used to transfer natural catastrophe risks to the capital markets. The buyers of such bonds profit from a comparatively high coupon rate, but assume all or part of the (re)insurer’s risk with regard to a natural catastrophe. If a catastrophe exceeds the predefined parametric trigger, some or all of the capital and interest is used to pay the (re)insurer’s financial loss from the natural catastrophe instead of being repaid/credited to the buyers.
Deferred tax assets/liabilities Deferred taxes derive from temporary differences between accounting on the basis of IASs/IFRSs and national tax law. If in the consolidated financial statements asset items are valued lower, or liabilities higher, than in the tax accounts of the Group company concerned, the resulting future tax relief must be recognised as a deferred tax asset. Also included are tax assets deriving from tax loss carry-forwards. If the accounting differences between the consolidated financial statements and tax accounts will lead to future tax burdens, these must be recognised as deferred tax liabilities. Deferred tax assets are reversed if a realisation of the receivable is not probable.
Derivative financial instrument Financial instrument whose increase or fall in value is based on and determined by the change in the amount of an underlying value (a particular interest rate, security price, exchange rate, price index, etc.). The main derivatives are futures, forwards, swaps and options.
Diversification Business policy tool geared to spreading a company’s activities over different areas so as to avoid particular dependencies. A diversification strategy may have different focal points: the breadth of product range with a view to acquiring new clients, the geographical spread of business, the mixture of risks in investments, or the optimum composition of an insurance portfolio. Active risk diversification is one of the Munich Re Group’s “cardinal virtues”, which shapes its integrated risk management.
Effective interest method Method of determining the amortised cost of financial instruments and the distribution of interest earnings and expenses between individual periods. IAS 39 requires that effective interest must include fees, other transaction costs and any premiums or discounts.
Embedded value Concept used in valuing life and health insurance business. Embedded value mainly comprises the present value of earnings from business in force, calculated according to actuarial principles, plus the value of equity, including valuation reserves, and less the cost of holding capital.
Equity method Investments in associates have to be valued in the consolidated financial statements using the equity method. The “at equity” value corresponds to the Group’s proportionate share of the shareholders’ equity of the entity concerned.
Exchangeable bond Special form of corporate bond which, besides entitling holders to repayment of the face amount and regular interest, give them the option to convert the bond into shares. The conversion right is for shares in a company which is not the bond issuer.
Fast close The sum of organisational and technical improvements in business processes that serve to accelerate publication of a company’s quarterly and annual financial statements within the legal deadlines.
International Accounting Standards Board (IASB) An international body of 14 accounting experts responsible for issuing IASs/IFRSs. The IASB’s objective is to achieve uniformity in the accounting principles that are used by businesses and other organisations for financial reporting around the world.
Life and health One of the segments in our segment reporting, containing the classes life (re)insurance and health (re)insurance.
Market value The publicly listed market price obtainable for an asset in an active market (especially stock market price).
Medicator Medicator AG is the German private health insurers’ fund for the protection of policyholders. It guarantees that a health insurance company ’s contractual obligations will be fulfilled in the event that the company encounters financial difficulties.
Minority interests in equity and earnings That part of the equity and earnings of subsidiaries that is attributable to shareholders outside the Group.
Mortality table Table developed using methods of probability theory for estimating the expected mortality of policyholders in a portfolio of life or health insurance contracts. It shows the probability of future mortality on a differentiated basis according to age and other factors, often taking into account demographic trends. Mortality tables with provision for adverse deviation are generally used for measuring technical provisions.
Net asset value Measurement of the fair value of companies. The starting point is the proportional equity capital of the company to be valued, plus the valuation reserves.
Net operating expenses Commission, personnel costs and general expenses for the acquisition and ongoing administration of insurance contracts, less any commission reimbursed by reinsurers, including profit commission, plus expenses from amortisation of PVFP.
Operating result before taxes on income Consolidated result from ordinary activities, before finance costs and taxes on income.
Option Derivative financial instrument where the holder is entitled – but not obliged – to buy (in the case of a call option) or sell (in the case of a put option) the underlying asset at a predetermined price within a certain period. The writer of the option is obliged to transfer or buy the asset and receives a premium for granting the option to the purchaser.
Policyholders’ bonus In life and health insurance, policyholders are entitled by law and contractually to an appropriate share of the surplus earned by their insurers. The amount of this bonus is fixed anew each year. As a rule, in life insurance these bonuses increase the benefit payable on maturity of the policy or on occurrence of the insured event; in health insurance, they are paid by way of premium refunds.
Provision for premium refunds Provisions made for obligations involving bonuses and rebates – especially in life and health insurance – which are not yet payable at the balance sheet date; the amount posted is based on supervisory or contractual regulations. They also include the policyholders’ share of accumulated valuation differences between IASs/IFRSs and the German Commercial Code (provision for deferred premium refunds).
Rating Standardised assessment of the credit standing of debt instruments and companies by specialised independent rating agencies.
Return on equity (ROE) Indicator for measuring a company’s financial performance. It is calculated as a percentage ratio of the result for the period to the average equity employed.
Securities lending The transfer (assignment) of fixed-interest securities or shares from the portfolio of a lender to a borrower for a given period of time. The borrower undertakes to retransfer securities with the same reference number and in the same amount to the lender after expiry of the lending period. In return, the lender is paid a lending fee.
Security Ability (and willingness) of a reinsurer to meet its financial obligations from reinsurance agreements in full and at all times. Security depends on such factors as earnings capacity, quality of investments, capitalisation and liquidity.
Special fund Investment fund with a maximum of 30 unit-holders that are not natural persons. As the fund owners pursue specific objectives with their investments, investment policy is geared to individual requirements.
Statutory surplus Surplus recorded in the balance sheet of US insurance companies on the basis of the statutory accounting regulations used by US state supervisory authorities.
Structured product In the case of structured products, a derivative financial instrument (e.g. an option) is combined with a non-derivative instrument (e.g. a bond). Structured products are also referred to as hybrid products.
Subordinated bond In the event of liquidation, dissolution or insolvency of the loan debtor or in the event of debt composition proceedings or other processes to avoid insolvency being taken against the loan debtor, the claims of holders of subordinated bonds are satisfied after the claims of all other non-subordinated creditors. In other words, payments on subordinated bonds are not made until claims of third parties against the bond debtor arising from non-subordinated liabilities have been fully satisfied.
Board of Management 26, 32, 34ff., 48, 53, 57, 59, 100, 111ff., 124f.,
Corporate governance 35f., 111ff. Corporate tax law 67, 87, 199 Corporate Underwriting/Global Clients 49, 56, 82f.
Geo Risks Research 105, 126 Germany, Asia Pacific and Africa 48f.
Temple Insurance Company Munich Re Centre 390 Bay Street, 22nd Floor Toronto, Ont., M5H 2Y2 www.mroc.com/temple
Munich American Reassurance Company 56 Perimeter Center East, N. E. Atlanta, GA 30346-2290 Tel.: +1 770 350 3200 www.marclife.com
Allgemeine Rechtsschutzversicherungs-AG D.A.S. Deutscher Automobil Schutz Versicherungs-AG Thomas-Dehler-Str. 2 81728 München
Further addresses may be obtained from the 2006 annual report of ERGO Versicherungsgruppe AG.
Result before amortisation and impairment losses of goodwill 5,498 4,150 3,369 1,971 –20
Amortisation and impairment losses of goodwill 4 7 344 687 371
Thereof: – Attributable to Munich Re equity holders 3,440 2,679 1,833 –434 288 – Attributable to minority interests 96 72 54 –34 –74 * Adjusted owing to first-time application of IAS 19 (rev. 2004). ** Finance costs shown under “other expenses”.
Thereof: – Attributable to Munich Re equity holders 3,440 641 715 1,125 959
Important dates 2007/2008 26 April 2007 Annual General Meeting 27 April 2007 Dividend payment 4 May 2007 Interim report as at 31 March 2007 6 August 2007 Interim report as at 30 June 2007 6 August 2007 Half-year press conference 6 August 2007 Publication of sustainability report 5 November 2007 Interim report as at 30 September 2007 12 March 2008 Balance sheet press conference for 2007 financial statements 8 May 2008 Interim report as at 31 March 2008 7 August 2008 Interim report as at 30 June 2008 6 November 2008 Interim report as at 30 September 2008
© 2007 Münchener Rückversicherungs-Gesellschaft Central Division: Corporate Communications Königinstrasse 107 80802 München Germany