1 For 2013, 2014, 2015 and 2016, this contains treasury shares earmarked for retirement. 2 Including those apportionable to minority interests and policyholders. 3 Previous years’ figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 4 Excluding health insurance conducted like life insurance.
» Key figures (IFRS) – Munich Re at a glance (XLS, 45 KB)
» Key figures (IFRS) – Munich Health (XLS, 42 KB)Munich Health
Net expenses for claims and benefits €bn –38.5 –38.7 –39.7 –39.9 –41.0 Net operating expenses €bn –12.3 –12.4 –12.0 –12.4 –12.6
Insurance-related investments €bn 9.6 9.2 8.5 7.3 Equity €bn 31.8 31.0 30.3 26.2 27.4
Corporate governance 007 Report of the Supervisory Board 009 Corporate governance report 014
Due to rounding, there may be minor deviations in summations and in the calculation of percentages in the present report.
The same is true for 2016. A profit of €2.6bn is pleasing, and falls within the upper half of the profit guidance of €2.3–2.8bn we forecast at the start of the year. This result allows us to propose an increase in the dividend to €8.60 per share. Munich Re is adhering to its shareholder-friendly and sustainable dividend policy. We are confident that we will be able to sustain this higher level in the future.
Munich Re Group Annual Report 2016 regular restructuring of investments should generate profits over time. In these challenging and uncertain times, we do not have unrealistically high financial targets that require us to erode our financial substance. You can be sure of that.
On the other hand, our confidence is also based on changes that we have already introduced which will have a positive impact on the consolidated result in the future. First, I would like to mention our initiatives in the areas of innovation and digitalisation. In recent years, we have built up a potent innovation infrastructure, and established many partnerships with promising start-ups. Our pipeline is overflowing with new insurance products and innovative services. The digitalisation of important processes within our business is progressing well. In this year, and in the coming years, we will continue to work hard to develop as many of these innovations as possible to the point where they make a visible contribution to the Group’s profits.
Munich Re is also a company in transition. Digitalisation is shifting client and customer demand, and enabling a comprehensive reorganisation of our business. Innovative business models and partnerships that would previously not have been taken into consideration are now being set up. All this has the effect of changing our company. My successor as Chairman of the Board of Management, Joachim Wenning, will continue to drive this process forwards.
Thanks to our strong balance sheet, we are able to operate from a position of strength in difficult times such as we are currently experiencing. Thanks to the huge pool of expertise offered by our staff, we have the creative potential to set today the foundation of tomorrow’s profits.
Collaboration between Supervisory Board and Board of Management The Board of Management involved the Supervisory Board in all important business transactions and decisions of fundamental significance for the Group. During meetings, we held in-depth discussions with the Board of Management about the information provided to us. Cooperation with the Board of Management was characterised in every regard by – and responsible action aimed at – promoting the successful development of Munich Re. The Board of Management satisfied its reporting obligations towards the Supervisory Board in all respects, both verbally and in writing.
Outside of Supervisory Board meetings, the Board of Management informed us promptly about important events in the Group, for example ERGO’s Strategy Programme and modified structure. The shareholder representatives and the employee representatives met regularly with the Chairman of the Board of Management for separate discussions in preparation for the meetings.
Focal points of the meetings of the full Supervisory Board There were six meetings of the Supervisory Board in the year under review. We regularly held in-depth discussions with the Board of Management about business performance and current topics, with a special focus on strategic considerations of the Board of Management with respect to the individual fields of business. The Board of Management reported regularly on Munich Re’s investments, addressing the development of the global economy and financial markets in detail, and their impact on the Group’s assets and earnings. The Board also supplied us with frequent updates on the objectives and implementation of the ERGO Strategy Programme. Moreover, we took advantage of the opportunity to confer on matters involving the Board of Management even in the Board’s absence. We also dealt with the following topics in the individual meetings in 2016: The meeting on 15 March focused on the Company and Group financial statements for 2015, the combined management report, and the motions for resolution by the 2016 Annual General Meeting. Furthermore, we conferred and took decisions regarding the extension of two appointments to the Board of Management, the appointment of the new Chairman of the Board of Management, and established the personal objectives for the Board members’ variable remuneration for 2016. We were also updated on the Group-wide compliance management system.
The meeting on 26 April dealt with matters involving the Board of Management, specifically the evaluation of the individual Board members’ annual performance for 2015 and their multi-year performance for 2013–2015. On 27 April, directly prior to the Annual General Meeting, we heard the Board of Management’s report on the present status of business performance in 2016. We also used the meeting to make last-minute preparations for the Annual General Meeting.
On 12 July, we discussed the reinsurance group’s result situation in a persistently challenging market environment. Moreover, we considered the new regulations concerning the market abuse regime and adopted guidelines for handling inside information in the Supervisory Board’s area of responsibility. Beyond this, we were briefed on the 2015 compensation report in accordance with the German Remuneration Regulation for Insurance Companies (VersVergV).
After a comprehensive discussion, on 6 December we decided on remuneration for the Board of Management as from 2017. We also made decisions on changes to Board of Management contracts and guidelines on fringe benefits. We looked into the Group’s risk strategy in the course of the report on Munich Re’s risk situation by the Group Chief Risk Officer. The Board reported on Group planning for 2017 to 2019. In this context, we adopted changes to the rules of procedure and distribution of responsibilities for the Board of Management. The Board also presented us with the Group human resources report 2015/2016 and detailed the focal points of human resources work and workforce planning within the Group. There was also a report on Munich Re’s investment management.
At its four meetings in 2016, the Standing Committee dealt with the preparation of the respective Supervisory Board meetings and topics of corporate governance. In addition, the Standing Committee carried out a review of the efficiency of the Supervisory Board’s work in 2016, and determined that, overall, the reporting by the Board of Management and the work of the Supervisory Board was efficient and appropriate. Regular reports by the Chairman of the Board of Management covered changes to the shareholder structure and the status of the share buy-back programme. The Committee also received the annual report on expenses for donations and sponsoring.
11Corporate governance Report of the Supervisory Board for the appropriation of the net retained profits for the financial year 2015. The Audit Committee also considered the 2016 Quarterly Statements, which it reviewed in conjunction with the auditor. The Committee heard regular reports on the current status of the Solvency II implementation project, and discussed in these meetings both initial and quarterly reporting to the Supervisory Authority. Other key tasks of the Committee consisted in monitoring the Group’s risk situation and risk management on an ongoing basis, and developing a risk strategy. In addition to quarterly written reports, the Committee also obtained detailed verbal information from the Group Chief Risk Officer on several occasions, and heard reports from the head of the actuarial function. Further issues discussed regularly were the internal control system and compliance topics. The Head of Group Audit informed the members of the Committee in full about the outcome of the audits for 2015 and the audit planning for 2016. The Committee received regular updates on the current status of individual compliance issues and the progress of audits. In the absence of the Board of Management, the members of the Committee took advantage of the opportunity to confer amongst themselves or with the Head of Group Audit, the Group Chief Compliance Officer, the Group Chief Risk Officer and the external auditors. Furthermore, the Audit Committee reviewed and monitored the auditor’s independence. The Committee passed guidelines on the awarding of service contracts to the auditor and conducted the approval process required under these guidelines. The Audit Committee regularly calls for reports on the auditor’s new activities beyond the auditing of the annual financial statements and on the utilisation of the statutory limit for awarding such contracts. Following a resolution by the full Supervisory Board, the Chair of the Committee commissioned KPMG with the audit for the 2016 financial year, and also commissioned the auditor’s review of the Half-Year Financial Report 2016.
Corporate governance and Declaration of Conformity The Supervisory Board pays close attention to good corporate governance. Together with the Board of Management, we therefore published the mandatory annual Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG) in November 2016. We again complied with all recommendations of the German Corporate Governance Code, and will continue to do so in future. We confirmed the assessment that all 20 members of the Supervisory Board are to be regarded as independent and that they do not have any relevant conflicts of interests.
Munich Re offered the members of the Supervisory Board an internal information event in 2016. Nearly all took advantage of the opportunity to brief themselves on the objectives and tasks of the Capital Partners and Digital Partners units.
Changes in the Board of Management Once Nikolaus von Bomhard had expressed his wish to retire after the 2017 Annual General Meeting, the Personnel Committee and the plenary sessions of the Supervisory Board intensively explored the question of his successor. On 15 March 2016, having discussed the conceivable alternatives in depth, the Supervisory Board appointed Joachim Wenning to be Nikolaus von Bomhard’s successor as Chairman of the Board of Management of Munich Re with effect from 27 April 2017. Joachim Wenning has been responsible for worldwide life reinsurance business on the Board of Management since the beginning of 2009; he has also been responsible for Human Resources since 1 October 2013 and has served as Labour Relations Director since that
Further information on corporate governance in general is available in the joint report of the Board of Management and Supervisory Board on page 14 ff.
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. We apply the highest standards to our operations and activities and therefore comply with all the recommendations and proposals of the German Corporate Governance Code. By adopting international guidelines such as the UN Global Compact, the Principles for Responsible Investment for the investments we make and the Principles for Sustainable Insurance for our core business, we further demonstrate our commitment to corporate responsibility.
More information on corporate governance can be found on our website at www.munichre.com/cg-en. There, you can also find the combined Statement on Corporate Governance in accordance with Sections 289a and 315 (5) of the German Commercial Code (HGB), and the Declaration of Conformity by the Board of Management and Supervisory Board with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG). The remuneration report can be found on page 29 ff. of the combined management report.
Münchener Rückversicherungs-Gesellschaft Aktien- gesellschaft in München (Munich Reinsurance Company) has three governing bodies: the Annual General Meeting, the Board of Management and the Supervisory Board. Their functions and powers are defined by law, the Articles of Association, the Co-determination Agreement applicable to Munich Reinsurance Company, and by rules of procedure and internal guidelines. Employee co- determination on the Supervisory Board is governed by the Co-determination Agreement concluded pursuant to the German Act on the Co-Determination of Employees in Cross-Border Mergers (MgVG). There, the principle of parity co-determination on the Supervisory Board has been strengthened by taking into account staff employed in the rest of Europe.
The supervisory requirements for (re)insurance companies, especially the German Insurance Supervision Act (VAG) and the European supervisory regulations (Solvency II implementing rules) are placing additional demands on corporate governance. They include specific rules on various issues such as business organisation or the qualifications and remuneration of members of the Board of Management, Supervisory Board members and other individuals.
The Board of Management is responsible for managing the Company, in particular for setting the Company’s objectives and determining strategy. In doing so, it is obliged to safeguard Company interests and endeavour to achieve a sustainable long-term increase in the Company’s value. The Board of Management is responsible for effecting adequate risk management and risk control in the Company. It must ensure that statutory requirements and internal Company guidelines are abided by, and works to achieve their compliance by Group companies (compliance).
The Group Compliance Division (GComp) of Munich Reinsurance Company reports directly to the Chairman of the Board of Management. GComp manages the compliance activities of Munich Re (Group) through Group-wide terms of reference, monitoring their 1 In accordance with Section 3.10 of the German Corporate Governance Code.
In accordance with Section 5.4.1 (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 professional knowledge, personal abilities and experience (especially of an international nature), independence, commitment to sustained corporate profitability, and enterprise of the nominated persons.
− In selecting candidates for membership, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. The objective of having at least 30% of the seats on the Supervisory Board to be filled by women by the start of the following term of office continues to apply. With a 45% representation of women since 3 January 2017, up from 40% at the end of 2016, the Supervisory Board’s objective has already been surpassed at this juncture.
− Future nominations of candidates for election to the Supervisory Board should also take into account that, as a rule, at the time of election no candidate should already have been on the Supervisory Board for a continuous period of more than ten years. Normally, Supervisory Board members should not serve on the Board for a continuous period of more than twelve years.
The Supervisory Board is of the opinion that all 20 of its members are to be regarded as independent within the meaning of Section 5.4.2 of the German Corporate Governance Code. The Supervisory Board is not aware of any business or personal relationship between a member and the Company, its governing bodies, a controlling shareholder or an entity affiliated with such a shareholder, as a result of which a major and not only temporary conflict of interest could arise. The Supervisory Board assumes that the employee representatives on the Supervisory Board elected in accordance with the Act on the Co-Determination of Employees in Cross-Border Mergers and the Co-Determination Agreement are independent as a matter of principle.
The Board of Management coordinates the Company’s strategic approach with the Supervisory Board and discusses the current state of strategy implementation with it at regular intervals. The Board of Management reports regularly and as needed to the Supervisory Board about all questions relevant to the Company. Beyond this, the Board of Management reports to the Audit Committee on specific topics falling within the latter’s scope of responsibility. The Supervisory Board has defined the Board of Management’s information and reporting requirements in detail. Specific types of transactions, such as certain investments and divestments pursuant to Article 4 of the Articles of Association, require the Supervisory Board’s consent. The Supervisory Board’s approval is also required for sideline activities assumed by members of the Board of Management, and for important transactions involving members of the Board of Management or persons or undertakings closely associated with them.
From 27 April 2017 Chairman of the Board of Management Chairman of the Group Committee Group Development1
Christian Fuhrmann Member since 22 April 2009, last re-elected 30 April 2014 Head of Divisional Unit, Munich Reinsurance Company
Dr. iur. Anne Horstmann Member since 30 April 2014 Employee of ERGO Group AG
Ina Hosenfelder Member since 30 April 2014 Employee of ERGO Group AG Deputy Chair of the Union Council of the Neue-Assekuranz-Gewerkschaft (NAG)
Renata Jungo Brüngger Member since 3 January 2017 Member of the Board of Management of Daimler AG
Ulrich Plottke Member since 30 April 2014 Employee of ERGO Group AG
Anton van Rossum Member from 22 April 2009 until 27 April 2016 Chairman of the Supervisory Board of Royal Vopak NV, Netherlands
Dr. jur. Hans-Jürgen Schinzler Honorary Chairman Former Chairman of the Supervisory Board
Marco Nörenberg Deputy Chairman Member since 22 April 2009, last re-elected 30 April 2014 Employee of ERGO Group AG
Nomination Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder Chair Prof. Dr. oec. Dr. iur. Ann-Kristin Achleitner Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann
Conference Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder Chair Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Marco Nörenberg Angelika Wirtz
Dr. rer. pol. Thomas Blunck – Global Aerospace Underwriting Managers Ltd. (GAUM), United Kingdom (Chair) New Reinsurance Company Ltd., Switzerland2 (Chair) Munich Re Digital Partners Ltd., United Kingdom2 (Chair)
Dr. rer. pol. Markus Rieß ERGO Beratung und Vertrieb AG2 (Chair) ERGO International AG2 (Chair) ERGO Versicherung AG2 (Chair) ERGO Digital Ventures AG2 (Chair) ERGO Deutschland AG2 (Chair) ITERGO Informationstechnologie GmbH2 (Chair) DKV Deutsche Kranken versicherung AG2 (Chair) MEAG MUNICH ERGO Kapital anlagegesellschaft mbH2 (Chair)
Dr. oec. publ. Joachim Wenning – – 1 As at 31 December 2016. 2 Own Group company within the meaning of Section 18 of the German Stock Corporation Act (AktG).
Munich Re Group Annual Report 2016 19Corporate governance Corporate governance report
Gerd Häusler BayernLB Holding AG (Chair) – Dr. iur. Anne Horstmann ERGO Group AG2 –
Anton van Rossum (until 27 April 2016) – Royal Vopak NV, Netherlands (Chair)
om bi ne d m an ag em en t r ep or t
Prospects 078 Comparison of the prospects for 2016 with the result achieved 078 Outlook for 2017 079
A core guiding principle for Munich Re is acting in a far-sighted and responsible manner in the interests of both the Group and society. We have refined our Groupwide corporate responsibility strategy, based on the shared-value approach. This means that, in our business operations, we bring together economic and social progress to counter the most significant global challenges. We are therefore concentrating on mitigating the consequences of climate change; improving access to healthcare for all levels of society worldwide; and increasing risk awareness within our Group, among our staff, clients, and shareholders, and in society.
In our estimation, the talent and performance of our staff are the keystones to Munich Re’s long-term success. Our international and diversity-focused human resources work sets great store in a corporate and leadership culture which promotes motivation and innovation in our highly qualified staff members. More information can be obtained under www.munichre.com/employees.
As at 31 December 2016, our Group employed 43,428 (43,554) staff members worldwide, 27.9% (27.6%) of whom worked in reinsurance, 66.2% (66.6%) at ERGO and 5.9% (5.7%) in Munich Health.
Besides assuming underwriting risks, we offer our clients a wide range of services, from medical expertise to automated risk assessment processes. In addition, we continuously expand our tailor-made structured concepts for clients seeking to optimise their capitalisation, liquidity or other important performance indicators.
From 1 February 2017, the reinsurance units of Munich Health were merged with the Life Division.
Munich Reinsurance Company and ERGO Group AG are under unified control within the meaning of the German Stock Corporation Act (AktG). The relevant statutory regulations, control agreements and Group directives govern the distribution of responsibilities and competences for key decisions between Group management and ERGO. Control and profit-transfer agreements are in place with many Group companies, especially between ERGO Group AG and its subsidiaries.
Munich Re Group Annual Report 2016 dedicated to industrial clients and is part of Risk Solutions, also belongs to this division. In 2015, we pooled the Risk Trading Unit, which offers alternative capital market solutions and retrocession (our own reinsurance), and other product experts in a new unit called Capital Partners. Structured prospective and retrospective reinsurance solutions have thus been added, so that we can offer our clients all the tools needed for dealing with complex issues from a single source. In spring 2016, SFR founded a new unit: Digital Partners. This company works together with start-ups to develop online insurance business based on a purely digital technology platform. A key component of Munich Re’s risk solution strategy is Great Lakes Insurance SE, which is assigned to this division. It has its headquarters in Munich (relocated from London at the end of December 2016) and a large branch office in London. Its aim is to leverage business potential in niche primary insurance business which is close to reinsurance.
The Germany, Asia Pacific and Africa Division conducts property-casualty business with our clients in Germany, Africa, Asia, Australia, New Zealand and the Pacific Islands. With offices in Australia and New Zealand, Munich Holdings of Australasia Pty. Ltd. ensures that we are on hand for our clients in the region. All the important Asian markets are serviced by our branch offices in Hong Kong, Mumbai (since February 2017), Beijing, Singapore and Seoul, and by other representative offices. In the African market, we are represented by our subsidiary Munich Reinsurance Company of Africa Ltd., headquartered in Johannesburg, and by other liaison offices. The branches in Asia guarantee our competitiveness in these key growth markets with their commitment and local presence.
The Special and Financial Risks Division is in charge of the classes of credit, marine, aviation and space, agriculture, enterprise, and other selected contingency risks. The Corporate Insurance Partner unit, which is
Munich Re Group Annual Report 2016 protection insurance under the D.A.S. brand. As a specialist for unit-linked life insurance, VORSORGE Lebensversicherung supports the restructuring of private provision products in the low- interest-rate environment. DKV Deutsche Krankenver sicherung is a leading provider and specialist in the healthcare market, catering for privately and statutorily insured individuals alike with its broad range of supplementary covers. The specialist travel insurer ERV is an established carrier and a market leader internationally as well as in Germany. ERGO’s own sales company, ERGO Beratung und Vertrieb AG, bundles the various sales channels – from tied intermediaries and brokers to banks and other cooperation partners. The ERGO Direkt com panies provide the expertise in digital marketing that is increasingly gaining in importance across the market. Their broad-based portfolio, spanning all classes of business and a plethora of distribution channels coupled with an individual sales advice approach, enables attractive all-round provision for all client groups.
With ERGO Lebensversicherung AG and ERGO Versicherung AG, our primary insurance arm is one of Germany’s largest providers of life and property insurance. ERGO Versicherung AG also markets legal 1 A detailed list of shareholdings can be found on page 168 ff. in the notes to the consolidated financial statements. 2 Units that also transact business in Munich Health and are therefore allocated proportionately to reinsurance.
Munich Reinsurance Company of Africa Ltd., Johannesburg Munich Holdings of Australasia Pty. Ltd., Sydney Munich Re, Hong Kong2 Munich Re, Kuala Lumpur Munich Re, Seoul2 Munich Re, Singapore2
SSAIH – is tapping into the potential of the major province of Shandong. ERGO broached yet another Asian market in 2016 by acquiring shares in Thailand’s Thaisri Insurance. In Vietnam, Munich Re’s primary insurance arm has an interest in the property insurer GIC.
ERGO is participating in the dynamic development of the Asian growth region via joint ventures in India and China, and acquisitions and investments in other countries. In India, we raised our stake in the property insurer HDFC ERGO to 48.7% in 2016. That same year, HDFC ERGO streng thened its market presence through the acquisition of another property insurer. In the Indian life insurance market, we are a joint venture partner in Avantha ERGO. In China, ERGO China Life – a joint venture with the state-owned financial investor
Life and Health Germany DKV Deutsche Krankenversicherung Aktiengesellschaft, Cologne ERGO Direkt Krankenversicherung AG, Fürth ERGO Direkt Lebensversicherung AG, Fürth ERGO Direkt Versicherung AG, Fürth ERGO Lebensversicherung Aktiengesellschaft, Hamburg ERGO Pensionskasse AG, Düsseldorf EUROPÄISCHE Reiseversicherung Aktiengesellschaft, Munich Victoria Lebensversicherung Aktiengesellschaft, Düsseldorf VORSORGE Lebensversicherung Aktiengesellschaft, Düsseldorf
International AGROTIKI Insurance S.A., Athens DAS Legal Expenses Insurance Company Limited, Bristol DAS Nederlandse Rechtsbijstand Verzekeringmaatschappij N.V., Amsterdam ERGO General Insurance Company S.A., Athens ERGO Insurance N.V., Brussels ERGO Insurance SE, Tallinn ERGO Life Insurance SE, Vilnius ERGO SIGORTA A.S., Istanbul ERGO Versicherung Aktiengesellschaft, Vienna Sopockie Towarzystwo Ubezpieczen Ergo Hestia Spolka Akcyjna, Sopot Sopockie Towarzystwo Ubezpieczen na Zycie Ergo Hestia Spolka Akcyjna, Sopot 1 A detailed list of shareholdings can be found on page 168 ff. in the notes to the consolidated financial statements.
Southeast Asia and China. The management and key operational functions of our reinsurance activities in North America were relocated to Minnesota in order to be even closer to clients and sales partners for future business development. We continued to grow our reinsurance business in the Middle East and Gulf region. In the year under review, we laid the organisational groundwork for future growth through capital-relief reinsurance solutions in Europe and Latin America. By increasing our stake in Apollo Munich Health Insurance in India by 23.3% to 48.7%, we have bolstered our opportunities to participate in the continuing dynamic growth within primary insurance. Despite the difficult economic environment, DKV Seguros in Spain confirmed its market-leading position. As a provider of funded health insurance, DKV Belgium did not escape the impact of the low-interest-rate environment, but it is consistently developing its offering further in favour of products that are not dependent on interest rates.
Since 2008, Munich Re had pooled its health business in the Munich Health field of business. A wide spectrum of service providers and risk carriers in primary insurance and reinsurance worldwide (though not in Germany) had attended to customers in services and the in surance sector since then. Despite a few individual success stories, the original growth and revenue targets for the Munich Health field of business had not been realised overall. We therefore decided to disband this field of business with effect from 1 February 2017. The reinsur ance part of Munich Health was merged with the Life Division, and the primary insurance part was transferred to ERGO International. The reorganisation will also release cost synergies.
Selected companies that operate in more than one segment and are allocated proportionately to Munich Health
Basic remuneration plus remuneration in kind/ fringe benefits 30% Function, Responsibility, Length of service on Board
Objectives for the fields of business – Reinsurance – ERGO – Munich Health2
In the fourth year, on con dition that 25% of the net amount paid out is invested by the Board member in shares that must be held for at least a twoyear period
Pension contribution > Retirement > Insured event > Premature termination 1 For the variable remuneration, the share shown presupposes 100% performance evaluation/achievement of objectives. 2 The field of business/division Munich Health was disbanded as at 1 February 2017, so that no objectives have been set with effect from 2017. 3 Target overall direct remuneration comprises basic remuneration plus variable remuneration based on 100% performance evaluation/achievement of objectives.
Annual objectives, multi-year objectives, overall performance evaluation and investment in shares together form a well-balanced and economic (i.e. strongly risk-based) incentive system, with great importance being attached to ensuring that the targets set for the members of the Board of Management do not have undesirable effects. No guaranteed variable salary components are granted.
Variable remuneration based on annual performance Firstly, annual targets for the variable remuneration component geared to annual performance are set on the basis of the consolidated result of Munich Re (Group), the results from the reinsurance and ERGO fields of business, divisional results and personal performance. In addition, the Supervisory Board assesses overall performance – particularly performance not taken into account in the objectives – of the Board of Management as a whole and the individual Board members, and it also takes into account developments during the appraisal period that are beyond the influence of the Board. Full achievement of the annual objectives (100%) allows for payment of 30% of the overall target amount for variable remuneration.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits include – in particular – company cars, insurance premiums and health screening examinations, and are reviewed against market practice at regular intervals. Income tax on the benefits in question is paid individually for each member of the Board of Management, with the Company bearing the amount due. Remuneration in kind and fringe benefits are disclosed in the Annual Report using expenditure as the basis of valuation.
Achievement of objectives and overall performance is measured at the end of the one-year and three-year periods in question, there being no adjustment of targets during
Details of the assessment bases for the multi-year performance can be seen in the following table: 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, ERGO and Munich Health fields of business and on individual performance are fixed every year. The Supervisory Board also assesses the overall performance of the whole Board of Management and the individual Board members. This allows for a response to developments during the three-year appraisal period that are beyond the influence of Board members, and which can also be taken into account along with performance not included in the agreement of objectives. Full achievement of the multi-year objectives (100%) allows for payment of 70% of the overall target amount for variable remuneration.
– Reinsurance Value-based economic Components of performance indicators: economic earnings3: – Property-casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in-force business
Severance cap and change of control Members of the Board of Management appointed before 1 January 2017 have no contractual right to severance payments. If the Board member’s activities on the Board are terminated prematurely without good cause, payments due may not exceed 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 (2) of the Securities Acquisition and Takeover Act – WpÜG) and may not cover more than the remaining period of the employment contract. If the employment contract is terminated for good cause on grounds that are within the Board members control, no payments are made to the Board member. The calculation is based on the overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
Members of the Board of Management appointed for the first time after 1 January 2017 whose contracts are terminated by the Company without good cause will have a contractual right to a severance payment. Such payments may not exceed the equivalent of two years total remuneration, and are restricted by the remaining term of the Board member’s contract. Total annual remuneration is calculated on the basis of fixed annual remuneration and the variable remuneration paid out for the prior full financial year before the contract was terminated; remuneration in kind, other ancillary benefits and contributions to occupational retirement schemes are
Remuneration for other board memberships In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular remuneration computation. Exempted from this is remuneration for memberships explicitly classified by the Supervisory Board as private.
Category of objective Share1 Assessment basis Parameters Collective contribution 0%–60% to corporate success Business-field objectives (three-year average)
– Reinsurance Value-based economic Components of economic earnings2: performance indicators: – Value added – Property-casualty reinsurance – Value added by new business – Life reinsurance – Change in the value of in-force business
– Munich Health3 Value-based economic Component of economic earnings2: performance indicator – Value added Individual contribution 20%–80% to corporate success Personal objectives Personal objectives Special focal points such as (three-year period) per Board member – Strategic goals – Client management – Innovation initiatives – Digitalisation initiatives Overall performance evaluation 20% Overall performance of individual Assessment by Supervisory Board taking Board members and the Board into account Section 87 of the Stock of Management as a whole Corporation Act (AktG) and the German Corporate Governance Code (incl. corporate responsibility)
Benefit: − In the case of defined contribution plans: Annuity based on the policy reserve or payment of the policy reserve as a lump sum. − In the case of a combination between defined benefit plans and defined contribution plans: Vested pension from the defined benefit plan and annuity from the policy reserve under the defined contribution plan or payment of a lump sum.
Disability pension Disability in this respect means that the member of the Board of Management is likely to be unable, or has already been unable, to exercise his or her position in the manner foreseen without health impairment for six months without interruption, as a result of illness, injury, or emaciation beyond what is normal for his or her age. The entitlement to a disability pension does not arise until expiry of remuneration payment obligations after a mutual agreement to terminate the employment contract, as a result of non-extension or revocation of their appointment to the Board or where the contract of employment has been terminated by the Company due to permanent incapacity.
As of 2009, newly appointed members of the Board have become members of a defined contribution plan. For this plan, the Company provides a pension contribution for each calendar year (contribution year) during the term of the employment contract. It uniformly amounts to 25.5% of the target overall direct remuneration (= basic remuneration + variable remuneration on the basis of 100% achievement of objectives). The pension contribution is paid over to an external pension insurer. The insurance benefits that result from the contribution payments constitute the Company’s pension commitment to the Board member.
Occupational pension Board members appointed for the first time before 1 April 2012 are entitled to an occupational pension on retiring from active service with the Company after reaching the age of 60 or, at the latest, at the end of the calendar year in which they turn 65.
Board of management remuneration under DRS 17 Under DRS 17, remuneration for annual performance 2016 is shown as the provisions set aside for that purpose taking into account the relevant additional/reduced expenditure for the previous year, since the performance on which the remuneration is based has been completed as at the balance sheet date and the requisite Board resolution is already foreseeable. Under DRS 17, remuneration for multi-year performance 2013–2015 is recognised in the year of payment, i.e. in 2016.
Fixed and variable remuneration components The remuneration received by the members of Munich Reinsurance Company’s Board of Management for fulfilling their duties in respect of the parent company and its subsidiaries is shown in the following table.
assumes payment of the difference between the monthly occupational pension and the monthly incremental pension from the external insurance.
Provision for surviving dependants In the event of the death of a Board member during active service, the surviving dependants receive the previous monthly basic remuneration for a period of six months if the deceased was appointed to the Board of Management before 2006. In the case of Board members appointed for the first time as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. If the Board members death occurs after retirement, the surviving dependants receive the previous monthly occupational pension for a period of three months, provided the marriage/registration of the civil partnership took place and/or the child was born before the Board member started drawing the occupational pension. Surviving spouses and registered civil partners normally receive a pension amounting to 60% of the defined benefit or insured occupational pension; half orphans receive 20% and complete orphans 40%. The total amount may not exceed the occupational pension of the Board member. If the Board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
4 The compensation components that Markus Rieß received for his work at ERGO Group AG are included in the remuneration. Remuneration in kind/fringe benefits for 2016 including expenditure for security.
Remuneration of individual Board members as per DRS 17 (revised 2010) (in accordance with Section 285 sentence 1 (9a) sentences 5–8 of the German Commercial Code (HGB) and Section 314 (1) (6a) sentences 5–8 of the German Commercial Code)
Remuner- Basic ation in Annual Multi-year Financial remuner- kind/fringe perform- perform- Name year ation benefits ance1 ance2 Other Total thereof for Munich Reinsurance Company 337,500 39,677 229,744 1,500,000 2,106,921 thereof for Munich Reinsurance Company 94,063 801 72,691 750,000 917,555
1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for 2016. The amounts shown for annual performance remuneration are based on estimates, i.e. the relevant provisions and the additional/reduced expenditure for 2015 posted in the table on page 35.
Amounts payable for the variable remuneration of the individual Board members in the event of 100% performance evaluation as per DRS 17 (revised 2010), corridor 0–200%
Munich Re Group Annual Report 2016 contribution system, the visible pension costs since 2009 are noticeably higher. The Company accepts this increase in order to avoid higher costs in future and to eliminate long-term pension-specific risks. The following defined benefits, present values, contribution rates and personnel expenses result for the individual members of the Board of Management: Pension entitlements Personnel expenses of €6.5m (6.1m) were incurred in the financial year to finance the pension entitlements for active members of the Board of Management. Of these, €1.5m was apportionable to defined benefit plans and €5.0m to defined contribution plans. As a consequence of the risk transfer to an external insurer under the defined
Munich Re Group Annual Report 2016 contribution plans) are in accordance with German Accounting Standard No. 17 (DRS 17). There are some deviations with regard to the variable remuneration for annual and multi-year performance.
The following tables show the benefits granted and the remuneration paid out in accordance with the German Corporate Governance Code.
7 Entitled to a reduced occupational pension on early retirement in the event of premature termination of employment, and to an occupational pension in the event of regular termination of employment. 8 Entitled to vested benefits under the Employers’ Retirement Benefits Act in the event of regular termination of employment. 9 Defined Contribution Plan within the meaning of IAS 19, Employee Benefits, so no present value shown. 10 Munich Reinsurance Company: see footnote 9; ERGO Group AG: No Defined Contribution Plan within the meaning of IAS 19, so present value shown.
Remuneration in kind/fringe benefits 35,783 35,783 35,783 33,564 21,959 21,959 21,959 96,010
Remuneration in kind/fringe benefits 90,384 90,384 90,384 38,717 31,700 31,700 31,700 33,996
Remuneration in kind/fringe benefits 35,034 35,034 35,034 34,932 37,011 37,011 37,011 34,627
Munich Re Group Annual Report 2016 members of the Standing Committee each receive an additional €13,500. The Chairs of these committees receive double the amounts stated for members. No additional remuneration is paid for serving on the Nomination Committee or the Conference Committee.
In addition, members of the Supervisory Board receive an attendance fee of €1,000 for each Supervisory Board meeting and each meeting of a Supervisory Board committee – with the exception of the Conference Committee.
3 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2014–2016 multi-year performance. The amount shown for the 2014-2016 multi-year performance remuneration is based on estimates and the relevant provisions posted.
Multi-year variable remuneration Multi-year performance 2013–20151 1,354,605 903,070 Multi-year performance 2014–20163 1,243,091 869,456
Munich Re Group Annual Report 2016 1 Plus value-added tax (USt) in each case, in accordance with Article 15 (6) of the Articles of Association. 2 Including attendance fees in each case, in accordance with Article 15 (4) of the Articles of Association.
Fixed remuneration2 Financial For committee Name year Annual work Total 2015 – – –
The global low-interest-rate environment continued to pose great challenges for investment by insurers. Yields on ten-year government bonds in Germany and the USA fell at the start of the year, and in July hit historical lows of –0.19% and 1.36% respectively. The reasons for this included weak global growth, low inflation, loose monetary policies, uncertainty after the Brexit vote, and a flight to safe-haven investments. Yields did not start to climb again more strongly until the final months of the year. This was due to higher inflation expectations, anticipation that policy rates would increase in the USA, and portfolio restructuring after the election of the new US President.
Equity markets were subject to increased volatility during the year – due mainly to concerns about China’s economic growth at the start of the year and uncertainty in the wake of the Brexit vote. But growth across the year as a whole was positive. The DJ EURO STOXX 50 went up by around 1% in the period under review, the DAX 30 climbed by about 7%, and the Dow Jones Index saw an increase of around 13%.
According to provisional estimates, in primary insurance global premium income in the property-casualty segment showed solid growth in 2016 when adjusted for inflation. Most major markets in North America and Europe grew robustly, while growth stagnated in Japan and Australia. China and India continued to show dynamic premium volume growth, while Brazil saw a sharp contraction.
According to provisional estimates, global premium income in life primary insurance grew only moderately in 2016 when adjusted for inflation. The main drivers of this development included high growth rates in China, India and Brazil, and stable growth in the USA, Canada and France. In other major developed markets such as Italy, Japan and Korea, premium income decreased appreciably.
Throughout 2016, renewal prices of property-casualty reinsurance business continued to fall, albeit at a slower pace than in the previous year. A slight increase in demand for reinsurance helped to support the figures. The influx of alternative capital was also not as strong as in previous years, but still contributed more than enough capacity to reinsurance markets. Market conditions remained difficult overall, not least because of the continuing robust capital base held by reinsurance companies. In the renewals as at 1 January 2017, prices softened only slightly on average.
Important tools of corporate management Munich Re’s management philosophy – based on value creation
Our value-based management is characterised by the following aspects: − Business activities are assessed not only according to their earnings potential, but also relative to the extent of the risks assumed. Only the risk-return relationship reveals how beneficial an activity is from the shareholder point of view. − With value-based corporate management tools, we ensure an economic valuation and the comparability of alternative initiatives. − We clearly assign responsibilities and specify the levers for adding value for both management and staff.
In particular, economic earnings comprise the contribution to profits from our new business, and changes in the value of in-force business against the previous year’s assessment. The development of eligible own funds is also considered because of the effect of changed capital market parameters on the assets and liabilities sides of the Solvency II balance sheet.
In applying the uniform Group performance- measurement model of economic earnings in the individual fields of business, we use conceptually consistent value-based and risk-capital-based measurement approaches that are individually geared to the characteristics of each of the respective businesses. They include the value added by property-casualty reinsurance and Munich Health, and the excess return from our investment activity (asset- liability management). In life reinsurance, we apply value added by new business and the change in value of in-force business, which are based on the Solvency II balance sheet. The management tool economic earnings is used directly for ERGO, as no adjustments for this field of business are necessary. Group corporate management is designed so that we are in a position to maximise value creation while observing subsidiary parameters.
Munich Re’s value orientation is also reflected in the aftertax return on risk-adjusted capital (RORAC). With the entry into force of Solvency II as of 1 January 2016 and the changes associated with this, we have adjusted the calculation to the key indicators used under Solvency II.
Munich Re posted a consolidated profit of €2.6bn for the year, thus meeting its profit target of €2.3–2.8bn announced in March. Property-casualty reinsurance 1 Excluding health insurance conducted like life insurance.
There were fewer major losses than anticipated, but much more than in the previous year. This is also reflected in the combined ratio for property-casualty reinsurance.
The RORAC for the full year 2016 was below our target of 15%. This target, which we set for the first time in 2006 when market interest rates were significantly higher, is difficult to reach in the current environment of very low interest rates. By posting a consolidated profit of €2.6bn, we were able to reach our result target for 2016, namely to realise a profit of €2.3–2.8bn.
The consolidated result of €2.6bn (3.1bn) for 2016 was below the level of the previous year. The lower technical result and the costs of the ERGO Strategy Programme were only partly offset by gratifying investment and currency translation results.
Life reinsurance 20% (21%) Property-casualty reinsurance 36% (35%) ERGO Life and Health Germany 19% (19%) ERGO Property-casualty Germany 7% (6%) ERGO International 7% (8%) Munich Health 10% (11%)
Carrying amounts Unrealised gains/losses1 Fair values €m 31.12.2016 Prev. year 31.12.2016 Prev. year 31.12.2016 Prev. year Land and buildings, including buildings on third-party land 4,444 4,317 2,413 2,273 6,857 6,590 Investments in affiliated companies, in associates and joint ventures 1,711 1,278 903 725 2,445 1,831
Other securities available for sale 147,843 141,543 11,573 10,332 147,843 141,543
Munich Re Group Annual Report 2016 companies, and in Belgian, French and Canadian government bonds. In the year under review, we reduced our bond holdings mainly from issuers in Germany, the UK, the USA, and Portugal. The still-falling interest-rate levels entailed higher fair values in our government bond portfolio, especially for the German securities. The purchase of government bonds from emerging markets is also part of our balanced investment strategy; they account for 8.1% of our government bond portfolio.
The emphasis of our commitment in covered bonds remained on German securities, with around 35%. We also hold bonds from France (20%) and the United Kingdom (9%) in our portfolio.
The regional weighting of corporate bonds in our portfolio is 39% for the USA and 33% for the eurozone. Our credit exposure is increased by a further percentage point through derivatives.
Our investment in bank bonds is limited, and was further reduced in the course of the year. The share in our overall portfolio was 3% at the reporting date. Financial instruments from states in southern Europe make up 1% of the portfolio. Most of our bank bonds are senior bonds (82%), i.e. bonds that are not subordinated or subject to loss participation. Subordinated bonds and loss-bearing bonds made up 18% of our bank bond holdings.
The portfolio of structured credit products at fair values increased moderately to €4.8bn (4.7bn) as a result of acquisitions. This asset class involves securitised receivables (asset-backed securities or mortgage-backed securities), e.g. securitisations of real estate finance, consumer credit or student loans. Around 58% of our portfolio of asset- and mortgage-backed securities have a rating of AAA.
The carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies, associates and joint ventures at fair value) rose in the course of the year due to acquisitions and the positive trend on the stock markets. Our equity- backing ratio amounted to 6.1% (5.2%); including derivatives, it came to 5.0% (4.8%). Besides this, we are protecting ourselves against accelerated inflation in an environment of continuing low interest rates. For this, we hold inflation-linked bonds with a volume of €9.9bn (8.9bn) at fair value, and inflation-linked swaps with an exposure of €0.2bn (3.8bn). Real assets like shares, property, commodities, and investments in infrastructure, renewable energies and new technologies also serve as protection against inflation. Additionally, our investments in real assets have a positive diversification effect on the overall portfolio.
The carrying amount of our investment portfolio – which continues to be dominated by fixed-interest securities and loans – increased largely on account of declining interest rates and the development of exchange rates. Other fixed-interest securities available for sale were up owing to acquisitions, falling interest rates and exchangerate developments. There was a reduction in deposits retained on assumed reinsurance due to the termination of life reinsurance treaties.
Over half of our fixed-interest portfolio is invested in government bonds. The vast majority of these continue to come from countries with a high credit rating. Our portfolio of German and US government bonds at fair value totals €29.6bn (29.0bn) and €19.9bn (20.0bn) respectively, which is equivalent to 14.3% and 9.6% of the portfolio of interest-bearing securities. The portfolio includes government bonds totalling €3.5bn (3.2bn) from Italy and €3.4bn (3.7bn) from Spain, which each account for around 1.7% of our portfolio of interest-bearing securities. We do not hold bonds from Greece, Cyprus or Ukraine. We reinvested above all in supranational
Owing to the ongoing low return on reinvestments, the amount of regular income fell against the previous year. Positive currency translation effects were unable to compensate for lower interest payments from fixed- interest securities. Our reinvestment return was 1.8% (1.8%). Due to the low levels of interest rates in the year under review, yields on new investments remained far lower than the average return on our existing portfolio of fixed-interest investments. The decrease in regular income is also due to lower interest income on deposits resulting from the termination of contracts in life reinsurance.
We posted lower net write-downs of non-derivative investments, particularly on our share portfolio.
In the year under review, we generated lower net gains on the disposal of non-derivative investments. The reduction is primarily attributable to our equity portfolio and because we had realised a positive one-off effect in the previous year from the almost complete acquisition of 13th & F Associates Limited Partnership Columbia Square (13th & F).
(3.2%) is calculated as the mean value of the investment portfolios (carrying amounts) as at 31 December 2015 (€215,093m), 31 March 2016 (€214,828m), 30 June 2016 (€218,805m), 30 September 2016 (€222,040m) and 31 December 2016 (€219,416m), and the off-balance-sheet unrealised gains and losses (excluding owner- occupied property) as at 31 December 2015 (€15,436m), 31 March 2016 (€18,114m), 30 June 2016 (€18,714m), 30 September 2016 (€19,784m) and 31 December 2016 (€16,738m).
Result from equities and equity derivatives1 €m 2016 Prev. year Regular income 556 618 Write-downs –323 –488 Realised gains/losses 440 1,018 Result from equities 672 1,148 Change in on-balance-sheet unrealised gains and losses in equity (gross) 478 176 Result from equity derivatives –777 –555 1 To calculate the total annualised returns on our portfolio, we obtain the overall result shown in the table from the mean value of these figures: Equity portfolio (carrying amounts) at 31 December 2015 (€13,882m), 31 March 2016 (€14,404m), 30 June 2016 (€12,661m), 30 September 2016 (€14,921m) and 31 December 2016 (€15,826m).
Our individual core markets Based on premium volume, over half (around 55%) of our global life reinsurance business is written in North America, where Canada (approximately 30%) continues to rank before the USA (about 25%). Around a fifth of our premium comes from Europe, with approximately 10% generated in the United Kingdom and about 5% in Germany. Further substantial shares derive from Asia (around 10%) and Australia/New Zealand (approximately 5%). We are also well positioned in Africa and Latin America, but due to the small size of the markets their share of our global business is low (about 5% in total).
Our Canadian branch, Munich Re, Toronto (Life), generated premium income of €3.0bn (3.7bn) in the life reinsurance segment. The decrease is largely attributable to the fact that a large treaty was renewed at a reduced volume with effect from 2016. In addition, a newly concluded transaction will not be fully reflected in premium income until 2017. The unit maintained its leading market position and again posted a very gratifying technical result that was even higher than in the prior year, thus accounting for a disproportionately large contribution to the overall result.
Thereof: Major losses Percentage points 9.1 6.2 Expense ratio % 32.4 32.6 Combined ratio % 95.7 89.7 Technical result €m 1,859 3,116 –40.4 Investment result €m 1,589 2,046 –22.3 Operating result €m 2,284 3,641 –37.3 Consolidated result €m 2,025 2,915 –30.5
On the African continent, our South African subsidiary Munich Reinsurance Company of Africa Ltd. posted a decrease in premium volume to €167m (187m), which was exclusively attributable to currency translation. The technical result was negative, since the technical provisions of one treaty had to be adjusted.
Our Swiss subsidiary New Reinsurance Company Ltd. (New Re) succeeded in growing its business volume by 32.7% to €733m (552m) in the area of property-casualty. Here, structured and customised reinsurance solutions generated additional premium volume. Traditional reinsurance business remained largely stable.
In adherence to our consistently cycle- and profitability- oriented portfolio management, we reduced our premium volume in Germany to €566m (669m) year on year. The reduction chiefly concerned unprofitable proportional fire business.
In Australia and New Zealand, we successfully defended our strong market position in a challenging environment, with margins remaining adequate and with largely stable premium volume of €935m (942m). We continue to provide substantial capacity for the coverage of natural hazards, in particular windstorm and earthquake.
In China, we continued to benefit from growth in the original markets, and also increased our premium income in motor business. Overall, our premium climbed to €1,190m (1,171m). Despite far-reaching changes in regulatory requirements and an extremely competitive market environment, we still see considerable medium-term growth potential for our Group in China.
In India, we were able to raise our premium income during the year. Moreover, we established a local branch office here in 2016, and received a licence as a local reinsurer from the Indian regulatory authority. We are now well positioned to successfully participate in the expected growth potential in India.
In direct industrial business, which we operate in our Corporate Insurance Partner unit, we responded to the currently difficult market environment by deliberately reducing our portfolio and expanding our range of innovative products. Premium income fell to €529m (633m).
Aviation and space saw a moderate fall in premium income to €459m (483m).
ERGO Group AG (ERGO) announced its Strategy Programme on 1 June 2016. With this Strategy Programme, ERGO is strengthening its role as a leading international primary insurer and pressing ahead with the digital transformation of its business. ERGO will invest a total net figure of €1bn up to 2020, i.e. after tax and policyholder participation. These funds will largely flow into modernising the ERGO Group‘s information technology. For customers using both online and offline channels, ERGO will develop suitable products that are online, intuitive, and will provide for rapid and efficient administration and short response times – complemented by personal advice either online or locally. In 2017, ERGO will also start up an independent digital insurance company for purely online customers under the brand name “nexible”. By consolidating sales organisations and paring down administration costs, ERGO plans to lower its cost basis by around €540m gross (about €280m net) by 2020. The measures will lead to the loss of around 1,800 jobs in Germany, mostly in the sales organisation. By 2021 at the latest, ERGO expects annual net profits of €600m, thus making a sustainable contribution to the annual result of Munich Re. From 2019, ERGO aims to grow more strongly than the market.
After conducting intense negotiations, the ERGO Board of Management and the co-determination bodies agreed on a reconciliation of interests regarding the sales organisation at the beginning of August 2016. ERGO’s new sales structure has been in place since 1 January 2017. Sales units that have previously been run separately will now be merged into a tied-agency sales force, and some decentralised business locations will be closed down.
The technical result generated by the ERGO Life and Health Germany segment in 2016 was up compared with the figures for the previous year. Above all, the investment result also increased, mainly attributable to better interest-rate hedge performance and higher gains on disposals, especially of fixed-interest securities to finance the additional interest reserve. The operating result consequently increased overall. Despite restructuring expenses, the consolidated result improved, mostly because the previous year’s figure had been impacted by impairment of goodwill.
Key figures 2016 Prev. year Change % Total premium income1 €m 10,009 10,322 –3.0 Gross premiums written €m 9,177 9,426 –2.7 Share of gross premiums written by ERGO % 57.2 57.0 Technical result €m 370 293 26.4
At 86.7%, the combined ratio for property-casualty business was below last year‘s (87.8%), and remained at a very good level.
Key figures 2016 Prev. year Change €m €m % Total premium income1 1,094 1,104 –0.9 Gross premiums written 1,009 1,011 –0.2 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
The downturn in premium volume was due in particular to the decrease in single-premium business. Unearned premiums from 2015 were also lower than the previous year’s figure. The strong fall in regular premium income was mainly attributable to the ongoing portfolio reduction, which could not be compensated for by new business. Overall, new business volume in 2016 was down by 5.8% year on year in terms of annual premium equivalent (APE, i.e. regular premium income plus onetenth of single-premium volume), which is the performance measure customary among investors. This was mainly due to the decrease in single-premium business. There was an increase in regular-premium new business, chiefly due to successful marketing of a standalone disability insurance cover launched at the beginning of the year.
The technical result increased compared with the previous year, partly due to a refined methodology. In the past financial year, the investment result totalled €3,064m (2,377m). Profits from our interest-rate hedges and higher gains on disposals contributed to this significant improvement, and were partly responsible for the rise in the operating result.
In Health Germany, around 91% of premium is derived from health insurance and around 9% from travel insurance.
In supplementary health insurance business, premium income was lower than in the previous year (–4.1%), chiefly owing to the termination of a large- volume treaty. Without this effect, premium income in supplementary health insurance would have increased by 1.1%. Also 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
New business Life Germany 2016 Prev. year Change €m €m %
Key figures 2016 Prev. year Change % Gross premiums written €m 3,194 3,162 1.0 Share of gross premiums written by ERGO % 19.9 19.1 Loss ratio % 61.9 64.7 Expense ratio % 35.1 33.2 Combined ratio % 97.0 97.9 Technical result €m 139 122 14.3 Investment result €m 80 187 –57.4 Operating result €m 128 219 –41.4 Consolidated result €m –72 214 –
Our main classes of business are motor and personal accident insurance, which account for around 21% and 20% of the segment’s premium income respectively.
Premium income developed favourably year on year. Premium volume climbed by 1.7% in liability insurance, 1.3% in motor insurance, and 1.5% in legal protection insurance. Fire and property business and personal accident insurance saw a year-on-year decline in premium volume of 3.1% and 2.5% respectively.
The technical result in the ERGO Property-casualty Germany segment rose in 2016, due mainly to lower major-loss expenditure. The investment result was significantly down on the previous year, due mainly to lower gains from disposals of equities. The reduced investment result and restructuring expenses were mainly responsible for the negative consolidated result.
The 2016 combined ratio was 0.9 percentage points below the previous year’s figure. Natural catastrophe losses and man-made major losses were below the level of 2015. The expense ratio increased, partly due to additional investments for implementing the Strategy Programme. Paid claims and the change in claims provisions totalling €1,955m (1,981m), along with net operating expenses of €1,108m (1,015m), compared to net earned premiums of €3,158m (3,059m).
Approximately 38% of the segment‘s premium income derives from life insurance, and around 62% from property-casualty insurance. ERGO’s biggest markets include Poland (accounting for approximately 29% of premium volume), Austria (about 17%) and Belgium (around 15%).
At €1,530m (1,991m), overall premium income from international life insurance business was less than in the previous year. The marked decrease is due in particular to developments in Poland and Belgium. In addition, the decline was attributable to the deconsolidation of our Italian company as at 30 June 2016. In terms of the annual premium equivalent, new business in international life insurance was down year on year. We posted premium volume of €2,502m (2,392m) in international property- casualty business, representing an increase of 4.6%. The higher premium income mainly resulted from developments in Poland and the Baltic states. The firsttime consolidation of the Greek insurer ATE Insurance in the third quarter contributed to this increase with gross premiums written of €46m.
On 1 August, ERGO successfully completed the acquisition of the Greek company AGROTIKI Insurance S.A. (ATE Insurance). As a result of this transaction, ERGO has expanded its presence in Greece, and is now the biggest property-casualty insurer in the market. The Greek insurance market offers great potential, even though the country’s overall economic situation remains difficult.
Key figures 2016 Prev. year Change % Gross premiums written €m 4,990 5,623 –11.3 Share of international business % 98.7 99.0 Loss ratio1 % 81.8 84.5 Expense ratio1 % 16.7 15.4 Combined ratio1 % 98.5 99.9 Technical result €m 92 24 280.8
Despite the fall in the technical interest, the technical result was significantly above the level of the previous year. Improved results in reinsurance derived mainly from high losses in the USA from the previous year that were not repeated due to the introduction of countermeasures. Improved business performance in other regions also allowed for the release of reserves from previous years. There was also an improvement in the result for primary insurance, especially at DKV Belgium and DKV Seguros. The investment result remained at the previous year’s level.
The Munich Health combined ratio, which relates only to short-term health business and not to business conducted like life insurance, was down on the previous year. The combined ratio was 99.5% (101.1%) for reinsurance and 94.2% (93.2%) for primary insurance. Business conducted like life insurance accounted for 10.5% (9.0%) of gross premiums written in the year under review.
Our primary insurance and reinsurance operations have a significant influence on the structure of our balance sheet: as we have consistently geared our Group towards value creation in its core business, investments serve to cover technical provisions (74% of the balance sheet total). Equity (12% of the balance sheet total) and bonds classified as strategic debt (2% of the balance sheet total) are the most important sources of funds.
Under the supervisory regulations of Solvency II, subordinated liabilities are recognised as own funds provided that they are available at all times to cover losses on a going-concern basis. Munich Re’s subordinated liabilities amount to €4,218m. Of this sum, €4,172m meet the requirements under Solvency II for loss absorption capacity and are therefore recognised as own funds. When this is considered in calculating the strategic debt, the latter is reduced to €429m and the debt leverage amounts to only 1.3%.
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. Supervisory authorities in some countries, for example, require foreign reinsurers to establish premium and reserve deposits to the benefit of primary insurers, or set up trustee accounts or guarantees with certain financial institutions. At the reporting date, this involved investments with a volume of €9.7bn (9.1bn). In addition, there were contingent liabilities. Information on these can be found on page 165 of the notes to the consolidated financial statements.
Debt leverage 31.12.2016 Prev. year Change €m €m % Strategic debt1 4,601 4,791 –4.0 1 The main components of our strategic debt are subordinated liabilities, and bonds and notes issued (see pages 142 f. and 151 of the notes to the consolidated financial statements).
Information in accordance with Sections 315 (4) and 289 (4) of the German Commercial Code (HGB) and explanatory report of the Board of Management
Shareholdings exceeding 10% of the voting rights Munich Reinsurance Company has not been notified, nor has it otherwise learned, about any direct or indirect shareholdings in the Company that exceeded 10% of the voting rights as at 31 December 2016.
Through active capital management, we ensure that Munich Re’s capital is always maintained at an appropriate level. In addition to the capital requirements determined using our internal risk model, more far- reaching requirements by regulatory authorities, rating agencies and our key insurance markets must be met. The Solvency II ratio is a key measure of Munich Re’s capital strength. Further information on this ratio can be found on page 74 of the risk report. We aim to ensure that our financial strength is such that it enables us to take advantage of profitable opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group own funds as one which does not lastingly exceed that which is required. Excess capital is returned to our shareholders via attractive dividends and share buy-backs. In practice, capital repatriation comes up against limits because German accountancy rules force our parent, Munich Reinsurance Company, to maintain the claims equalisation provision in local GAAP accounting at a level that exceeds the economic requirements. This restricts the revenue reserves and profit distribution possibilities. As at 31 December 2016, Munich Reinsurance Company’s claims equalisation provision totalled €10.1bn. Additional information can be found under Munich Reinsurance Company (Information reported on the basis of German accountancy rules) on page 87.
Between 2006 and 2016, we returned a total of €22.0bn to our shareholders. In March 2016, we announced a further share buy-back programme of a maximum of €1bn up to the 2017 Annual General Meeting. During the reporting year, we had bought back shares with a total volume of €969m.
System of control for employee share scheme where the control rights are not exercised directly by the employees
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 Stock Corporation Act (AktG), and Sections 24, 47 and 303 of the German Insurance Supervision Act (VAG). Munich Re’s Co-determination Agreement and Articles of Association follow the legal tenets of the German Co- Determination Act (MitbestG). Pursuant to Article 16 of the Articles of Association, the Board of Management must comprise a minimum of two persons; beyond this, the number of members is determined by the Supervisory Board. There are currently ten members of the Board of Management. The Supervisory Board appoints the members of the Board of Management pursuant to Section 84 of the Stock Corporation Act 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 to five years, and extensions of up to five years are possible. For the appointment or dismissal of members of the Board of Management, Article 13 (3) of the Articles of Association stipulates a two-thirds majority of the votes cast on the Supervisory Board. If the requisite majority is not obtained in the initial resolution, the appointment or dismissal of the Board of Management requires a simple majority of the votes cast. The second resolution is only possible following a suitable period of reflection and after the issue has been dealt with in the competent committee, but is thereafter also possible by written consent in lieu of a meeting. In exceptional cases, members of the Board of Management may also be appointed by a court of law, pursuant to Section 85 of the Stock Corporation Act.
Powers of the Board of Management, with particular regard to the option of issuing or buying back shares
− The Annual General Meeting of 23 April 2015 authorised the Board of Management to issue, with the consent of the Supervisory Board, in one or more issues up to 22 April 2020, convertible bonds, bonds with warrants, profit participation rights, profit participation certificates or combinations of such instruments (hereinafter collectively referred to as “bonds”) for a maximum nominal amount of €3bn with or without a limited term to maturity. 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 or conversion obligations 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 (3) of the Articles of Association (Contingent Capital 2015).
− Under Article 4 (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 24 April 2018 by an amount of up to €280m by issuing new shares against cash or non-cash contribution (Authorised Capital 2013). In accordance with the above-mentioned provisions of the Articles of Association, it may exclude subscription rights.
The complete text of the aforementioned authorisations is provided in the agenda of the respective Annual General Meetings at www.munichre.com/agm/archive. Munich Reinsurance Company’s Articles of Association are available at www.munichre.com/articles- of-association.
There are no compensation agreements with members of the Board of Management or employees for the event of a takeover bid.
In the consolidated cash flow statement, the consolidated profit of €2,581m is used as the starting point for determining the cash inflows from operating activities. The consolidated result is also adjusted by €2,783m 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.
Outflows from investing activities were determined by payments for the acquisition of investments. They exceeded the inflows from the sale and/or maturity of investments by €1,200m.
Consolidated cash flow statement 2016 Prev. year Change €m €m % Cash flows from operating activities 3,132 4,327 –27.6 Cash flows from investing activities –1,284 –1,030 –24.7 Cash flows from financing activities –2,531 –2,337 –8.3 Cash flows for the financial year –683 960 –
The cash outflows for financing activities stem mainly from the dividend payment in 2016 and the share buy-back programme.
In the year under review, cash – which encompasses cash at banks, cheques and cash in hand – decreased by €683m (including currency effects) to €3,353m overall. There were items pledged as security and other restrictions on title amounting to €10m (23m).
Our implementation of risk management at operational level embraces the identification, analysis and assessment of all significant risks, which provide a basis for risk reporting, limits and monitoring.
Quantitative risk monitoring based on indicators is carried out both centrally and within units. We monitor risks that cannot be expressed directly as an amount either centrally or in our units, depending on their materiality and allocation.
Organisational structure Munich Re has set up a governance system as required under Solvency II. The most important elements of this are the risk management, compliance, audit and actuarial functions. At Group level, risk management is part of the Integrated Risk Management Division (IRM) and reports to the Chief Risk Officer (Group CRO). In addition to the Group functions, there are risk management units in the fields of business, each headed up by its own CRO.
Defining the risk strategy The risk strategy, which is derived from the business strategy, defines where, how and to what extent we are prepared to incur risks. The further development of our risk strategy is embedded in the annual planning cycle, and hence in our business planning. It is approved by the Board of Management, and discussed regularly with the Audit Committee of the Supervisory Board as an important element of the Own Risk and Solvency Assessment (ORSA).
We determine our risk strategy by defining risk appetites for the following risk criteria.
− Supplementary criteria: These are used to limit the loss amounts for individual risk types and potential accumulations that could endanger Munich Re’s ongoing viability.
− Other criteria: These support our objective of preserving Munich Re’s reputation and protecting its future business potential.
Solvency capital requirement – Internal model We have a comprehensive internal model that determines the capital needed to ensure that the Group is able to meet its commitments even after extreme loss events. We use the model to calculate the capital required under Solvency II (the solvency capital requirement, or SCR). The SCR is the amount of eligible own funds that Munich Re needs to have available, with a given risk appetite, to cover unexpected losses in the following year. It corresponds to the value at risk of the economic profit and loss distribution over a one-year time horizon with a confidence level of 99.5%, and thus equates to the economic loss for Munich Re that, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. Our internal model is based on specially modelled distributions for the risk categories property-casualty, life and health, market, credit and operational risks. We use primarily historical data for the calibration of these distributions, complemented in some areas by expert estimates. Our historical data covers a long period to take account of our one-year time horizon and to provide a stable and appropriate estimate of our risk parameters. We also take account of the diversification effects we achieve through our broad spread across the different risk categories (underwriting, market, credit and operational risks) and our combination of primary insurance and reinsurance business. We also take into account dependencies between the risks, which can result in higher capital requirements than would be the case if no dependency were assumed. We then determine the effect of the loss absorbency of deferred taxes.
The table shows the solvency capital requirement for Munich Re and its risk categories as at 31 December 2016.
Reinsurance ERGO Munich Health 31.12.2016 Prev. year 31.12.2016 Prev. year 31.12.2016 Prev. year €m €m €m €m €m €m
Diversification effect –7,709 –7,368 –2,444 –2,090 –32 –30 Tax –2,180 –2,028 –987 –664 –51 –53
The diversification effect between the risk categories property-casualty, life and health, market, credit and operational risks increased by €724m and stood at 36%. The solvency capital requirement, which is disclosed under “other”, increased because of a change in allocation, as the solvency capital requirement for investments of this category only needs to be shown without diversification and no longer under market risk. Further information on the changes within individual risk categories can be found in the sections below.
Underwriting risk here is defined as the risk of insured losses being higher than our expectations. The premium and reserve risks are significant components of the underwriting risk. The premium risk is the risk of future claims payments relating to insured losses that have not yet occurred being higher than expected. The reserve risk is the risk of technical provisions established being insufficient to cover losses that have already been
By way of example, we limit our exposure by setting limits and budgets not only for natural catastrophe risks but also for potential man-made losses, with our experts developing scenarios for possible natural events, taking into account the scientific factors, occurrence probabilities and potential loss amounts. On the basis of these models, the impact of various events on our port folio is calculated and represented in mathematical terms in the form of a stochastic model. These models serve as the basis for calculating the SCR. As part of the model validation, we regularly consider the sensitivity of the results produced by the risk model for large and accumulation losses to changes in the return periods or loss amounts for events, or a change in the business volumes written.
Another important measure for controlling underwriting risks is the cession of a portion of our risks to other carriers via external reinsurance or retrocession. Most of our companies have intra-Group and/or external reinsurance and retrocession cover. In addition to traditional retrocession, we use alternative risk transfer for natural catastrophe risks in particular. Under this process, underwriting risks are transferred to the capital markets with the assistance of securitisation vehicles.
Our internal model treats the accumulation-risk scenarios as independent events. The diagrams show our estimated exposure to the peak scenarios for a return period of 200 years.
The risk modelling attributes probabilities to each modified assumption and produces a complete profit and loss distribution. We use primarily historical data extracted from the underlying portfolios to calibrate these
Our largest short-term risk concentration in the life and health risk category 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 probable disruptions in the capital markets. We counter this risk by analysing our overall exposure in detail (scenario analysis) and defining appropriate measures to manage the risks, i.e. by specifying limits.
In reinsurance, we control the assumption of biometric risks by means of a risk-commensurate underwriting policy. 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.
Solvency capital requirement – Life and health The solvency capital requirement for life and health increased by €454m as against the previous year, because of increased volume in reinsurance and changes in the capital markets, particularly the appreciation of the US dollar and Canadian dollar as against the euro. There were various compensatory effects in the ERGO field of business: falling euro interest rates have the effect here of increasing solvency capital requirements, while implementation of the new ERGO strategy in particular has the opposite effect.
We use appropriate limit and early-warning systems in our asset-liability management to manage market risks. Derivatives such as equity futures, options and interest- rate swaps – which are used mainly for hedging purposes – also play a role in our management of the risks. Information on derivative financial instruments can be found in the notes to the consolidated financial statements on page 134 f.
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. It includes equity risk, general interest-rate risk, specific interest-rate risk, property-price risk and currency risk. The general interest-rate risk relates to changes in the basic yield curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, for example on euro government bonds from various issuers, or on corporate bonds. We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also our underwriting liabilities, especially in life insurance. Due to the long-term interest-rate guarantees given in some cases and the
General interest-rate risk 1,719 1,894 3,904 2,245 –1,636 –1,072 Specific interest-rate risk 1,485 1,565 4,317 2,763 –804 –795
General interest-rate risk 3,987 3,068 919 30.0 Specific interest-rate risk 4,998 3,534 1,464 41.4 Property risk 1,443 1,463 –20 –1.4
On the basis of defined stress scenarios, our experts forecast potential consequences for the financial markets, the fair values of our investments, and the present values of our underwriting liabilities. At Group level, we counter any negative effects with the high degree of diversification in both our investments and our liability structure, and with our active Group-wide asset- liability management.
In the ERGO field of business, the fair value of interest-sensitive investments as at 31 December 2016 was €130.1bn (130.5bn). The modified duration was 9.3 (8.4) for interest-sensitive investments and 10.6 (9.1) for liabilities. This resulted in exposure to falling interest rates arising mainly out of the long-term options and guarantees in life insurance business. A decrease in interest rates of one basis point would have reduced the freely available financial resources by approximately €22.2m (15.4m).
Reputational risk, strategic risk and liquidity risk are identified and analysed with other appropriate qualitative procedures and – where possible – these risks are evaluated and managed.
Reputational risk Reputational risk is the risk of a loss resulting from damage to the Group’s public image (for example with clients, shareholders or other parties). Actual reputational issues arising out of specific incidents are evaluated in the fields of business by Reputational Risk Committees. The Group Compliance Committee deals with compliance risks and concrete reputation issues and risks at Group level, with a view to standardising the way they are handled throughout the Group. In addition, monitoring and limitation of reputational risk is an essential element of operational risk within the scope of our internal control system. Our whistleblower portal also helps to reduce risk in this category.
In recognition of the increasing spread of information technology in society and the economy, we are intensifying our analysis of cyber risks. We monitor developments closely and, with the help of scenarios based on our observations, derive approaches for both risk management and the development of new business opportunities.
Operational risks are managed via our internal control system (ICS), complemented by the results of scenario analyses. In addition, we have a framework to define the rules for a standard Group-wide procedure for, in particular, identifying, assessing and managing security risks for people, information and property. Appropriate measures – up to and including larger projects – are used to correct identified weaknesses or mistakes. The sensitivity in the internal model is regularly checked against the most important input parameters.
In addition to political imponderables in Europe, current developments in the USA and the situation in emerging economies, international crises such as the situation in the Middle East and Ukraine are cranking up uncertainty levels. We constantly analyse the potential impact that developments of this sort may have on our risk profile.
Climate change represents one of the greatest long-term risks of change for the insurance industry. Our Corporate Climate Centre analyses and measures this risk with a holistic strategic approach.
As part of the normal course of business, Munich Re (Group) companies are involved in court, regulatory and arbitration proceedings in various countries. The outcome of pending or impending proceedings is neither certain nor predictable. However, we believe that none of these proceedings will have a significant negative effect on the financial position of Munich Re, as none of the risks exceeds a low three-digit-million euro figure.
In accordance with the prescribed processes, our Board committees explicitly defined the risk appetite for significant risk categories in the year under review, and quantified it with key figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout the Group. During the whole of 2016, risk exposures were regularly quantified and compared with the risk appetite. We assess Munich Re’s risk situation to be manageable and under control.
The Solvency balance sheet prepared in accordance with Solvency II is used to determine the excess of the Group’s assets over its liabilities, with both assets and liabilities largely being measured at fair value. This surplus is the key element of eligible own funds. Other components mainly comprise eligible subordinated liabilities, which need to be added to the calculation, and share buy-backs announced but not yet carried out at the reporting date, which must be deducted. Own fund items leading to restrictions in eligibility, such as surplus funds or minority interests in equity, must also be deducted. The dividend planned for the 2016 financial year is still included.
Global and regional economic and financial developments Munich Re has substantial investments in the eurozone. We attach importance to maintaining a correspondingly broad diversification of investments to cover our technical provisions and liabilities in euros. But low interest rates continue to pose major challenges for life insurance companies in the eurozone in particular. The fluctuations in the capital markets give rise to considerable volatility in investments and liabilities. We counter these risks with various risk management measures.
2 Eligible own funds excluding the application of transitional measures for technical provisions; including the application of transitional measures for technical provisions, the eligible own funds amounted to €48.2bn (Solvency II ratio: 316%).
In the age of digitalisation, our strong client focus, global risk management capabilities and industry knowledge put us in a strong position to benefit from continuously evolving markets and changes in client behaviour, whilst we continue to develop customised solutions together with our clients. Unless stated otherwise, the opportunities outlined below generally relate equally to all fields of business.
We have experts present in major start-up hubs such as Silicon Valley, London, Beijing, Berlin and Tel Aviv. By partnering with various accelerators in London and Berlin such as “Axel Springer Plug and Play” and “startupbootcamp”, we are engaging in an active exchange with many InsurTech companies and research institutions. These partnerships give rise to numerous ideas for cooperating and doing business, which allow us to expand our business model beyond the insurance value chain and open up growth opportunities in the digital world.
Customers are increasingly purchasing insurance cover in parallel via traditional and digital channels. The demands of our customers are rising in terms of contact options, smooth transitions between channels, and short response times. We intend to continue to utilise the resulting opportunities rapidly and systematically by enhancing the integration of products and distribution channels, and expanding direct sales in all lines of primary insurance. In doing so, we rely on our existing capabilities (such as at ERGO Direkt) and benefit from sharing knowledge across the Group. We are using innovative client approaches such as our fully digital insurer “nexible”, which will be launched in 2017, to engage tech-savvy customers. In the medium term, we are striving for the highest possible level of automation across all processing stages, alongside improvements in process quality, efficiency and safety along the whole value chain, and with new digital customer interfaces.
It is our aim to utilise the constantly evolving digital opportunities to expand the limits of insurability for health risks. Digitalisation, data analysis and data management play a major part in enhancing our service concepts in reinsurance, and in expanding our business. For the analysis of health risks, for example, we provide our cedants with modern solutions and tools for standardised medical risk assessment. In primary insurance, we aim to tap into new business potential through innovative products which are more closely tailored to fit customers’ individual needs. Wearable devices are just one way of gaining a better understanding of our customers and their habits. Our aim is to strengthen customer ties even further and make our spectrum of services more comprehensive by offering digital solutions. New products using digital monitoring technology can be useful in preventing chronic diseases or monitoring
Given the ever more stringent regulatory requirements, many insurers face the significant challenge of sustainably managing their capital relief and optimisation programmes and diversifying as best they can. Thanks to our strong capital base, innovative strength and professional expertise, we are well placed to be a long-term strategic partner for our reinsurance clients, with a wide range of products and services from all-round consultancy to tailor-made reinsurance and capital market solutions. In life and health primary insurance, changes in the legal environment also play an important role. Regulatory intervention could open up additional opportunities for our health insurer, DKV – for example, in further expanding our strong position in supplementary long-term care and health insurance.
patients with certain risk factors, helping to optimally adapt ongoing treatment methods to individual patients’ needs, and to identify acute deteriorations in a person’s health at an early stage. In developing and emerging countries, mobile apps on smartphones can help bridge existing gaps in healthcare infrastructure. They provide access to – and a method of paying for – medical care, often paving the way for setting up basic healthcare systems. Overall, we expect customers’ needs and expectations to undergo a fundamental change away from pure cost coverage for illness towards health maintenance and prevention.
The positive economic dynamics and low levels of insurance penetration in many developing and emerging markets provide opportunities for profitably expanding and further diversifying our business portfolio. In growth markets such as Latin America, the Middle East and Asia in particular, we operate as one of the leading reinsurers and also increasingly participate in primary insurance activities. As an example, in India we have strengthened our presence and business activities in reinsurance in Mumbai. In addition, niche and specialty insurers that are part of our Risk Solutions unit, such as HSB, Corporate Insurance Partner, Munich Re Syndicate and American Modern Insurance Group Inc. (American Modern), are also expected to generate significant, sustained growth beyond the reinsurance field of business, thanks to international innovation networks and extensive expertise in product development. ERGO, our primary insurer, will continue to focus its activities on growth markets whilst looking into the possibility of also entering new markets as an additional source of growth.
We are constantly working together with our clients on pushing back the limits of insurability in various ways. For instance, our experts have been working for many years on cyber risks and enhanced cover options. Apart from data loss and misuse, direct property damage and business interruption, we are now also offering coverage solutions for product liability risks and reputational damage caused by faulty product software. The next evolutionary level will be covers for breach of industrial property rights and business secrets. In addition, there will be insurance for other sensitive data exposed to malfunctioning software or cyber attacks, and epidemic risk covers for the private and public sectors.
Another example of product innovation is the new renewable energy insurance product line developed by our subsidiary HSB. The cover provides protection for developers, operators and investors of projects in the fields of wind energy, solar technology, photovoltaics, biofuels, biomass, water power and geothermal systems.
In the area of natural hazards and climate change, we are a sought-after partner for developing solutions aimed at increasing resilience at community, state and regional level. Examples include our involvement in the development of, and participation in, state-backed pool solutions for flood and terrorism risks in the UK and for drought risks in East Africa, or our role as the World Bank’s partner in the global Disaster Risk Financing and Insurance Program in the Pacific region.
Despite reduced shares in large-volume treaties, the sale of ERGO Italia and negative currency translation effects, gross premiums were in the upper range of our target corridor at €48.9bn.
At the beginning of the year, we had forecast a result of €2.3bn to €2.8bn for the 2016 financial year.
Comparison of prospects for Munich Re (Group) for 2016 with results achieved
Gross premiums written €bn 47–49 48.9 Technical result life reinsurance €m 400 487 Combined ratio property-casualty reinsurance % 98 95.7 Combined ratio ERGO Property-casualty Germany % 95 97.0 Combined ratio ERGO Property-casualty International % 99 99.0 Combined ratio Munich Health % 99 98.5 Return on investment1 % around 3 3.2
Economic earnings stood at €2.3bn. We thus met our original objective of achieving a result in the range of €2.3–2.8bn.
Munich Re Group Annual Report 2016 this objective. Our forecast at the start of the year for the combined ratio in property-casualty business in Germany had been around 95% – provided major losses remained within normal bounds. Owing to the investments made in the ERGO Strategy Programme, we had increased the combined ratio predicted for the 2016 financial year to 98%. At 97.0%, we were well under the adjusted projection.
ERGO International posted gross premiums written of €3.7bn. At the beginning of the year, our expectation had been between €3 and €3.5bn. We had been expecting overall premium income for the financial year of €3.5–4bn; at €4.0bn, the actual figure achieved was in the upper range of our target corridor. The combined ratio of 99% was in line with our original projection.
At €5.0bn, gross premiums written were within our envisaged range of just under €5bn. At 98.5%, the combined ratio slightly bettered our target of around 99%, and Munich Health’s consolidated result totalled €137m, meaning that we significantly surpassed our original target profit in the range of €50–100m.
€9–10bn range. In property-casualty reinsurance, we had forecast gross premiums written of €17–18bn. We achieved this target and posted €17.8bn, notwithstanding negative currency translation effects.
At €487m, the technical result in life reinsurance was well above our expectation of €400m. The very pleasing result benefited from positive reserving effects, especially in the USA.
In the segment Property-casualty Germany, gross premiums written of somewhat over €3bn had been our goal for the 2016 financial year. At €3.2bn, we surpassed
The renewals at 1 April 2017 (mainly Japan) and 1 July 2017 (parts of the portfolio in the USA, Australia and Latin America) will involve the renegotiation of a premium volume of around €4bn in reinsurance treaty business. Munich Re is proceeding on the assumption that the market environment will not change significantly in these renewal rounds, unless extraordinary loss events occur or there are other major market upheavals.
We anticipate that gross premiums written in property- casualty reinsurance in 2017 will be in the range of €17.5–18.5bn, which is roughly at the same level as last year. Taking into account the low major-loss expenditure in the first two months of 2017, we foresee a combined ratio of around 97% of net earned premiums. We are expecting reserve releases for claims from prior years in the order of six percentage points in 2016. The increase of more than one percentage point on the combined ratio achieved in 2016 is mainly due to the fact that 2016 saw randomly fewer major losses than predicted. For 2017, before the start of the year we anticipated major losses in the order of €2bn, which corresponds to 12% of net earned premium.
Consolidated result €bn 2.0–2.4 1 Including the result from reinsurance treaties recognised in the non-technical result owing to insufficient risk transfer. 2 Excluding insurance-related investments.
We are adhering to our 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 in the current environment of low interest rates on low-risk investments.
Provided that major-loss experience from now onwards is in line with expectations, our assumption for 2017 is that Munich Re will post a technical result that is lower than last year at €2.6–2.8bn.
In our Health Germany segment, we anticipate that gross premiums written will roughly be at the previous year’s level of €5–5.5bn. We aim to achieve our premium volume targets by designing new products in long-term care insurance and supplementary insurance, and by making improvements in comprehensive insurance.
Munich Re Group Annual Report 2016 that of 2016 and reach 20–25%, which is the generally expected rate for our Group. This profit guidance is subject to claims experience with regard to major losses being within normal bounds, to claims provisions remaining unchanged and to our income statement not being impacted by severe currency or capital market movements, significant changes in fiscal parameters, special restructuring expenses, or other special factors.
In the period from June 2016 to the end of February 2017, we bought back shares with a value of €898m; another €102m are to be used for share buy-backs before the Annual General Meeting in April 2017. We are using this measure to return unneeded capital to shareholders. Despite the buy-backs, our good capital position will allow us to continue paying attractive dividends and selectively utilising opportunities for profitable growth. Subject to approval by the Annual General Meeting, the dividend will rise by 35 cents to €8.60 per share. Altogether, this would mean a total payout of €1.3bn.
In the 2016 financial year, Munich Reinsurance Company’s business performance was good overall. Major-loss expenditure was higher than in the previous year, but was nevertheless again below the expected range. Moreover, the release of loss reserves for prior accident years, which we were able to make following a review of our reserving position, made a positive contribution to the technical result before claims equalisation provision.
In the past financial years, the composition of the accounting result of Munich Reinsurance Company has developed as follows: Munich Reinsurance Company (information reported on the basis of German accountancy rules)
Investment expenses –1,922 –3,390 43.3 Interest income on technical provisions –452 –506 10.7
At €702m, aggregate losses from natural catastrophes were significantly higher than in the previous year (€93m), accounting for 5.0 (0.6) percentage points of net earned premiums.
In property-casualty reinsurance, man-made losses totalled €496m (771m), equivalent to 3.6 (5.4) percentage points of net earned premiums.
The combined ratio (excluding life business), which reflects the relation of claims and costs to net earned premiums, came to 96.9% (91.2%). This development is mainly attributable to the above effects.
Life 2016 Prev. year Change % Gross premiums written €m 7,930 8,021 –1.1 Underwriting result before claims equalisation provision and similar provisions €m 164 –59 –
In the financial year 2016, Munich Reinsurance Company’s gross premium income totalled €23,527m (24,234m), a year-on-year decrease of 2.9%, mainly owing to changes in the value of the euro as against other currencies.
Gross premium volume in life reinsurance was lower than in the previous year. Gross premiums written were down slightly by 1.1% to €7,930m (8,021m). In health reinsurance, we posted premium totalling €2,939m (3,567m), which represents a decline of 17.6%. A large part of the fall in premium volume was again mainly attributable to a reduction of our share in a particularly large-volume treaty in 2016, and to negative currency translation effects. If exchange rates had remained unchanged, our premium income would have increased by 2.1% in life reinsurance and decreased by 14.4% in health reinsurance.
Our technical result before claims equalisation provisions amounted to €596m in the 2016 financial year, compared with €1,194m in the previous year. This decline was mainly attributable to higher major-loss expenditure. A customary review of provisions for the full year also resulted in a reduction in the provisions for claims from prior years, albeit at a lower level than in 2015. Over the years, the safety margin in the provisions has remained unchanged at a high level, as Munich Re has adhered to its careful
In liability business, premium volume fell slightly in the 2016 financial year. An increase in the loss ratio caused the technical result before claims equalisation provision to deteriorate substantially.
Motor reinsurance showed a marginal reduction in premium volume owing to negative currency translation effects in the 2016 financial year. After the profit generated in the previous year, the technical result before claims equalisation provision fell into negative territory in the year under review, mainly on account of reduced reserve releases for claims from prior accident years.
In marine reinsurance, the premium level was down compared with the previous year. We reduced our portfolio, as risk-commensurate prices, terms and conditions could no longer be achieved in various areas. The technical result before claims equalisation provision deteriorated significantly. After the positive result posted in the previous year, the technical result was negative in the year under review, mainly owing to higher major-loss expenditure and reduced releases of claims reserves compared with the previous year.
Motor 2016 Prev. year Change % Gross premiums written €m 3,082 3,130 –1.5 Combined ratio % 100.0 97.4 Underwriting result before claims equalisation provision and similar provisions €m –2 62 –
reserving effects. Geographically speaking, Canada and the European markets were the main contributors in this gratifying development, but Asia also again delivered a solid share to the overall result. Business in the USA and Australia largely developed in line with our expectations.
In personal accident reinsurance, the premium level was up slightly in the year under review. The result before claims equalisation provision improved appreciably owing to lower claims expenditure than in the previous year.
Health 2016 Prev. year Change % Gross premiums written €m 2,939 3,567 –17.6 Combined ratio % 100.4 100.2 Underwriting result before claims equalisation provision and similar provisions €m –10 –8 –25.0
Third-party liability 2016 Prev. year Change % Gross premiums written €m 1,887 1,974 –4.4 Combined ratio % 114.6 110.5 Underwriting result before claims equalisation provision and similar provisions €m –256 –190 –34.7
In engineering reinsurance (machinery, EAR, CAR, EEI, etc.), premium income was down somewhat on the previous year. The technical result fell year on year, especially owing to lower loss reserve releases than in the previous year.
Yields on government bonds in Germany and the USA hit historical lows during the course of 2016 and did not start to climb again more strongly until the final months of the year. While the European Central Bank intensified its expansionary monetary policies, the US Federal Reserve raised its key interest rates. Equity markets were subject to increased volatility over the course of the year, but the performance for the full year 2016 was positive overall. The EURO STOXX 50 went up by around 1% in the period under review, the DAX 30 climbed by about 7%, and the Dow Jones Index saw an increase of around 13%. The euro exchange rate fell slightly against most major currencies in the course of the year, and only increased substantially against the pound sterling.
In the 2016 financial year, Munich Reinsurance Company’s return on investment (including deposits retained on assumed reinsurance) totalled 5.0% (3.1%) on the basis of carrying amounts.
Other classes 2016 Prev. year Change % Gross premiums written €m 2,355 2,033 15.8 Combined ratio % 100.7 99.4 Underwriting result before claims equalisation provision and similar provisions €m –16 10 –
Premium income in aviation reinsurance, which comprises the aviation and space classes, remained more or less at the same level as in 2015. The result in aviation reinsurance was up slightly on the previous year, chiefly because of lower major-loss expenditure.
Aviation 2016 Prev. year Change % Gross premiums written €m 443 454 –2.4 Combined ratio % 75.3 75.9 Underwriting result before claims equalisation provision and similar provisions €m 111 106 4.7
Engineering 2016 Prev. year Change % Gross premiums written €m 752 823 –8.6 Combined ratio % 95.9 89.7 Underwriting result before claims equalisation provision and similar provisions €m 28 76 –63.2
The profit of €3,411m for 2016 is €833m higher than that of 2015 (€2,578m), mainly on account of a reduced allocation to the claims equalisation provision and the increased non-technical result. Besides the investment result, the other income also saw an improvement, especially because of positive foreign exchange influences and income generated by a change in the averages used in calculating liabilities arising from pension commitments due to a change in legislation.
Unlike in the previous year, Munich Reinsurance Company’s taxable income was positive in the 2016 financial year and is subject to the minimal tax rate. This led to a tax expense in the current year. The remeasurement of provisions for tax risks raised the tax burden further.
Balance sheet structure of Munich Reinsurance Company 2016 Prev. year Change T€ T€ % Intangible assets 12 19 –36.8
Deferred items 332 420 –21.0 Excess of plan assets over pension liabilities 534 346 54.3
In the 2016 financial year, Munich Reinsurance Company generated net retained profits of €1,754m (1,376m) according to German accountancy rules. Including these net retained profits, the Company’s revenue reserves amounted to €4,574m (3,460m) as at the balance sheet date, of which €407m (142m) is subject to a restriction on distribution. The distributable funds thus amount to €4,167m (3,318m).
The carrying amount of Munich Reinsurance Company’s investments (excluding deposits retained on assumed reinsurance) rose by €1,625m to €67,073m (65,448m) in the 2016 financial year. Investments in bearer bonds and other fixed-interest securities showed a rise of €2,367m owing to investments mainly in European, Canadian and US government bonds. New investments were mainly made in covered bonds and government bonds.
The claims equalisation provision is established for individual classes of property-casualty business. It serves to smooth significant fluctuations in loss experience over a number of years. Its recognition and measurement are largely governed by legal provisions.
If, in a given financial year, loss ratios in individual classes of business are significantly in excess of the long-term average (which amounts to 15 years in most classes), the claims equalisation provision is reduced and the above-average loss expenditure is largely offset. According to current calculations, it is likely that there will be a major release in 2017, as from that year on the very poor 2001 accident year (when the World Trade Center loss occurred) no longer needs to be taken into consideration in the averaging.
Combined Statement of Corporate Governance for the 2016 financial year pursuant to Section 289a and Section 315(5) of the German Commercial Code (HGB)
1 Information on Section 160 (1) no. 2 of the German Stock Corporation Act can be found on page 21 of Munich Reinsurance Company’s Annual Report 2016.
Given the ongoing low-interest-rate environment, Munich Reinsurance Company’s return on investment is likely to continue to fall. As things stand at present, we expect to achieve a good German GAAP result in 2017, although it is likely to be lower than in the year under review.
In anticipation of the assumption of business operations as at 1 January 2017, the subsidiary Great Lakes Reinsurance (UK) SE, London, was renamed Great Lakes Insurance SE, Munich, on 30 December 2016.
Consolidated balance sheet 094 Consolidated income statement 096 Statement of recognised income and expense 097 Group statement of changes in equity 098 Consolidated cash flow statement 100
Equity and liabilities A Equity 113 B Subordinated liabilities 113 C Gross technical provisions 113 D Gross technical provisions for unit-linked life insurance 115 E Other provisions 115 F Liabilities 115 G Deferred tax liabilities 115 H Liabilities related to assets held for sale 115
Notes to the consolidated balance sheet – Assets 02 Other intangible assets 125 03 Land and buildings, including buildings on third-party land 127 04 Hierarchy for the fair value measurement of investments 127 05 Investments in affiliated companies, associates and joint ventures 132 07 Other securities available for sale 133 08 Other securities at fair value through profit or loss and insurance-related investments 134 09 Deposits retained on assumed reinsurance 135 10 Other investments 135
Notes to the consolidated income statement 30 Income from technical interest 153 31 Expenses for claims and benefits 154 32 Operating expenses 154 33 Investment result 155 34 Insurance-related investment result 155 35 Other operating result 155 36 Other non-operating result, impairment losses on goodwill and net finance costs 156 37 Taxes on income 156
List of shareholdings as at 31 December 2016 pursuant to Section 313 (2) of the German Commercial Code (HGB) 168
IV. Other securities 1. Available for sale (7) 147,843 141,543 6,300 4.5 2. At fair value through profit or loss (8) 2,672 2,551 121 4.8
V. Deposits retained on assumed reinsurance (9) 5,240 7,253 –2,013 –27.8 VI. Other investments (10) 3,814 4,635 –821 –17.7
F. Cash at banks, cheques and cash in hand 3,353 3,955 –602 –15.2
C. Gross technical provisions I. Unearned premiums (20) 8,984 8,841 143 1.6 II. Provision for future policy benefits (21) 108,108 108,572 –463 –0.4 III. Provision for outstanding claims (22) 61,362 59,756 1,606 2.7
D. Gross technical provisions for unit-linked life insurance (24) 8,429 8,201 228 2.8
G. Deferred tax liabilities (14) 2,230 2,343 –113 –4.8 H. Liabilities related to assets held for sale2 (16) 0 6,301 –6,301 –100.0 Total equity and liabilities 267,805 268,868 –1,063 –0.4
Notes 2016 Prev. year Change €m €m €m €m €m % Gross premiums written 48,851 50,374 –1,523 –3.0
Thereof: Income from associates and joint ventures accounted for using the equity method 121 375 –253 –67.6 10. Deduction of income from technical interest –6,490 –6,713 223 3.3 13. Other non-operating result (36) –437 –532 95 17.8 14. Impairment losses on goodwill (36) –28 –452 424 93.7 16. Taxes on income (37) –760 –476 –284 –59.8
Statement of recognised income and expense for the financial year 2016 €m 2016 Prev. year Consolidated result 2,581 3,122 Currency translation
Unrealised gains and losses on investments Gains (losses) recognised in equity 1,394 –933 Recognised in the consolidated income statement –1,129 –888
Change resulting from equity method measurement Gains (losses) recognised in equity 12 –40 Recognised in the consolidated income statement 0 0
Change resulting from cash flow hedges Gains (losses) recognised in equity –1 1 Recognised in the consolidated income statement 0 0
Group statement of changes in equity for the financial year 2016
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Issued Consolidated capital Capital reserve Retained earnings Other reserves result Retained Remeasurement earnings before Unrealised Currency gains/losses deduction of Treasury gains and translation from cash flow €m own shares shares losses reserve hedges Balance at 31.12.2014 572 6,845 13,669 –678 6,026 434 –2 3,152 271 30,289
Unrealised gains and losses on investments 0 0 0 0 –1,817 0 0 0 –5 –1,821 Change resulting from valuation at equity method measurement 0 0 –15 0 –25 0 0 0 0 –40 Change resulting from cash flow hedges 0 0 0 0 0 0 1 0 0 1 Remeasurements of defined benefit plans 0 0 258 0 0 0 0 0 8 266
Total recognised income and expense 0 0 266 0 –1,841 1,415 1 3,107 24 2,972 Change in shareholdings in subsidiaries 0 0 0 0 0 0 0 0 0 0
Unrealised gains and losses on investments 0 0 0 0 268 0 0 0 –2 265 Change resulting from valuation at equity method measurement 0 0 29 0 –12 0 –6 0 0 12 Change resulting from cash flow hedges 0 0 0 0 0 0 –1 0 0 –1 Remeasurements of defined benefit plans 0 0 –72 0 0 0 0 0 –4 –76
Net change in technical provisions 2,783 3,798 Change in deferred acquisition costs –203 62 Change in deposits retained and accounts receivable and payable 90 196 Change in other receivables and liabilities –414 –86 Gains and losses on the disposal of investments –2,029 –1,943 Change in securities at fair value through profit or loss –921 –1,683 Change in other balance sheet items 737 77 Other non-cash income and expenses 508 784
I. Cash flows from operating activities 3,132 4,327 Change from losing control of consolidated subsidiaries 235 36 Change from obtaining control of consolidated subsidiaries –397 –67 Change from the acquisition, sale and maturity of other investments –1,200 –566 Change from the acquisition and sale of investments for unit-linked life insurance contracts –8 –446
III. Cash flows from financing activities –2,531 –2,337 Cash flows for the financial year (I + II + III) –683 960
Additional information Income tax paid (net) – included in the cash inflows from operating activities –231 –117 Dividends received 594 660 Interest received 5,533 6,138 Interest paid –359 –455 1 For a definition of the disposal group, see Assets – J Assets held for sale.
Our internal processes are geared to determining amounts as accurately as possible, taking into account all the relevant information. The basis for determining amounts is management’s best knowledge regarding the items concerned at the reporting date. Nevertheless, it is in the nature of these items that estimates may have to be adjusted in the course of time to take account of new knowledge.
Munich Re’s consolidated financial statements have been prepared on the basis of Section 315a (1) of the German Commercial Code (HGB) in conjunction with Article 4 of Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with Articles 2, 3 and 6 of the aforementioned Regulation, and with the rules designated in Section 315a (1) of the Commercial Code.
Consolidated income statement 2015 Changes due as originally to adjustments recognised in 2015 2015 €m 2. Income from technical interest 6,803 –90 6,713 10. Deduction of income from technical interest –6,803 90 –6,713
Furthermore, portions of the investment income that the segment generated with other segments and that were eliminated in consolidation, were no longer taken into account in calculating the income from technical interest in the ERGO Life and Health Germany segment. The items concerned were corrected retrospectively in the second quarter in line with IAS 8.41.
The adjustments had the following effects on the consolidated balance sheets for the 2014 and 2015 financial years and on the consolidated income statement for 2015: − Amendments to IAS 19 (rev. 11/2013), Defined Benefit Plans: Employee Contributions − Amendments published as part of the “Annual Improvements to IFRSs 2010–2012 Cycle”, (rev. 12/2013) − Amendments to IAS 16 and IAS 38 (rev. 5/2014), Clarification of Acceptable Methods of Depreciation and Amortisation − Amendments to IFRS 11 (rev. 5/2014), Accounting for Acquisitions of Interests in Joint Operations − Amendments to IAS 16 and IAS 41 (rev. 6/2014), Agriculture: Bearer Plants − Amendments to IAS 27 (rev. 8/2014), Equity Method in Separate Financial Statements − Amendments published as part of the “Annual Improvements to IFRSs 2012–2014 Cycle”, (rev. 9/2014) − Amendments to IFRS 10, IFRS 12 and IAS 28 (rev. 12/2014), Investment Entities: Applying the Consolidation Exception − Amendments to IAS 1 (rev. 12/2014), Disclosure Initiative
The amendments will become mandatory in 2017 or 2018, but have little or no material effects on Munich Re.
Standards or changes in standards not yet entered into force Unless otherwise stated, all standards or amendments to standards that have not yet entered into force will be applied by Munich Re for the first time as from the mandatory effective date for entities with their registered office in the European Union. The relevant dates for the mandatory first-time application are shown in the following list of new standards.
Hedge accounting under IFRS 9 focuses more strongly on the entity’s risk management activities than was the case under the current rules of IAS 39.
The provisions of IFRS 9 are associated with extensive additional disclosures required in the appendices that were adopted in IFRS 7, Financial Instruments: Disclosures. The provisions are mandatory for financial years beginning on or after 1 January 2018.
Due to the great importance of this standard for Munich Re, we have established a project to analyse the provisions in detail and to set up the required implementation processes.
The revision of the IFRS governing recognition and measurement of insurance contracts (IFRS 17, Insurance Contracts) is expected to be released in the first half of 2017, but application of the new rules will not be mandatory until 2021. Due to the close interlinking of underwriting liabilities and investments of insurance companies, it is essential to have an aligned valuation of these line items in the balance sheet in order to prevent balance sheet distortions. For this reason, the insurance industry has been pressing for a postponement of the mandatory first application of IFRS 9 for the industry until application can be aligned with the insurance standard.
In assessing whether control exists for structured entities, we focus our analysis on the decisions still to be made within the corresponding unit and on the agency relationships between the parties. For structured entities used by us to issue catastrophe bonds, we focus above all on our relationship to the trustees and our possibilities to influence their decision-making. Generally, we do not control such structured entities, even if we hold their bonds.
A list of all our shareholdings can be found in the section “List of shareholdings as at 31 December 2016 in accordance with Section 313 (2) of the German Commercial Code (HGB)”.
Cash flows and net assets from obtaining and losing control of consolidated subsidiaries or other operations are shown in the tables: Information on gains and losses from losing control can be found in the notes to the consolidated balance sheet under Assets (16) Non-current assets and disposal groups held for sale that were sold in the reporting period.
Net assets acquired €m 31.12.2016 Prev. year Goodwill/gain from bargain purchase 9 –1 Other intangible assets 289 8
Other intangible assets –2 –1 Investments –5,045 –79 Cash –59 –1 Other assets –371 –16 Technical provisions (net) 3,157 59 Other liabilities 1,801 9 Total –520 –30
Munich Re Group Annual Report 2016 expenses for ATE Insurance were included in the consolidated income statement. Gross premiums written of €46.3m were recognised. The contribution to the consolidated result was not material. If the business combination had already been complete on 1 January 2016, ATE Insurance would have contributed gross premiums written of €117.7m to Group revenues and a result of €52.2m to the consolidated result.
On 23 September 2016, via its subsidiary Munich American Holding Corporation, Wilmington, Delaware, USA, Munich Re acquired 100% of the voting shares in the structured entity Financial Reassurance Company 2010, Ltd., Burlington, Vermont, USA from Citigroup Insurance Holding Corporation, Duluth, Georgia, USA for a total of CAD$ 445.6m (€302.5m) in cash. The company was renamed Munich Re Life Insurance Company of Vermont (Munich Re, Vermont). Goodwill in the amount of €1.6m resulted from the difference between model-based remeasurement of the shareholders’ equity at fair value at the time of the acquisition and the actual market price paid. It was written off in full. The purpose of Munich Re, Vermont is to provide reinsurance for a Canadian portfolio of term life policies. The portfolio is secured by bonds in line with the requirements of the Canadian regulatory authorities. The transaction strengthens Munich Re’s global life reinsurance business. The income and expenses included in the consolidated income statement for Munich Re, Vermont for the period between 23 September and the balance sheet date are not material. If the business combination had already been complete on 1 January 2016, Munich Re, Vermont would have contributed gross premiums written of €92.0m to Group revenue and a result of €14.9m to the consolidated result.
On 4 October 2016, via its subsidiary HSB Group, Inc., Dover, Delaware, USA, Munich Re acquired 100% of the voting shares in Meshify, Inc., Houston, USA. Meshify Inc. is a start-up company that offers technology to link separate devices through the Internet of Things (IoT). The acquisition strengthens HSB’s IoT strategy, which supports insurers and other companies by providing operational services and technologies (IoT applications) in order to improve their operations and avoid or reduce losses.
The IFRS fair values of the assets and liabilities of the acquired company at the time of acquisition are as follows: Business combinations occurring during the reporting period On 1 January 2016, via its subsidiary MR RENT- Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the solar park company Lynt Farm Solar Ltd., London, UK, from Solarpark Lynt GmbH, Gräfelfing, Germany. The solar park has total installed capacity of 26.9 megawatts.
On 12 January 2016, via its subsidiary MR RENT- Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the wind park company Eolus Vindpark Tio AB, Hässleholm, Sweden, from Eolus Vindpark Nio AB, Hässleholm, Sweden. Eolus Vindpark Tio AB was renamed Wind Farms Västra Götaland AB immediately after the acquisition, and owns wind power plants with a total installed capacity of 12 megawatts.
On 1 August 2016, via its subsidiary ERGO International AG, Düsseldorf, Munich Re acquired 100% of the voting shares in AGROTIKI Insurance S.A. (ATE Insurance), Athens, Greece, for a cash amount currently estimated at €83m. Negotiations with the seller with respect to the final purchase price on the basis of the contractual conditions were not yet settled as at the balance sheet date. ATE Insurance focuses on property-casualty insurance, in particular motor and fire business, and it also offers life insurance products in the Greek insurance market. In acquiring ATE, ERGO is significantly expanding its presence in Greece and will thus become the largest property-casualty insurer in Greece. The initial accounting of the acquired assets and liabilities was not yet complete at the time the consolidated financial statements were prepared, and so the figures shown are presented on a provisional basis. There may be changes to recognition and measurement of technical provisions. Therefore, at the moment it is not possible to give a definitive assessment of the potential difference that may arise between the amounts. For the period between 1 August and the balance sheet date, income and
Cash at bank, cheques and cash in hand 4.8 12.8 Deferred tax assets 100.3 0.0 Other assets 84.1 1.8
Liabilities assumed Technical provisions –479.8 –283.3 Other provisions and liabilities –70.8 –0.2 Contintent liabilities recognised pursuant to IFRS 3.232 –39.6 0.0 1 The fair value of the receivables acquired as part of the transactions corresponds to the carrying amount. No defaults were expected at the acquisition date.
2 The Company is the defendant in a legal proceedings regarding a liability policy and business interruption cover.The Company is also expecting potential lawsuits to be filed by staff. No reliable statement can be made with regard to the potential size of the claim or timing of payments, since the legal proceedings are still ongoing.
Investment funds As part of its investment activities Munich Re invests in investment funds on its own behalf, and on behalf of policyholders under unit-linked life insurance. Investment funds are mainly financed by issuing redeemable shares or units. Some of the investment funds are managed by MEAG MUNICH ERGO AssetManagement GmbH, others by fund managers outside the Group. We also report under investment funds all investments in infrastructure (including renewable energies and new technologies) forestry, private equity and other investments.
Managed fund assets MEAG MUNICH ERGO Kapital anlagegesellschaft mbH also manages investment funds for private clients and institutional investors, for which it receives a management fee. The management fees are recognised as an expense in the consolidated income statement (commissions).
The maximum exposure to loss relates to the loss of future management fees. Fund management activities generated income of €34m (33m) in the 2016 financial year. The value of fund assets under management provides information about the size of the unconsolidated structured entities. As at 31 December 2016, the managed fund assets amounted to €3,836m (3,507m), and Munich Re itself also holds a small interest in these funds.
Sponsored unconsolidated structured entities Munich Re provides structuring and consultancy services for clients within the context of the foundation and structuring of third-party securitisation vehicles. As at 31 December 2016, Munich Re did not have any interests in these structured entities.
At fair value through profit or loss 0 0 0 4 4
Securities at fair value through profit or loss comprise securities held for trading and securities classified as at fair value through profit or loss. Securities held for trading mainly 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. Securities designated as at fair value through profit or loss comprise structured securities.
Other investments mainly include deposits with banks and investments in renewable energy sources and physical gold and are accounted for at amortised costs. The effective interest method applies for deposits with banks. Investments in renewable energies are amortised on a straight-line basis at a rate of at least 4%, but mostly at 5%, over a useful life of 20–25 years. If required, impairment losses or impairment losses reversed follow the yearly impairment test. If the recoverable amount of physical gold is lower than the carrying amount, a write-down for impairment is carried out. If higher, the impairment is reversed, with impact on the income statement. The resultant carrying amount may not exceed the acquisition cost.
Investments in affiliated companies, associates and joint ventures that are not material for assessing the Group’s financial position are regularly accounted for at fair value; changes in the fair value are recognised in “other reserves” under unrealised gains and losses. For the consolidated financial statements, investments in associates and joint ventures are measured using the equity method, i.e. with our share of their equity, and our earnings are included in the investment result. As a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate or joint venture are used. In the case of financial statements of important associates or joint ventures, appropriate adjustments are made to ensure they conform with Munich Re’s accounting policies and exceptional transactions are recognised in the same reporting period.
Assets allocated to Level 2 are valued using models based on observable market data. If the financial instrument concerned has a fixed contract period, the inputs used for valuation must be observable for the whole of this period. Moreover, we have allocated to this level such investments for which prices are provided by price quoters but for which there is no proof that these were based on actual market transactions. The financial instruments we have allocated to this level mainly comprise bearer bonds and bond funds, borrowers’ note loans, covered bonds, subordinated securities, derivatives not traded on the stock market, and physical gas.
Information on the valuation models and processes can be found in the Notes to the consolidated balance sheet – Assets (4) Hierarchy for the fair value measurement of investments. An internal process ensures that the measurement basis at every reporting date results in the correct allocation to the individual levels of the fair value hierarchy according to IFRS 13.
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. If a quoted price in an active market is available, this should always be used. The financial instruments we have allocated to this level mainly comprise equities, equity funds, exchange-traded derivatives, and exchange-traded subordinated bonds.
Impairment At each balance sheet date, we assess whether there is any substantial objective evidence of impairment in a financial asset or group of financial assets. As the recognition of impairments – both on the merits and in terms of amount – is based on discretionary judgement and estimates, we have established a process that guarantees that at every reporting date all investments that might be subject to impairment are identified and tested for impairment. On the basis of these test results, a list of investments will be prepared for which an impairment must be recognised; this list will then be verified once again with the involvement of management.
IAS 39.59 contains a list providing evidence of impairment of financial assets. In addition, IAS 39.61 states that for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. These rules are given more concrete form by means of internal guidelines. For equities quoted on the stock exchange, we assume a significant decline in fair value if the market price at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. In the case of fixed-interest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.
We determine acquisition cost on the basis of the average purchase price. In the case of an impairment, a write-down is made to the fair value at the balance sheet date and recognised in profit or loss.
Other insurance-related investments Other insurance-related investments are not utilised for asset- liability management. They include insurance- linked derivatives, derivatives to hedge variable annuities, weather and commodity derivatives, and physical gas. Insurance-linked derivatives include derivatives embedded in variable annuities, the derivative components of natural catastrophe bonds and from securitisations of mortality and morbidity risks, individually structured insurance-linked derivatives, and derivative components which are separated from their host insurance contract in accounting. Insurance-linked derivatives also include retrocessions in the form of derivatives to hedge insurance risks assumed. Insurance risks are defined as risks which – in a modified form – can also be covered by an insurance contract within the meaning of IFRS 4. Other insurance-related investments are accounted for at fair value, and we recognise changes in value in profit or loss. For physical gas, the fair value is reduced by estimated costs to sell.
Net insurance-related investment result The net result from insurance-related investments comprises regular income, income from write-ups, gains and losses on the disposal of insurance-related investments, other income, write-downs of insurance- related investments, management expenses, interest charges and other expenses.
Other assets are generally recognised at amortised cost. Amortisations mainly occur on a straight-line basis, the underlying useful lives amounting to up to 55 years. Where required, impairment losses are recognised or reversed for the Group’s owner-occupied property, plant and equipment. These impairment losses or impairment losses reversed are distributed between the functional areas.
Other reserves primarily contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and from investments in unconsolidated affiliated companies, and in associates and joint ventures that we do not value at equity. These reserves also include unrealised gains and losses from the measurement of associates and joint ventures using the equity method, differences resulting from the currency translation of foreign subsidiaries’ figures, and remeasurement gains/losses from the hedging of cash flows.
This item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance). The value of the provision for future policy benefits essentially corresponds to the fair value of the relevant investments shown under Assets – C Insurance-related investments – Investments for policyholders under unit-linked life insurance contracts. Changes in this provision 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 investments, they are matched by opposite changes of the same amount in the insurance- related investment result.
Pension obligations are recognised in accordance with IAS 19, using the projected unit credit method. The calculation includes not only the pension entitlements and current pensions known on the balance sheet date but also their expected future development. The assumptions for the future development are determined on the basis of the circumstances in the individual countries.
The discount rate applied to the pension obligations is based on the yields for long-term high-quality bonds (e.g. corporate or government bonds).
Tax liabilities for current taxes are posted – without discounting – in accordance with the probable tax payments for the financial year or previous years.
H Liabilities related to assets held for sale Liabilities to be transferred together with disposal groups are recognised in this item; please see Assets – J Assets held for sale.
Munich Re’s presentation currency is the euro (€). The assets of foreign subsidiaries whose national currency is not the euro are translated using the year-end exchange rates, and results using quarterly average exchange rates. Any exchange differences arising in the process are recognised in equity (reserve for currency translation adjustments).
In contrast to this, currency translation differences are largely recognised in profit or loss in our subsidiaries’ individual financial statements, and shown under “other non-operating result”.
Based on the way Munich Re is managed internally, we have identified six segments to be reported: − Life reinsurance (global life reinsurance business) − Property-casualty reinsurance (global property-casualty reinsurance business) − ERGO Life and Health Germany (German life and health primary insurance business, German property-casualty direct insurance business, and global travel insurance business) − ERGO Property-casualty Germany (German property- casualty insurance business, excluding direct business) − ERGO International (ERGO primary insurance business outside Germany) − Munich Health (global health reinsurance business and health primary insurance business outside Germany)
Certain primary insurers whose business requires special solution-finding competence are coupled to reinsurance as the risk carrier. We therefore transact their business from within reinsurance and consequently allocate them to the reinsurance segments.
Income and expenses from intra-Group loans are shown unconsolidated under “other non-operating result, impairment losses of goodwill and net finance costs” for the segments concerned. These are otherwise shown after elimination of intra-Group transactions and shareholdings.
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. €m 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year
E. Liabilities related to assets held for sale 0 0 0 0 0 0 0 0 0 6,301 0 0 0 6,301
Interest expense –14 –16 –14 –31 –46 –38 –10 –10 –12 –10 –4 –6 –100 –110 Depreciation and amortisation –272 –333 –2,285 –1,545 –581 –539 –238 –199 –403 –351 –230 –209 –4,008 –3,177
Reinsurance ERGO Munich Health Total Life and Health Property-casualty Inter- Life Property-casualty Germany Germany national €m 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 3. Net expenses for claims and benefits –7,669 –8,025 –10,730 –9,631 –11,633 –11,654 –1,985 –2,009 –2,470 –2,811 –4,011 –4,601 –38,498 –38,731 4. Net operating expenses –2,093 –2,367 –5,496 –5,510 –1,384 –1,449 –1,108 –1,015 –1,394 –1,189 –820 –838 –12,295 –12,367 8. Other operating result 28 59 –129 –73 –43 –11 –17 –3 –24 –15 –9 –24 –194 –68 9. Deduction of income from technical interest –574 –749 –1,138 –1,373 –4,242 –4,013 –73 –87 –432 –452 –30 –39 –6,490 –6,713 12. Other non-operating result, net finance costs and impairment losses on goodwill 81 –98 293 –299 –475 –631 –242 –64 –345 –129 4 –1 –684 –1,222
Reinsurance ERGO Munich Health Total Inter- Life Property-casualty Life and Health Property-casualty national €m 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year
Other operating expenses –84 –80 –374 –385 –172 –147 –100 –91 –161 –165 –48 –73 –938 –941 Income from associates and joint ventures accounted for using the equity method 0 0 73 287 25 73 2 2 6 –1 15 14 121 375 Non-cash items –446 –273 1,481 1,200 –1,569 –1,722 –13 –86 –76 –107 –134 –157 –190 –1,143
Munich Re Group Annual Report 2016 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.
1 Information on the combined ratio is provided in the management report under “Important tools of corporate management”. 2 Excluding health insurance conducted like life insurance. 3 Adjustment only for ERGO Property-casualty Germany and Property-casualty International.
Property-casualty Property-casualty Property-casualty Germany International €m 2016 Prev. year 2016 Prev. year 2016 Prev. year 2016 Prev. year
Net expenses for claims and benefits –10,730 –9,631 –1,985 –2,009 –1,289 –1,379 –3,577 –4,157 Net operating expenses –5,496 –5,510 –1,108 –1,015 –866 –828 –728 –755
Fire brigade tax and other expenses 12 11 13 13 23 15 1 0
Adjusted net expenses for claims and benefits –10,725 –9,627 –1,955 –1,981 –1,282 –1,373 –3,576 –4,157
Munich Re Group Annual Report 2016 1 The premiums are generally allocated according to the location of the risks insured.
Allocation of goodwill to cash-generating units For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units that derive benefit from the synergies of the business combinations. At the same time, the unit or group of units to which the goodwill is allocated represents the lowest level at which goodwill is monitored for internal management purposes. Goodwill is allocated in reinsurance to divisions or groups of divisions, and in primary insurance to the ERGO segment Property-casualty Germany, and to legal entities.
Impairment losses –28 –452 Carrying amount at 31 Dec. financial year 2,817 2,790 Accumulated impairment losses at 31 Dec. financial year –1,541 –1,513 Gross carrying amount at 31 Dec. financial year 4,358 4,303
ERGO Property- Property- Various casualty casualty cashreinsurance Germany generating €m segment segment units
The goodwill from the acquisition of Munich Reinsurance America, Inc. has been allocated to a group of divisions (cash- generating units) bundled as the reinsurance property-casualty segment. The carrying amount shown also 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. This other goodwill is tested for impairment on the basis of the same key assumptions used for the goodwill from the acquisition of Munich Reinsurance America, Inc.
The goodwill from the acquisition of shares in the ERGO Group was allocated to the segments of the ERGO field of business. The shares allocated to the segments ERGO Life and Health Germany and ERGO International was written off for impairment in previous years.
Goodwill allocated across multiple cash-generating units or groups of cash-generating units is not significant in comparison with the total goodwill, either individually or in total. We regard amounts of 10% or more of total Group goodwill as significant.
Our general assumption was that there Our general assumption was that there will will be moderate upward movement on the be moderate upward movement on the equity equity markets and a stable interest-rate markets and a stable interest-rate level. level.
Carrying amount at 31 Dec. financial year 536 294 42 62 288 295 Accumulated amortisation and impairment losses at 31 Dec. financial year –798 –1,035 –363 –326 –898 –811 Gross carrying amount at 31 Dec. financial year 1,334 1,329 405 388 1,186 1,106
The calculation of these values in use is based on distributable target results derived from the current market environment and the latest corporate planning approved by management. Prepared in an interactive process involving the operational units, the responsible controlling units and the Board of Management, the corporate plans are reviewed and updated at least every quarter. The aforementioned key assumptions regarding premium income development and combined ratios derive from the aggregation of the company plans of the individual companies of a cash-generating unit, or of a group of cash-generating units. The key assumptions regarding developments in the equity market and interest-rate level are defined on the basis of the current market 2 Other intangible assets
Acquired Acquired distribution Acquired licences/ brand names networks/client bases patents €m 2016 Prev. year 2016 Prev. year 2016 Prev. year Gross carrying amount at 31 Dec. previous year 234 232 726 680 318 300 Accumulated amortisation and impairment –196 –196 –534 –468 –60 –47 losses at 31 Dec. previous year Carrying amount at 31 Dec. previous year 38 36 192 212 258 253
Carrying amount at 31 Dec. financial year 0 0 21 33 1,303 1,171 Accumulated amortisation and impairment losses at 31 Dec. financial year 0 0 –64 –55 –2,974 –3,018 Gross carrying amount at 31 Dec. financial year 0 0 85 88 4,277 4,189
Carrying amount at 31 Dec. financial year 4,444 4,317 Accumulated depreciation and impairment losses at 31 Dec. financial year –1,224 –1,220 Gross carrying amount at 31 Dec. financial year 5,668 5,538
Group, and the portfolio managed by third parties is valued by external valuers. Property is allocated to Level 3 of the fair value hierarchy; see Assets – B Investments – Determining fair values. Determining the sustainability of cash inflows and outflows, taking into account the market conditions at the property location, is material for measurement. The fair value is determined individually per item by discounting the future cash flow as at the measurement date. Depending on the type of property and its individual opportunity/risk profile, discount rates of 1.75% to 4.25% are used for residential buildings, 3% to 6.5% for office buildings, and 3% to 6.75% for retail.
The following table provides an overview of the models used to measure the fair values of our investments when market prices are not available.
Derivatives Pricing method Parameters Pricing model Equity and index risks OTC stock options Theoretical price Listing of underlying shares Black-Scholes (European) Effective volatilities Cox, Ross and Rubinstein Money-market interest rate (American) Dividend yield Monte Carlo simulation Equity forwards Theoretical price Listing of underlying shares Present-value method Money-market interest rate Dividend yield Interest-rate risks Interest-rate swaps Theoretical price OIS/swap curve Present-value method Swaptions/interest-rate Theoretical price At-the-money volatility index and skew Bachelier/ guarantee OIS/skew swap curve Normal Black Interest-rate currency swaps Theoretical price Swap curve Present-value method Currency spot rates Money-market interest-rate curve Inflation swaps Theoretical price Zero-coupon inflation swap rates Present-value method OIS curve Bond forwards (forward transactions) Theoretical price Listing of underlying Present-value method Swap curve Currency risks Currency options Theoretical price Volatility skew Garman-Kohlhagen Currency spot rates (European) Money-market interest-rate curve Currency forwards Theoretical price Currency spot rates Present-value method Money-market interest-rate curve, CCY spreads Other transactions Insurance derivatives Theoretical price Fair values of cat bonds Present-value method (excluding variable annuities) Historical event data Interest-rate curve Insurance derivatives Theoretical price Biometric and lapse rates Present-value method (variable annuities) Volatilities Interest-rate curve Currency spot rates Catastrophe swaps Theoretical price Fair values of catastrophe bonds Present-value method Interest-rate curve Credit default swaps Theoretical price Credit spreads Present-value method Recovery rates ISDA CDS Standard Model Interest-rate curve Total return swaps on Theoretical price Listing of underlying index Index ratio calculation commodities Commodity options Theoretical price Listing of underlying Black-Scholes (European) Effective volatilities Cox, Ross and Rubinstein Money-market interest rate (American)
Bonds with embedded Pricing method Parameters Pricing model derivatives Callable bonds Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix CMS floaters Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix Zero-to-coupon switchable bonds Theoretical price Money-market/swap interest-rate curve Hull-White model Issuer-specific spreads Volatility matrix CMS floaters with variable cap Theoretical price OIS/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility matrix and skews Inverse CMS floaters Theoretical price OIS/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility matrix and skews CMS steepeners Theoretical price OIS/swap interest-rate curve Replication model (Hagan) Issuer-specific spreads Volatility matrix and skews Correlation matrix Convergence bonds Theoretical price Money-market/swap interest-rate curves LIBOR market model Issuer-specific spreads Volatility matrix Correlation matrix Multi-tranches Theoretical price At-the-money volatility index and Bachelier/ skew Normal Black, Swap curve Present-value method Money-market interest-rate curve Sector-, rating- or issuer-specific yield curve FIS loans against borrower’s note Theoretical price At-the-money volatility index and Bachelier/ skew Normal Black, Swap curve Present-value method Money-market interest-rate curve Sector-, rating- or issuer-specific yield curve Swaption notes Theoretical price At-the-money volatility index and Bachelier/ skew Normal Black, Swap curve Present-value method Money-market interest-rate curve Sector-, rating- or issuer-specific yield rate curve
At 31 December 2016, around 12% (10%) of the investments measured at fair value were allocated to Level 1 of the fair value hierarchy, 84% (85%) to Level 2 and 4% (4%) to Level 3, as shown in the table below.
In the financial year, we maintained the allocation to the individual levels of the fair value hierarchy unchanged. For the first time in the 2016 financial year, investments for unit-linked life insurance contracts shown under insurance-related investments were subjected to a far more granular allocation of the various types of investment to the individual levels of the fair value hierarchy. This led to significant shifts in allocation. The other, lower transfer amounts relating to Level 3 of the fair value hierarchy are adjustments to our Group requirements.
Insurance-linked derivatives (excluding variable annuities) are allocated to Level 3 of the fair value hierarchy. The derivative components of catastrophe bonds are measured based on the values supplied by brokers for the underlying bonds, which is why it is not possible to quantify the inputs used that were not based on observable market data. If no observable inputs are available for customised insurance-linked derivatives, the present-value method on the basis of current interest-rate curves and historical event data is used. Due to the low volume involved, the effects of alternative inputs and assumptions are immaterial.
Allocation of investments (including insurance-related investments) to levels of the fair value hierarchy €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value 0 0 138 138 Investments in associates and joint ventures measured at fair value 0 0 8 8 Other securities available for sale
Other securities at fair value through profit or loss Held for trading, and hedging derivatives1 157 2,180 0 2,337 Designated as at fair value through profit or loss 222 178 2 402
Investments in affiliated Investments in associates companies measured at and joint ventures fair value measured at fair value €m 2016 Prev. year 2016 Prev. year Carrying amount at 31 Dec. previous year 145 274 8 5 Gains and losses –1 3 0 2
Gains (losses) recognised in the income statement –5 1 2 0 Gains (losses) recognised in equity 3 3 –2 2
Transfer out of Level 3 0 –107 0 0 Changes in the fair value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 138 145 8 8 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year –7 –1 0 0
Other securities available for sale Fixed-interest Non-fixed-interest €m 2016 Prev. year 2016 Prev. year Carrying amount at 31 Dec. previous year 2,160 2,547 2,803 2,395 Gains and losses 77 104 –1 182
Gains (losses) recognised in the income statement 38 –4 –28 –9 Gains (losses) recognised in equity 39 108 27 191
Transfer out of Level 3 –47 –2 –27 –43 Changes in the fair value of derivatives 0 –1 0 0 Carrying amount at 31 Dec. financial year 2,683 2,160 2,814 2,803 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 39 –4 –35 –11 1 Including hedging derivatives of €68m (141m) accounted for under “other assets”.
Aggregated financial information on investments in associates and joint ventures accounted for using the equity method €m 31.12.2016 Prev. year Overall result for the year after tax from continued operations 153 131 Result after tax from discontinued operations –1 0 Income and expenses recognised directly in equity –5 7 Total recognised income and expenses 147 138 5 Investments in affiliated companies, associates and joint ventures
Reversed impairment losses with respect to associates and joint ventures amounted to €39m (7m). They are distributed between the following different Group segments: €37m (6m) is apportionable to reinsurance and €2m (1m) to ERGO Life and Health Germany.
Impairment losses with respect to these companies amounted to €14m (22m). They are distributed between the following different Group segments: In reinsurance, €14m (11m) is apportionable to property-casualty; in the ERGO field of business, €0m (1m) is apportionable to Life and Health Germany, and €0m (10m) to ERGO International.
Designated as at fair value Other through profit or loss investments €m 2016 Prev. year 2016 Prev. year Carrying amount at 31 Dec. previous year 0 0 30 0
Gains (losses) recognised in the income statement 0 0 7 0 Gains (losses) recognised in equity 0 0 0 0
Changes in the fair value of derivatives 0 0 0 0 Carrying amount at 31 Dec. financial year 277 1,052 5,959 6,198 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 116 65 121 49
Over 40% of the corporate debt securities are covered bonds or issues by development banks and comparable institutions. The remaining portfolio is composed of securities issued by companies outside the banking sector, with each individual risk making up less than 1%, bonds issued by banks and state central savings banks, and asset-backed securities/mortgage-backed securities. The asset-backed securities/mortgage-backed securities are largely rated A or better. Assets pledged as security and other restrictions on title amount to €8,661m (8,115m). Some €1,715m (1,710m) of the securities shown are loaned to third parties. These securities are not derecognised, as the main resultant risks and rewards remain with Munich Re. Of the €11,573m (10,332m) in unrealised gains and losses, €4,309m (4,040m) has been recognised in equity (other reserves), after deduction of provisions for deferred premium refunds, deferred taxes, non-controlling interests, and consolidation und currency translation effects.
The fair value of the loans is based on recognised valuation techniques in line with the present value principle and taking observable market inputs into account; see Notes to the consolidated balance sheet – Assets (4) Hierarchy for the fair value measurement of investments. The fair value totalled €67,282m (66,126m) at the reporting date.
Carrying amounts €m 31.12.2016 Prev. year Mortgage loans 5,606 5,128 Loans and advance payments on insurance policies 297 331 Other loans 47,788 48,057
Rating of “other loans” according to carrying amounts €m 31.12.2016 Prev. year
Disposal proceeds in the financial year €m 2016 Prev. year Fixed-interest securities 58,408 49,476 Non-fixed-interest securities
Realised gains and losses €m 2016 Prev. year Gains on disposal 2,993 3,279
Losses on disposal –897 –848 Fixed-interest securities –414 –306 Non-fixed-interest securities –483 –542
No Insurance-related investments 1,046 899 Yes Other assets 68 141 No Negative
Other investments comprise deposits with banks totalling €2,925m (3,775m), tangible assets in renewable energies amounting to €482m (496m), and physical gold of €361m (324m). Deposits with banks include receivables of €117m (202m) from borrowers under repurchase agreements that have been booked by us as the lender.
The miscellaneous receivables contain cash collateral of €534m (390m), mainly for derivative transactions.
As at 31 December 2016, our accounts receivable on ceded reinsurance business were split between the following ratings (based on those of Standard & Poor’s): Of all our receivables on underwriting business at the balance sheet date, €346m (298m) was outstanding for more than 90 days. The average defaults of the last three years amount to €261m (225m).
The tangible assets in renewable energies include items pledged as security and other restrictions on title amounting to €206m (235m).
Details of the ceded share of technical provisions are shown in the Notes to the consolidated balance sheet – Equity and liabilities (20) Unearned premiums, (21) Provisions for future policy benefits, (22) Provisions for outstanding claims, (23) Other technical provisions, and in the risk report in the section “Credit risks”.
Impairment losses reversed 0 7 Depreciation and impairment losses Depreciation –36 –34
In the ERGO International segment, assumptions regarding future lapses, costs and long-term interest-rate levels were adjusted in the 2016 financial year on the basis of the non-current regular return on investments. Overall, these adjustments led to impairment losses of deferred acquisition costs.
Equity and liabilities C. Net technical provisions 2,612 4,806 2,401 4,605
Expiring in up to three years 0 0 0 0 0 0 Expiring in over three years and up to ten years 40 0 40 25 45 70 Expiring in over ten years 0 0 0 2 6 8
No deferred taxes were posted for temporary differences of €52m (54m) in connection with investments in subsidiaries and associates, also referred to as outside basis differences.
The available loss carry-forwards and tax credits are broken down as follows.
Gross carrying amount at 31 Dec. previous year 3,580 1,049 33 4,662 Accumulated depreciation and impairment losses at 31 Dec. previous year –1,178 –760 –25 –1,963 Carrying amount at 31 Dec. previous year 2,402 289 8 2,699 Currency translation differences 5 –1 0 4 Additions
(289m). Advance payments on insurance amounted to €339m (384m), derivatives totalled €68m (141m), miscellaneous deferred items €177m (169m), and recoveries from policyholders €0m (42m).
In the financial year, Munich Re bought back 5,880,769 shares. This includes the 2015/2016 share buy-back programme completed on 15 April 2016, and the 2016/2017 programme approved by the Board of Management of Munich Reinsurance Company on 16 March 2016, which provides for the acquisition of shares up to a value of €1bn until the 2017 AGM.
Composition of the capital authorised for capital increases €m 31.12.2016 Authorised Capital 2013 (until 24 April 2018) 280 Authorised Capital 2015 (until 22 April 2020) 10 Total 290
The fair value of the property amounts to €2,912m (2,924m). This is allocated to Level 3 of the fair value hierarchy; see Assets – B Investments, Determining fair values. The methodology for determining the fair values is described in the Notes to the consolidated balance sheet – Assets (3) Land and buildings, including buildings on third-party land.
The expenditures recognised in the carrying amount for assets in the course of construction totalled €8m (25m) for property and €25m (24m) for plant and equipment. Commitments to acquire property total €3m (3m) and commitments to acquire plant and equipment €15m (12m).
In November 2015, ERGO International AG, Düsseldorf, had agreed on selling its Italian subsidiary ERGO Italia to the private equity investor Cinven. The transaction was concluded at the end of June 2016, and ERGO Italia and its subsidiaries were deconsolidated. The disposal had an impact of around €9m on our consolidated result in the financial year. As at 31 December 2015, we had set aside a reserve of €82m for the anticipated loss.
In the financial year, we classified several of the ERGO Life and Health Germany segment’s investment properties as “held for sale”. Their carrying amounts totalled €108m, and the disposals had been concluded by the balance sheet date. The results from the disposals were all positive and, due to policyholder participation, had no material effect on our net result.
Notes to the consolidated balance sheet – Equity and liablities 17 Equity The total share capital of €587,725,396.48 as at 31 December 2016 is divided into 161,053,897 no- par- value registered shares, each fully paid up and entitled to one vote. In the year under review, the number of shares in circulation developed as follows: Development of shares in circulation
Disposals from hedging stock appreciation rights under long-term incentive plans 471 1,859
The taxes of €57m (467m) recognised directly in equity comprise current taxes on unrealised gains of €34m (11m) on assets, and an amount of €23m (456m) for deferred tax assets.
Income and expense recognised directly in equity 487 57 544 –617 467 –150
Only derivatives with a negative fair value are currently recognised at fair value. Of these, we allocate the derivative portions to level 3 of the fair value hierarchy.
The following table presents the reconciliation from the opening balances to the closing balances for other liabilities allocated to Level 3: Prev. year €m Level 1 Level 2 Level 3 Total Liabilities measured at fair value Other liabilities
The fair value of the subordinated liabilities at the balance sheet date amounted to €4,725m (4,921m). For the Munich Reinsurance Company bonds, we take the stock market prices as fair values. For the other subordinated liabilities, we determine the fair values using net present- value methods with observable market inputs.
Breakdown of subordinated liabilities €m A.M. Best Fitch Moody’s S&P 31.12.2016 Prev. year Munich Reinsurance Company, Munich, 6.25% until 2022, thereafter floating, €900m, Bonds 2012/2042 a A – A 896 895 Munich Reinsurance Company, Munich, 6.625% until 2022, thereafter floating, £450m, Bonds 2012/2042 a+ A – A 526 609 Munich Reinsurance Company, Munich, 6.00% until 2021, thereafter floating, €1,000m, Bonds 2011/2041 a A – A 994 992 Munich Reinsurance Company, Munich, 5.767% until 2017, thereafter floating, €1,349m, Bonds 2007/perpetual a A A3 (hyb) A 1,380 1,445 Munich Reinsurance Company, Munich, 7.625% until 2018, thereafter floating, £300m, Bonds 2003/2028 a+ A+ A2 (hyb) A 351 406 ERGO Versicherung Aktiengesellschaft, Vienna, secondary market yield on federal government bonds (Austria) +70 BP, €12m1, Registered bonds 2001/perpetual – – – – 12 12 ERGO Versicherung Aktiengesellschaft, Vienna, secondary market yield on federal government bonds (Austria) +70 BP, €13m2, Registered bonds 1998/perpetual – – – – 13 13 HSB Group Inc., Delaware, LIBOR +91 BP, US$ 76m, Bonds 1997/2027 – – – – 47 44 1 ERGO International AG holds bonds with a nominal value of €3m; the volume outstanding has been reduced accordingly. 2 ERGO Group AG holds bonds with a nominal value of €3m; the volume outstanding has been reduced accordingly.
Development of gross unearned premiums €m 31.12.2016 Prev. year Status at 31 Dec. previous year 8,841 8,373 Currency translation effects –45 349 Changes in consolidated group/Other 0 –36 Gross premiums written 48,851 50,374 Earned premiums –48,664 –50,219 Status at 31 Dec. financial year 8,984 8,841
Term life insurance 3,363 3,293 Other life insurance 26,718 28,343 Annuity insurance 32,268 31,277 Disability insurance 1,292 1,281 Contracts with combination of more than one risk 31 25
Development of gross provision for future policy benefits €m 2016 Prev. year Status at 31 Dec. previous year 108,572 112,648 Currency translation differences –520 1,616 Changes in consolidated group/Other –694 –4,726 Changes
The change shown under “changes in consolidated group/ other” contains €462m (367m) in savings premiums for capitalisation products and –€2,434m (–1,255m) for portfolio entries and withdrawals.
Scheduled changes in the provision 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 2016 financial year.
For the year under review 15,978 –602 15,376 15,159 –644 14,515 For previous years –1,624 153 –1,471 –1,707 108 –1,599
For the year under review –5,737 151 –5,587 –5,517 131 –5,386 For previous years –8,557 341 –8,216 –7,619 394 –7,225
€m Accident year Calendar year ≤ 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total
31 Dec. 2006 51,505 31 Dec. 2007 51,659 12,711 31 Dec. 2008 51,145 12,928 14,191 31 Dec. 2009 50,478 12,824 14,440 13,936 31 Dec. 2010 49,900 12,742 14,383 13,891 14,335 31 Dec. 2011 49,694 12,704 14,083 13,385 14,522 18,544 31 Dec. 2012 49,193 12,320 13,924 13,243 14,388 18,646 15,168 31 Dec. 2013 49,125 12,064 13,751 13,216 14,475 18,307 14,972 15,076 31 Dec. 2014 48,894 11,978 13,471 12,890 14,512 17,901 14,742 15,325 15,089 31 Dec. 2015 48,588 11,744 13,330 12,663 14,318 17,771 14,519 15,270 15,128 14,361 31 Dec. 2016 48,339 11,771 13,241 12,618 14,081 17,298 14,482 14,953 15,089 14,408 15,336 191,617
Of the provision for premium refunds based on national regulations, €84m (81m) is apportionable to property- casualty insurance. The provision for deferred premium refunds is established solely for life and health insurance.
Breakdown of other technical provisions €m 31.12.2016 Prev. year Provision for premium refunds based on national regulations 8,209 7,730 Provision for deferred premium refunds 10,155 9,190
Development of provision for premium refunds based on national regulations €m 2016 Prev. year Status at 31 Dec. previous year 7,730 7,557 Changes in consolidated group 0 0 Allocations/Withdrawals 479 173 Status at 31 Dec. financial year 8,209 7,730
Expenses for defined contribution plans in the year under review totalled €67m (74m), with €111m (111m) for contributions to state plans.
The pension obligations of the ERGO Group account for €2,967m (2,547m) of the present value of obligations under defined pension plans and €420m (290m) of plan assets. The obligations include disability and old-age pensions, and pensions for surviving dependants. The amount of the pensions generally depends on salary and length of service. The commitments are generally funded through pension provisions. New members receive pension commitments in the form of defined contribution plans financed by means of intra-Group insurance contracts securing the obligations under pension schemes. There are also medical-care benefit obligations.
The pension obligations of Munich Reinsurance America, Inc. account for €771m (733m) of the present value of obligations under defined benefit plans, and €530m (488m) of plan assets. The obligations include pensions for employees and surviving dependants. The amount of the pensions generally depends on includable compensation and length of service. The plan is financed through a trust and pension provisions. The plan was closed to new members effective 1 January 2006, and to all remaining members effective 31 December 2011. With effect from 1 January 2012, all members now receive pension commitments in the form of defined contribution plans. There are also retiree medical-care benefit obligations.
The present value of medical-care benefit obligations amounted to €310m (274m) at the balance sheet date.
The present value of the obligations under defined benefit plans breaks down as follows: Change in the present value of the defined benefit obligations €m 2016 Prev. year Status at 31 Dec. previous year 5,389 5,584 Currency translation differences –4 106 Changes in consolidated group 4 0 Current service cost 157 160 Past service cost –1 3 Gains and losses from plan settlements –1 0 Contributions by plan participants 8 8 Interest expense 136 123 Payments –142 –139 Payments from plan settlements –3 0 Transfer of obligations 0 0 Actuarial gains/losses: Change in demographic assumptions –13 –27 Actuarial gains/losses: Change in financial assumptions 384 –469 Actuarial gains/losses: Experience adjustments –23 –31
Present value of defined benefit obligations 3,335 2,838 Fair value of plan assets –3,388 –2,847 Assets from the defined benefit plan 343 209 Effect of asset ceiling 9 0
Present value of defined benefit obligations 6,095 5,389 Fair value of plan assets –3,388 –2,847 Assets from the defined benefit plan 343 209 Effect of asset ceiling 9 0
% 31.12.2016 Prev. year Quoted market price in an active market Cash or cash equivalents 1 1 Equity instruments 8 8 Debt instruments 49 51 Real estate 1 1
Securities funds 16 18 Asset-backed securities 0 0 Structured debt 0 0 Insurance contracts 24 19
Market fluctuations may give rise to changes in the fair value of the plan assets over the course of time. Adjustments to the actuarial assumptions (e.g. life expectancy, actuarial interest rate) or deviations in actual risk experience from the risk experience assumed may result in changes in the present value of the defined benefit obligations. Both factors may therefore lead to fluctuations in the funded status. To avoid these fluctuations wherever possible, care is taken, when choosing investments, that fluctuations in the fair value of the plan assets and in the present value of defined benefit obligations offset each other as far as possible whenever changes in certain influencing variables occur (asset- liability matching).
Change in the provision for defined benefit plans €m 2016 Prev. year Balance at 31 Dec. previous year 2,751 2,965 Currency translation differences 8 38 Changes in consolidated group 4 0
Payments –88 –82 Payments from plan settlements 3 0 Capital transfer to plan assets –80 –62 Transfer to other receivables 142 85 Actuarial gains/losses recognised in equity 91 –404 Other 13 –9 Balance at 31 Dec. financial year 3,058 2,751
Sensitivity analysis €m 31.12.2016 Prev. year Increase in actuarial discount rate by 50 BP –564 –490 Decrease in actuarial discount rate by 50 BP 653 570 Increase in salary/entitlement trends by 10 BP 28 25 Decrease in salary/entitlement trends by 10 BP –28 –24 Increase in pension trends by 10 BP 66 59 Decrease in pension trends by 10 BP –60 –54 Increase in medical cost trend rate
A.M. €m Best Fitch Moody’s S&P 31.12.2016 Prev. year Munich Re America Corporation, Wilmington, 7.45%, US$ 342m, Senior Notes 1996/2026 a– A+ A2 A– 324 314
The provisions for restructuring mainly concern €69m (106m) for the ERGO Group’s “Continuous improvement of our competitive position” project and €214m (253m) for the comprehensive restructuring of the ERGO Group’s sales organisations. In the financial year, ERGO for the first time also posted restructuring provisions of €391m for the ERGO Strategy Programme, plus another €136m for the planned discontinuation of new business and the closure of the sales organisation in Belgium. The provision for multi-year variable remuneration includes
Early retirement benefits/semi-retirement 63 14 –12 0 0 65 26 Bonds and notes issued
Outflows of liquidity occur annually in the amount of the interest payments until the notes mature. These totalled US$ 25m in the financial year. The fair value at the reporting date amounts to €410m (402m).
The following table provides information on the remaining contractual maturities of the items shown under “other liabilities”. The amounts payable on primary insurance business are directly linked to the underlying insurance business, and therefore we analyse the liquidity risk arising from these together with the corresponding insurance contracts. This currently also applies to the derivatives embedded in variable annuity business; see Disclosures on risks from insurance contracts, (38) Disclosures on risks from life and health insurance business. The derivatives listed below are recognised at fair value.
The major portion of the liabilities up to one year involve interest-free items, where the carrying amounts and the undiscounted cash flows are identical. A total of €47m (51m) of the amounts owed to banks and €391m (401m) of the liabilities from derivatives are due within one year. Any deviations in the liabilities with remaining terms of over one year from the undiscounted cash flows are not material for presenting the significance of the financial liabilities for our financial position and performance.
Carrying amounts €m 31.12.2016 Prev. year Up to one year 8,948 8,293 Over one year and up to two years 102 91 Over two years and up to three years 237 54 Over three years and up to four years 37 259 Over four years and up to five years 82 35 Over five years and up to ten years 1,153 640 Over ten years 998 1,025 27 Deposits retained on ceded business
The miscellaneous liabilities contain liabilities of €1,439m (394m) resulting from reinsurance contracts without significant risk transfer, derivative financial instruments with a negative fair value of €872m (1,085m), and negative fair values totalling €939m (733m) for insurance-linked derivatives and hedging derivatives of variable annuities. The miscellaneous liabilities also include €24m (22m) for social security and €175m (183m) for interest and rent.
Breakdown of other liabilities €m 31.12.2016 Prev. year Amounts payable on primary insurance business 2,734 2,902 Accounts payable on reinsurance business 5,477 5,274 Amounts due to banks 396 428 Miscellaneous liabilities 6,580 5,457
The total gross premiums include not only the gross premiums written but also savings premiums from unit-linked life insurance and capitalisation products. Premiums from long-term insurance business, especially in life primary insurance, are recognised in full as earned premiums and income when they become due. Under gross premiums written, only those parts of the premium from unit-linked life business are included that are used to cover the risks and associated costs.
Of the gross premiums written from short-term insurance business, the portions attributable to periods after the balance sheet date are recognised as unearned premiums; see Notes to the consolidated balance sheet – Equity and liabilities under (20) Unearned premiums. Over the duration of the contracts, unearned premiums are reversed in accordance with the reduction in risk.
Premiums €m 2016 Prev. year Total gross premiums 50,052 51,705 Gross premiums written 48,851 50,374 Change in gross unearned premiums –188 –155 Gross earned premiums 48,664 50,219
Ceded premiums written –1,526 –1,869 Change in unearned premiums – Ceded share –20 –41 Earned premiums ceded –1,546 –1,910
In the ERGO Property-casualty Germany segment, the income from technical interest is calculated analogously to the procedure in the property-casualty reinsurance segment.
Operating expenses €m 2016 Prev. year Gross Acquisition costs, profit commission and reinsurance commission paid –9,753 –9,445 Administrative expenses –2,945 –2,990 Change in deferred acquisition costs and contingent commissions, amortisation and impairment losses of acquired insurance portfolios 42 –410 Gross operating expenses –12,655 –12,846
Ceded share Acquisition costs, profit commission and reinsurance commission paid 355 480 Change in deferred acquisition costs and contingent commissions 6 –2 Operating expenses – Ceded share 360 478
Net operating expenses –12,295 –12,367 31 Expenses for claims and benefits
Provision for future policy benefits –322 –552 Provision for outstanding claims –799 –1,252 Provision for premium refunds –1,969 –1,366
Other technical result –67 –113 Expenses for claims and benefits – Ceded share 669 1,025
Munich Re Group Annual Report 2016 34 Insurance-related investment result 35 Other operating result
Other operating income mainly comprises income of €527m (533m) from services rendered, interest and similar income of €70m (103m), income of €57m (123m) from the release/reduction of miscellaneous provisions and provisions for bad and doubtful debts, and income of €48m (47m) from owner-occupied property, some of which is also leased out.
In addition to expenses of €431m (414m) for services rendered, other operating expenses chiefly include interest charges and similar expenses of €92m (99m), other write-downs of €57m (61m), and other tax of €107m (107m). They also contain expenses of €24m (14m) for owner-occupied property, some of which is also leased out.
The other operating result includes the result from reinsurance treaties without sufficient risk transfer totalling €43m (62m), of which €41m (71m) derives from the Life Reinsurance segment.
Result from insurance-related investments €m 2016 Prev. year Result from investments for unit-linked life insurance contracts 238 259 Result from other insurance-related investments 88 –119
Other operating result €m 2016 Prev. year Other operating income 744 873
Other operating expenses –938 –941 Thereof: Interest charges –89 –97 Write-downs of other operating assets –71 –69 33 Investment result
€m 2016 Prev. year Land and buildings, including buildings on third-party land 383 334 Investments in affiliated companies –159 –82 Investments in associates and joint ventures 124 375
Other securities available for sale Fixed-interest 4,857 4,889 Non-fixed-interest 672 1,148 Other securities at fair value through through profit or loss Held for trading
Write-downs of non-derivative investments €m 2016 Prev. year Land and buildings, including buildings on third-party land –101 –113 Investments in affiliated companies –7 –2 Investments in associates and joint ventures –14 –22 Loans –38 –59 Other securities available for sale –353 –553 Other securities at fair value through profit or loss –44 –20 Other investments –52 –78 Total –608 –848
The other non-operating result is unrelated to the conclusion, administration or settlement of insurance contracts or the administration of investments. It essentially comprises a foreign-currency result of €485m (–213m), the other non-technical result of –€245m (–225m), write-downs of €96m (79m) on other intangible assets, and restructuring expenses of €583m (18m).
This item shows the corporation tax and municipal trade earnings tax paid by the German consolidated companies (including solidarity surcharge and interest on back tax) and the comparable taxes on earnings paid by the foreign consolidated companies in the Group. The determination of taxes on income includes the calculation of deferred taxes.
Other non-operating result, impairment losses on goodwill and net finance costs €m 2016 Prev. year Other non-operating result –437 –532 Impairment losses on goodwill –28 –452 Net finance costs –219 –238
Main components of tax expenses/income €m 2016 Prev. year Current tax for financial year –1,093 –987 Current tax for other periods 286 927 Deferred tax resulting from the occurrence or reversal of temporary differences 174 –435 Deferred tax resulting from the occurrence or utilisation of loss carry-forwards –254 117 Valuation allowances for deferred taxes/loss carry-forwards 126 –99 Effects of changes in tax rates on deferred tax 1 1 Taxes on income –760 –476
Reconciliation to effective tax expenses/income €m 2016 Prev. year Result before taxes on income (after “other tax”) 3,341 3,598 Group tax rate in % 33 33 Derived taxes on income –1,102 –1,187 Tax effect of: Tax rate differences 279 275 Tax-free income 1 17 Non-deductible expenses –299 –495 Valuation allowances for deferred taxes/loss carry-forwards 126 –99 Change in tax rates and tax legislation 1 1 Tax for prior years 310 956 Trade tax adjustments –21 14 Other –55 42
Munich Re Group Annual Report 2016 38 Disclosures on risks from life and health insurance business
In reinsurance, we use the following discount rates for the provision for future policy benefits and the provision for outstanding claims: Disclosures on risks from insurance contracts
In life primary insurance, an implicit or explicit interest-rate guarantee is granted for the majority of contracts over their whole duration, based on a fixed interest rate applying at the time the contract is concluded. The discount rate used to calculate the provision for future policy benefits is identical with this interest rate for the majority of contracts in our portfolios. An appropriate minimum return needs to be earned in the long term from the investment result (possibly also with assistance from the technical result) for the contractually guaranteed benefits. In long-term health primary insurance, a discount rate is also used for calculating the provision for future policy benefits. However, this rate can generally be altered by way of premium adjustment. For short-term business, there is no direct interest-rate risk.
Some primary insurance and reinsurance contracts contain derivative components of variable annuities. These are measured separately from the underlying contract and their changes in value are recognised in the insurance- related investment result. The valuation of these embedded derivatives is sensitive to share prices, exchange rates and interest rates, but these sensitivities are nearly fully compensated for by the fact that such derivatives are for the most part directly matched by financial derivatives for hedging purposes.
Munich Re Group Annual Report 2016 39 Disclosures on risks from propertycasualty insurance business
Expected future technical cash flow (gross)1 €m 31.12.2016 Prev. year Up to one year –3,602 –3,879 Over one year and up to five years –10,207 –10,762 Over five years and up to ten years –15,798 –15,154 Over ten years and up to 20 years –39,076 –36,237 Over 20 years –102,062 –94,543 1 Premiums less benefits guaranteed at the balance sheet date and costs (excluding unit-linked products).
Provisions for asbestos and environmental claims 31.12.2016 Prev. year €m1 Gross Net Gross Net 1 The previous year’s figures have been adjusted to eliminate currency translation effects.
Reinsurance Primary insurance Total €m 31.12.2016 Prev. year 31.12.2016 Prev. year 31.12.2016 Prev. year
The Group parent is Münchener Rückversicherungs- Gesellschaft Aktiengesellschaft in München (Munich Reinsurance Company Joint-Stock Company in Munich), Königinstrasse 107, 80802 München.
Information on the remuneration of Board members and transactions with these persons can be found in the management report under the remuneration report, and under (44) Remuneration report. Transactions between Munich Reinsurance Company and subsidiaries that are to be deemed related parties have been eliminated in consolidation and are not disclosed in the Notes. Business relations with unconsolidated subsidiaries are of subordinate importance as a whole; this also applies to business relations with associates and joint ventures.
In 2016, expenses of €4.0m (22.0m) were recognised for the Mid-Term Incentive Plan. The provision at the reporting date amounted to €35.3m (49.2m).
The number of staff employed by the Group at year-end totalled 21,077 (21,812) in Germany and 22,351 (21,742) in other countries.
For services rendered to the parent and consolidated subsidiaries by the Group auditor (KPMG Bayerische Treuhandgesellschaft AG Wirtschaftsprüfungsgesell- schaft Steuerberatungsgesellschaft, Munich, and its affiliated companies within the meaning of Section 271 (2) of the German Commercial Code – HGB), the following fees have been recognised as an expense in the financial year: Breakdown of number of staff 31.12.2016 Prev. year
Breakdown of auditor’s fees €k 2016 Audits of financial statements1 –9,436 Other assurance and appraisal services 0 Tax consultancy services –2,235 Other services –4,597 Total –16,267 44 Remuneration report
The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €23.1m (23.4m). The total remuneration of Munich Reinsurance Company’s Supervisory Board amounted to €2.6m (2.6m); not included in this figure is €0.2m (0.2m) for membership of supervisory boards at other Group companies, so that the overall amount came to €2.8m (2.8m).
Payments to retired members of the Board of Management or their surviving dependants totalled €7.4m (8.6m).
Personnel expenses for pension commitments were not incurred for retired members of the Board of Management. After deduction of plan assets held by a separate entity (under a contractual trust agreement), there were no pension provisions or provisions for comparable benefits for retired members of the Board of Management or their surviving dependants.
The Board members did not receive any cash advances or loans in the 2016 financial year. For their service as employees of the Group, Supervisory Board members received remuneration in the amount of €1.3m (1.3m). There were no significant notifiable transactions between Board members and Munich Re.
Fair value 2016 for one right €0.00 €413.38 €436.74 €461.16 Number of rights (for 100% achievement of objectives) on 1 January 2013 0 0 0 0
Additions 51,168 0 0 0 Number of rights (for 100% achievement of objectives) on 31 December 2013 51,168 0 0 0 Number of rights (for 100% achievement of objectives) on 1 January 2014 51,168 0 0 0
Number of rights (for 100% achievement of objectives) on 31 December 2014 51,212 42,233 0 0 Number of rights (for 100% achievement of objectives) on 1 January 2015 51,212 42,233 0 0
Number of rights (for 100% achievement of objectives) on 31 December 2015 50,442 41,649 38,217 0 Number of rights (for 100% achievement of objectives) on 1 January 2016 50,442 41,649 38,217 0
Number of rights (for 100% achievement of objectives) on 31 December 2016 0 41,467 38,004 32,525
Besides this, Munich Re has entered into various other financial obligations amounting to €380m (348m) for work and service contracts and €1,265m (1,439m) for investment obligations, of which €79m (98m) is from our investments in joint ventures. At the reporting date, there were loan commitments amounting to €1,029m (580m). These figures represent undiscounted nominal amounts. There are other financial commitments amounting to €7m (7m).
Munich Re enters into contingent liabilities in connection with its normal business operations. In this context, the obligations from guarantees total €2m (1m) and those from legal disputes €31m (42m). There are other con tingent liabilities amounting to €28m (12m). Furthermore, there is a contingent liability of £20m (20m) from our investments in associates and joint ventures. These concerned a payment obligation in the event of an associate’s over-indebtedness.
Our subsidiary Munich American Reassurance Company shows a negative earned surplus in its local financial statements as at 31 December 2016 (Statutory Accounting Principles). For this reason, the company can only pay dividends or transfer capital to the parent company with the approval of the competent US regulatory authority.
There were several finance leases for property at the balance sheet date, which are listed in the following table: Future minimum lease payments under operating leases €m 31.12.2016 Prev. year Up to one year 97 87 More than one year and up to five years 236 233 More than five years 162 160
Under the share buy-back programme decided on by Munich Reinsurance Company’s Board of Management in March 2016, we repurchased a further 1.3 million Munich Re shares with a volume of €231m from the balance sheet date to the end of February 2017.
On 1 January 2017, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the wind park company Eolus Vindpark Tolv AB, Hässleholm, Sweden, from Eolus Vindpark Elva AB, Hässleholm, Sweden. Eolus Vindpark Tolv AB was renamed Wind Farm Iglasjön AB immediately after the acquisition, and owns wind power plants with a total installed capacity of 26.4 megawatts.
Earnings per share 2016 Prev. year Consolidated result attributable to Munich Reinsurance Company equity holders €m 2,580 3,107 Weighted average number of outstanding shares 159,975,155 165,893,895 Earnings per share € 16.13 18.73
Consolidated subsidiaries 13th & F associates Limited Partnership, Washington D.C. 98.0000 40, Rue Courcelles SAS, Paris 100.0000 Adelfa Servicios a Instalaciones Fotovoltaicas S.L., Santa Cruz de Tenerife 100.0000 AEVG 2004 GmbH, Frankfurt4 0.0000 AGROTIKI Insurance S.A., Athens 100.0000 ALICE GmbH, Düsseldorf 100.0000 ALLYSCA Assistance GmbH, Munich 100.0000 American Alternative Insurance Corporation, Wilmington, Delaware 100.0000 American Family Home Insurance Company, Jacksonville, Florida 100.0000 American Modern Home Insurance Company, Amelia, Ohio 100.0000 American Modern Home Service Company, Amelia, Ohio 100.0000 American Modern Insurance Company of Florida, Inc., Jacksonville, Florida 100.0000 American Modern Insurance Group, Inc., Amelia, Ohio 100.0000 American Modern Lloyds Insurance Company, Dallas, Texas 100.0000 American Modern Property & Casualty Insurance Company, Cincinnati, Ohio 100.0000 American Modern Select Insurance Company, Amelia, Ohio 100.0000 American Modern Surplus Lines Insurance Company, Amelia, Ohio 100.0000 American Southern Home Insurance Company, Jacksonville, Florida 100.0000 American Western Home Insurance Company, Oklahoma City, Oklahoma 100.0000 Amicus Legal Ltd., Bristol 100.0000 ArztPartner almeda AG, Munich 100.0000 ATU Landbau GmbH & Co. KG, Heiligengrabe11 94.9000 avanturo GmbH, Düsseldorf 100.0000 Bagmoor Holdings Limited, London 100.0000 Bagmoor Wind Limited, London 100.0000 Beaufort Dedicated No.1 Ltd, London 100.0000 Beaufort Dedicated No.2 Ltd, London 100.0000 Beaufort Dedicated No.5 Ltd, London 100.0000 Beaufort Underwriting Agency Limited, London 100.0000 Bell & Clements (Bermuda) Ltd., Hamilton, Bermuda 100.0000 Bell & Clements (London) Ltd, London 100.0000 Bell & Clements (USA) Inc, Reston, Virginia 100.0000