1 Including amounts attributable to minority interests and policyholders. 2 Before elimination of intra-Group transactions across segments. 3 The figure for 2011 is not adjusted for relief of 1.3 percentage points from economic risk transfer to the capital markets. 4 Excluding health insurance conducted like life insurance. 5 This includes own shares earmarked for retirement.
Valuation reserves not recognised in balance sheet1 €bn 5.7 3.6 3.2 2.5 0.8
Large and very large losses (net) €m 5,126 2,228 1,157 1,507 1,126
Our operations encompass all aspects of risk assumption in primary insurance and reinsurance. We are one of the world’s largest reinsurers, and one of the largest primary insurers in Germany and Europe.
The diagram provides a general overview of our Group and makes no claim to completeness. For further details, please see the list of shareholdings on page 277 ff.
Reinsurance Primary insurance Reinsurance and primary insurance * Singapore 1 Including Munich Health’s primary insurance and reinsurance activities in the health market as at 31 December 2011.
Munich Re 052 Business environment 067 Business performance 072 Financial position 103 other success factors 112 Risk report 120 prospects 141
Consolidated financial statements 149 consolidated balance sheet 154 consolidated income statement 156 Statement of recognised income and expense 157 Group statement of changes in equity 158 consolidated cash flow statement 160 notes to the consolidated financial statements 161
Glossary 292 index of key terms 299 important addresses 300 Service 302 locations Multi-year and quarterly overview important dates
Dr. Nikolaus von Bomhard chairman of Munich Reinsurance company´s Board of Management
In primary insurance, ERGO’s successful launching of its brand campaign in 2010 was followed by a setback in 2011. Severe transgressions by individual employees and agents came to light in connection with a series of disputes with intermediaries who had left HMI, an ERGO structured sales organisation. ERGO clearly acknowledged its responsibility, apologised, conducted an extensive inquiry and took the necessary corrective measures. As a consequence, with effect from 1 January 2012, the compliance function was strengthened significantly and assigned to a separate organisational unit reporting to the ERGO CEO. Furthermore, shortcomings in processing business, which emerged in the course of investigations into various allegations, were immediately and comprehensively addressed. ERGO naturally remains committed to its goal of realising its brand mission “To insure is to understand” and is pursuing it with great resolve. Likewise, ERGO is further advancing the internationalisation of its business, expanding its activities in growth markets such as Asia as well as central and eastern Europe.
In reinsurance, market development is increasingly heterogeneous. Players who want their business to be successful must therefore maintain close proximity to their clients and the markets in order to identify individual market trends early on. We are ideally positioned throughout the world and can steer our business according to the individual state of the market; we refer to this approach as cycle management. Overall, we are currently seeing largely stable price levels, although certain loss-affected segments and countries are showing significant price increases. It is also our aim to develop steadily profitable growth areas through innovation. A recent example of this strategy is the cover we provide in the field of renewable
Munich Re broadly diversifies its investments across different asset classes and regions. With this strategy and our disciplined risk management, we are well equipped to cope with greatly varying capital market scenarios. And we will thus remain a strong and reliable partner for our clients, a safe and profitable investment for our shareholders, and an attractive employer for our staff.
eRGo sets up a joint venture for life insurance with a local partner in china. in addition, eRGo acquires shares in a vietnamese insurance company and pursues its international growth strategy.
Q3/2011 eRGo appoints Stefanie held as chief compliance officer. Following accusations levelled at agents and individual business units, eRGo strengthens its compliance rules and adopts a code of conduct for independent agents, thus giving top priority to the prevention and avoidance of infringements.
8 September 2011 // Munich Re and the chinese insurer ping an enter into a cooperation agreement in the field of renewable energy insurance.
10 September 2011 // new Munich Re software supports the qualitative and quantitative analysis of complex risk accumulations. the complex accumulation Risk explorer (caRe) combines expert knowledge from many disciplines. interdependencies between risks are revealed and can be analysed from an underwriting perspective.
as part of Munich Re’s Rent investment programme, MeaG invests in German power grids and solar plants in italy and Spain. By the end of the year, around €500m of the €2.5bn target has thus been invested.
devastating earthquakes and a large number of weatherrelated catastrophes in 2011 made it the costliest year ever in terms of natural catas trophe losses. Global economic losses totalled around uS$ 380bn, over two-thirds higher than in 2005. insured losses of uS$ 105bn also exceeded the 2005 record (uS$ 101bn).
Wolfgang Strassl Board member responsible for personnel and welfare matters, within the meaning of Section 33 of the German Co-Determination Act healthcare; human Resources
Nikolaus von Bomhard Chairman of the Board of Management, Chairman of the Group Committee Group development; Group investments; Group communications; Group audit
Weak markets impact Munich Re’s share price the sovereign debt crisis had a major impact on the european financial sector in 2011, and hence also on the performance of insurers’ share prices. investors were further unsettled by extremely low interest rates (particularly in Germany and the uSa), which are unfavourable for the insurance industry’s earnings position in the long term. over the course of the year, these factors put increasing pressure on share prices, with companies focused on life insurance suffering especially, since their results are more dependent on the performance of the capital markets. Reinsurers and primary insurers with the main emphasis on property-casualty insurance fared better. they profit ed from the fact that many investors saw them as comparatively defensive and crisisresistant investments. Munich Re could only benefit from this development to a certain extent.
total return outperforms benchmark indices turbulence on capital markets hits share price in second half-year
Munich Re GRoup annual RepoRt 2011 particularly in the last three months of the financial year, developments on the stock markets were greatly influenced by political efforts to find a solution to the debt crisis in europe. neither a series of financial stabilising measures and political initiatives nor concerted action by the central banks was able to calm the situation on the capital markets for long.
Munich Re’s share price finished the year at €94.78. even allowing for the difficult business environment, we are not satisfied with its overall development in 2011. nevertheless, the medium- and long-term performance of Munich Re shares is still convincing: over the last three- and five-year periods, their price performance has bettered that of the dJ euRo StoXX insurance.
dJ euRo StoXX 50 1.1 dJ euRo StoXX insurance 11.5 MSci euRo 1.0 FtSe euRotop 100 0.6 dJ Sustainability World 0.3
Munich Re GRoup annual RepoRt 2011 active capital management remains an integral part of Munich Re’s business policy. We pursue a flexible dividend policy, with the payout essentially based not only on the result for the year but also on our capital requirements. We were one of the few German listed companies to pay a higher dividend for the financial year 2010, up 8.7% to €6.25 per share.
even though the turmoil on the capital markets and the high losses from natural catastrophes clearly impacted our result for 2011, the Board of Management and Supervisory Board intend to propose an unchanged dividend of €6.25 for the financial year 2011 at the annual General Meeting on 26 april 2012. altogether, this would mean a total payout of €1.1bn – the same level as last year. Subject to approval by the annual General Meeting, the dividend will be paid on 27 april 2012. With a stable dividend even in a difficult year, we are once again underlining the stability of our business model and the solidity of our capital position.
Munich Re shares are no-par-value registered shares. First admitted for trading on the stock exchange in Munich on 21 March 1888, they are today listed on all the German stock exchanges, with trading nowadays taking place almost exclusively on the Xetra electronic trading platform.
the average daily turnover of Munich Re shares in Xetra and floor trading on the German stock exchanges was €121.0m in the year under review, putting our shares in 14th place among the daX stocks at year-end 2011. in terms of market capitalisation, we ranked 13th with around €17.0bn.
1 percentage of share capital. status: 31 december 2011. source: munich re share register
Munich Re GRoup annual RepoRt 2011 our corporate strategy geared to a sustained increase in value is accompanied by ongoing and open communication with all capital market participants. the main task of investor and Rating agency Relations at Munich Re is to cultivate contact with existing shareholders and attract new ones. We mainly use roadshows and investor conferences to initiate and intensify dialogue with institutional investors, our main focus being on financial centres in europe and the uSa. We regularly supplement our investor relations activities with special events, such as the capital Markets day we held in new York in July 2011 to present our uS non-life business, or an event in december, when we spotlighted the expected implications of Solvency ii for Munich Re and the insurance sector.
our 124th annual General Meeting was held at the icM – international congress center – in Munich on 20 april 2011. Some 45.4% of the voting share capital was represented in the votes. With online participation in the annual General Meeting and (electronic ) postal voting, Munich Reinsurance company again offered its shareholders all the facilities for casting their votes on agenda items.
open communication with all capital market participants an overview of ratings from the leading rating agencies can be found on page 103
We integrate our three pillars of primary insurance, reinsurance and Munich health in one Group. this set-up allows us to cover the insurance industry’s entire value chain. it benefits our clients, because we can offer them solutions that draw on our full spectrum of knowledge. as a Group, we are less dependent on cycles in individual lines of business and regional markets or on developments in the capital markets.
the risks that we cover differ greatly in nature. their partial non-correlation in terms of potential loss occurrence enables us to balance the risks over time, across regions and across fields of business – a diversification benefit that is key for our success. the size and mix of our risk portfolio mean we can cover comparatively more risks with the risk capital available.
our risk management considers much more than just the risks from our insurance business. it includes investments, for example, and models interactions between the different risks. it is firmly embedded Group-wide and actively practised. our selection of investments takes into account the due dates, the currencies and the inflation intensity of our underwriting liabilities, thus reducing reinvestment, currency and inflation risks. With our active capital management, we ensure that Munich Re’s capitalisation is always appropriate. our economic equity, calculated on a market- consistent basis, covers the capital requirement derived from our internal risk model and takes into account the stipulations of regulators and rating agencies. excess capital is returned to our shareholders in the form of dividends and share buy-backs.
three-pillar strategy reduces capital requirements disciplined financial management as the foundation
// integrated business model covers the whole value chain in the insurance industry
// new insurance solutions secure competitive edge, generate profitable growth and win clients’ loyalty our strategy
Munich Re GRoup annual RepoRt 2011 an important success factor is the constant improvement of the value-based methods and processes we use to write, control and manage our business. our most important performance indicator in this context is return on risk-adjusted capital (RoRac), which relates the profit earned to the required risk capital, allowing the management of all activities in the Group to be geared to economic value added (see page 61).
new, previously unknown risks pose a particular challenge. We have to identify and evaluate these as swiftly as possible, with a view to maintaining our competitive advantage. in so doing, we aim to expand the boundaries of insurability, correctly structure the conditions, and calculate technically adequate prices. essential prerequisites for this are our broad risk knowledge, our experience in the markets and intensive dialogue with our clients. With new insurance solutions, we aim to generate profitable growth, clearly set ourselves apart from the competition, and win our clients’ loyalty.
eRGo gears itself consistently to the needs and wants of its clients and aims to constantly improve through close communication with them. the claim “to insure is to understand” is being systematically implemented in the form of needs-based, customer-centric consultancy, clear and understandable communication, innovative ser vices and swift support when loss or damage occurs. Strong client focus is the yardstick for action in all eRGo’s business units and companies, and distinguishes eRGo from its competitors. in combination with its broad range and financial strength, this makes eRGo and its specialists reliable partners for insurance and provision product needs. Beyond this, we attach great importance to complying with legal and ethical standards in all activities: in 2011, eRGo accordingly adopted a new package of measures to strengthen compliance within the group.
the common aim of all our activities is to create long-term value for our clients, shareholders and staff. For us, a forward-looking and responsible approach is axiomatic. as one of the world’s leading insurance groups, we give our clients the promise that we will always fulfil the obligations we assume under insurance contracts.
Ladies and Gentlemen, 2011 was an extraordinary year in many respects: Munich re had to absorb the highest losses from natural catastrophes in its history – and this at a time when the financial markets found themselves in an extremely difficult situation. in this challenging envir­ onment, the supervisory board fulfilled with due care all the tasks and duties incum­ bent upon it under the law, the articles of association and the rules of procedure. We closely monitored the work of the board of Management, providing regular advice on its running of the company, and subjecting its conduct of the business to critical review and supervision. inspection measures in accordance with section 111 para. 2 sentence 1 of the german stock companies act were at no time required.
Collaboration between Supervisory Board and Board of Management the collaboration between the supervisory board and the board of Management was constructive and characterised by a spirit of mutual trust. the board of Management met its reporting obligations towards the supervisory board in full. in total, six ordinary meetings of the supervisory board took place, with the board of Management partici­ pating in meetings where the topics discussed did not require its absence. this afforded the supervisory board an intensive exchange with the board of Management and gave us a good insight into the competitive position, strategic considerations, cor­ porate planning and the group’s development. the board of Management kept us con­ stantly informed both orally and in writing about all important business transactions. the supervisory board was directly involved in all decisions of fundamental signifi­ cance to the company. We reviewed and – where necessary – questioned the informa­ tion supplied by the board of Management.
beyond this, as chairman of the supervisory board, i was in regular contact with the chairman of the board of Management, particularly in connection with issues of strat­ egy, corporate risk management and current business performance. the chairman of the board of Management informed me promptly of significant events and develop­ ments in the group. between the meetings, Jörg schneider, member of the board of Management responsible for group reporting, provided timely updates on key events and developments to henning Kagermann, chairman of the audit committee. in add­ ition, the shareholder representatives and employee representatives frequently availed themselves of opportunities prior to the supervisory board meetings to discuss import­ ant topics separately with the chairman of the board of Management.
Munich re group annual report 2011 from the new european supervisory system, solvency ii, and the ifrs accounting revi­ sions, and on the highly specific issue of the systemic relevance of insurers.
at our first meeting in 2011, we dealt with the company and group financial state­ ments for the financial year 2010 and prepared the motions for resolution by the 2011 annual general Meeting. besides taking the decision to extend the appointments of three members of the board of Management, we also reached a resolution on the evalu­ ation of individual objectives for annual performance in 2010. in addition, we estab­ lished the individual objectives for the board members’ variable remuneration compon­ ents for 2011, and took reports on compliance and anti­fraud management. finally, we appointed the external auditors for the 2011 financial year.
at its meeting in July, the supervisory board received reports on topics including the group’s prospects in german life primary insurance business. We also discussed the main focuses of human resources work in the group. in the same session, the board of Management gave us an account of the structure of the compensation systems in the group, thus fulfilling its annual obligation pursuant to section 3 para. 5 of the german regulation on the supervisory law requirements for remuneration schemes in the insur­ ance sector (versvergv).
in october, the agenda included issues of corporate governance, an in­depth report on the development and status of ergo international, and discussion of the positioning of Munich re (non­life reinsurance) in greater china.
Work of the committees the supervisory board has a total of five committees in place that enable us to perform our tasks efficiently and deal with complex issues more intensively in smaller bodies. the committees’ main tasks include preparing resolutions to be taken by the full supervisory board and topics for its agenda. details regarding the responsibilities of the respective committees are available in the corporate governance report on page 26 f. the composition of each committee is shown on page 30 f. at all meetings of the full supervisory board, the committee chairmen submitted detailed reports on the topics dealt with by the committees and the results of these consultations.
the audit committee held seven meetings in the period under review. at two meet­ ings, it discussed in detail the company and group financial statements, the company and group management report, the auditor’s report and the board of Management’s proposal for the appropriation of the net retained profits for the financial year 2010. at one of these two meetings, the external auditor answered questions. in addition, the audit committee considered the 2011 quarterly reports and the 2011 half­year financial report, which it reviewed in the presence of the auditor.
the audit committee looked into the impact of the financial crisis on Munich re again in the financial year ended. asset management was thus a recurring topic of thorough debates at the meetings. the committee regularly monitored the group’s risk situation; alongside quarterly written reports, it also received verbal updates from the chief risk officer, with whom the members of the audit committee gave detailed consideration to developments in risk management and the risk strategy.
Munich re group annual report 2011 the committee reviewed and monitored the auditor’s independence. in this context, the audit committee took delivery of reports from the auditor on its auditing and non­ audit­related services. likewise, the audit committee prepared for the full supervisory board the appointment of the external auditor for the financial year 2011, determined the main points of the audits, and set the auditor’s fees. following a resolution by the full supervisory board, the chairman of the audit committee commissioned the audit for the financial year 2011. furthermore, it commissioned the external auditor with a review of the half­year financial report 2011. the good close cooperation with the exter­ nal auditor was of notable benefit to the audit committee in its tasks and duties.
at the beginning of 2011, the nomination committee concluded the discussions it had begun in the previous year about a successor to thomas Wellauer, who left the super­ visory board as at 30 september 2010. the committee agreed to propose annika falkengren, president and ceo of skandinaviska enskilda banken ab (publ), as a can­ didate to the shareholders.
Corporate governance and declaration of conformity the efficiency audit of the supervisory board’s work, this time conducted on a non­ formal basis, concluded that the measures to improve efficiency implemented in the previous year, which had been identified in an extensive study, had proven successful, and that the work of the supervisory board is considered to be efficient and appropri­ ate overall.
in november 2011, the board of Management and supervisory board submitted their compulsory annual declaration of conformity with all the recommendations of the ger­ man corporate governance code as per section 161 of the german stock companies act and their intention to continue complying with it in future. further information on corporate governance in general is available in the joint report of the board of Manage­ ment and supervisory board on page 26 ff.
Changes on the Supervisory Board on 20 april 2011, the annual general Meeting of shareholders elected annika falken­ gren, president and ceo of skandinaviska enskilda banken ab (publ), to the supervis­ ory board to succeed thomas Wellauer. annika falkengren’s appointment brings another exceptionally qualified and internationally experienced figure to the supervis­ ory board.
Company and Group financial statements KpMg bayerische treuhandgesellschaft aktiengesellschaft Wirtschaftsprüfungsge­ sellschaft steuerberatungsgesellschaft duly audited the following documents and gave them an unqualified auditor’s opinion: the company and group management reports and financial statements as at 31 december 2011. the respective reports and the board of Management’s proposal for appropriation of the net retained profits were subse­ quently submitted directly to the members of the supervisory board. at its meeting on 1 february 2012, the audit committee had already had the opportunity to confer in detail about the preliminary year­end figures as at 31 december 2011. on 11 March 2012, it prepared the supervisory board’s resolution on the adoption of the company financial statements and the approval of the group financial statements. to this end,
the full supervisory board also checked the company and group financial statements and management reports and the proposal of the board of Management for appropri­ ation of the net retained profits. on the basis of its own examination and having heard the auditor’s report, the supervisory board had no objections and agreed to the out­ come of the external audit. it approved the company and group financial statements on 12 March 2011. the financial statements were thus adopted. having carefully weighed all the relevant aspects, the supervisory board agreed with the proposal of the board of Management for appropriation of the net retained profits.
Corporate governance report the following report by the board of Management and supervisory board of Munich reinsurance company on the group’s corporate governance within the meaning of item 3.10 of the german corporate governance code contains the remuneration report in accordance with item 4.2.5 of that code and the corporate governance statement as per section 289a of the german commercial code.
also applicable to Munich reinsurance company is the german act on the co­deter­ mination of employees in cross­border Mergers (Mgvg) and a co­determination agreement, which is published on our website.
corporate governance report and corporate governance statement1 1 copy from the management report of Munich reinsurance company. some of the figures in the remuneration report deviate owing to the application of international accounting standards.
Munich re group annual report 2011 the german corporate governance code contains the main legal rules to be observed by listed german companies. in addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. every year, Munich reinsurance company’s board of Management and supervisory board publish a declaration stating how far the code’s recommendations have been and will be complied with.
the board of Management has two committees – one for group matters and one for reinsurance – in order to enhance the efficiency of its work.
Group Committee the group committee comprises the chairman of the board of Management and at least one other member of the board of Management, i.e. nikolaus von bomhard and Jörg schneider. a further member is Munich reinsurance company’s chief risk officer, Joachim oechslin. the chairman of the board of Management is also chair­ man of the group committee, which decides on all fundamental matters relating to its voting members’ divisions unless the full board of Management is mandatorily respon­ sible. in addition, it prepares decisions that have to be taken by the full board.
Duties and responsibilities the supervisory board monitors the board of Management and gives counsel where appropriate. certain transactions require its approval, but it is not authorised to take management action in place of the board of Management. the supervisory board also appoints the external auditor for the company and group financial statements and for the half­year financial report.
in compliance with the articles of association, the supervisory board has 20 members. half are representatives of the shareholders, elected by the annual general Meeting, and half are elected representatives of the employees. under the co­determination
Munich re group annual report 2011 agreement, employees of group companies in the european union (eu) and european economic area (eea) may also participate in the election of employee representatives.
an overview of the members of the supervisory board can be found on page 63 f. add­ itional information on the current members of the supervisory board is available on our website.
the supervisory board has established its own rules of procedure, specifying responsi­ bilities, work processes and required majorities. it has also adopted separate rules of procedure for the audit committee. as provided for in the german co­determination act and included in the provisions of article 12 of the articles of association, the chair­ man of the supervisory board and his first deputy must be elected by a majority of two­thirds of its constituent members. if a second vote is needed, the shareholder rep­ resentatives elect the chairman of the supervisory board, and the employee represen­ tatives his first deputy, by a simple majority of the votes cast in each case.
Objectives for composition of Supervisory Board in accordance with item 5.4.1 para. 2 of the german corporate governance code, the supervisory board has set itself the following objectives for its composition: // the main criteria for selecting future members of the supervisory board continue to be sustained corporate profitability, personal abilities, talents, experience (especially of an international nature), independence, professional knowledge and enterprise of the nominated persons.
currently, four members of the supervisory board are women: two representatives of the employees and two shareholder representatives.
The five Supervisory Board committees Munich reinsurance company’s supervisory board has set up five committees: the standing committee, the personnel committee, the audit committee, the nomination committee, and the conference committee. the full supervisory board is regularly informed about the work of the committees by their respective chairmen.
Personnel Committee the personnel committee prepares the appointment of members of the board of Man­ agement and, together with the board of Management, concerns itself with long­term succession planning. it also prepares the supervisory board’s resolution on the remuner­ ation system for the board of Management, including the total remuneration of the indi­ vidual members of the board of Management. the personnel committee represents the company vis­à­vis the members of the board of Management and is responsible for per­ sonnel matters involving members of that board unless these are issues that have been allocated to the full supervisory board. it approves loan transactions between the com­ pany and members of the board of Management or parties related to them, as well as any material transactions between the company or its associated companies and members of the board of Management or parties related to them. it also decides on secondary occupations that members of the board of Management may pursue and seats they hold on the boards of other companies. Members of the personnel committee are hans­Jürgen schinzler (chairman), herbert bach and bernd pischetsrieder.
Audit Committee the audit committee prepares supervisory board resolutions on the adoption of the annual company financial statements and approval of the group financial statements, reviews the financial reporting, discusses the quarterly reports, and takes delivery of the audit reports and other reports and statements by the external auditor. the com­ mittee monitors the accounting process, including the effectiveness of the company’s internal control system, the risk management system, the compliance system and internal audit system. furthermore, it initiates the decision on the appointment of the external auditor and monitors the latter’s independence and quality. it appoints the external auditor for the company and group financial statements, determines focal points of the audits and agrees the auditor’s fee for the annual audit; the same applies to the review of the half­year financial report. in addition, together with the board of Management, the audit committee prepares the annual discussion of the risk strategy held before the supervisory board and discusses any changes or deviations from the risk strategy with the board of Management during the year. in this connection, the audit committee obtains reports not only from the board of Management but also directly from the compliance officer, the head of group audit, and the chief risk officer, or from corporate counsel. Members of the audit committee are henning Kagermann (chairman), christian fuhrmann, Marco nörenberg, anton van rossum and hans­Jürgen schinzler.
More details of the work of the supervisory board committees in the financial year ended can be found in the report of the supervisory board to the annual general Meet­ ing, which is printed on page 22 ff.
annual general Meeting the regular responsibilities of the annual general Meeting include reaching a reso­ lution on the appropriation of profits and approving the actions of the board of Man­ agement and supervisory board.
“since the last declaration of conformity in november 2010, Münchener rückver­ sicherungs­gesellschaft aktiengesellschaft in München has fulfilled all the recommen­ dations of the german corporate governance code of 26 May 2010 (published on 2 July 2010) and will continue to do so in future.”
Munich Re Code of Conduct beyond this, we have our own Munich re code of conduct specifying high­level ethical and legal requirements that must be met by employees. this document is also pub­ lished on our website.
in this connection, employees also have the option of contacting an external and inde­ pendent ombudsman, who reports cases of suspected fraud to the fraud prevention committee, comprising the fraud prevention officer and the compliance officer, thus
the remuneration system for members of the Board of management in place since 1 January 2010 focuses more strongly than before on long­term targets and thus creates an even greater incentive for sustainable corporate development. no changes were made with effect from 1 January 2011.
1 this remuneration report is part of the group management report.
supporting munich re’s anti­fraud management. in the ergo group, as from 1 January 2012, the Board of management has transferred responsibility for overseeing adher­ ence to corporate rules of conduct to a separate compliance unit, which reports directly to the chairman of the Board. through this new set­up, the prevention and avoidance of compliance violations are assigned top priority.
Basic remuneration plus remuneration in kind/ fringe benefits (company car, healthcare, security measures, insurance)
objectives for the business fields – reinsurance – primary insurance – Munich health individual objectives 0–200% (fully achieved = 100%)
– pensionable basic remuneration (= 25% of target overall direct remuneration) number of years on the board fixed > retirement > insured event > premature termination or non­extension of employment con­ tract under certain circumstances
b) Defined contribution plan (board members appointed before 2009 who had not reached the age of 55 in 2008 and board members appointed since 2009)
compliance with the processes laid down for specifying objectives and assessing their achievement is critically reviewed by the external auditor, who verifies whether the envisaged financial objectives are measurable and whether their achievement is in accordance with the guidelines established by Munich re. the outcome of this review and any potentially controversial aspects are rendered transparent for the supervisory board.
achievement of objectives is measured at the end of the performance terms, there being no adjustment of the targets during these periods. payouts are made at the end of the one­ and three­year periods under consideration. With a view to promoting a management approach that takes due account of the company’s long­term interests, the members of the board of Management are obliged to invest 50% and 25% of the paid­out variable remuneration in Munich reinsurance company shares.
for the value­based performance objectives, three­year average targets are set for each of the business fields reinsurance, primary insurance and Munich health. achievement of objectives is measured at the end of the plan’s term, there being no adjustment of the targets during the course of the plan.
long­term incentive plan this remuneration component, with a long­term perspective, is linked to the sustained appreciation of Munich re’s share price. the long­term incentive plan, launched each year as from 1999, was set up for the last time in 2009 for members of the board of Management and in 2010 for other eligible participants. the participants were granted a certain number of stock appreciation rights. these can only be exercised if, after a two­year vesting period, Munich re’s share price has risen by at least 20% since incep­ tion of the plan and the shares have outperformed the euro stoXX 50 at least twice over a three­month period during the term of the plan.
Whether the stock appreciation rights can be exercised and, if so, when, is not certain. the exercising and proceeds depend on the development of the share price and on ful­ filment of the exercise conditions. future obligations arising from the long­term incen­ tive plans are safeguarded in such a way that the expenses resulting from a growth in value of the stock appreciation rights are neutralised as far as possible by an increase in the value of the share portfolio. the amount of income is limited. up to now, it has only been possible to exercise stock appreciation rights under the plans set up in 1999 and 2003 to 2005. further information on the long­term incentive plan can be found in the notes to the financial statements under (44) long­term incentive plan.
Munich re group annual report 2011 all in all, the remuneration system for members of the board of Management was in conformity with the recommendations of the german corporate governance code for 2011. in particular, it also complies with the german regulation of 6 october 2010 con­ cerning the supervisory law requirements for remuneration schemes in the insurance sector (insurance compensation regulation – versvergv).
Continued payment of remuneration in the case of incapacity to work in the case of temporary incapacity to work due to illness or for other cause beyond the board member’s control, the remuneration is paid until the end of the contract of employment. the company may terminate the contract prematurely if the board mem­ ber is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him (permanent incap­ acity to work). in this event, the board member will receive a disability pension.
the members of the board of Management have no contractual entitlement to sever­ ance payments. if the board member’s activities on the board are terminated prema­ turely without good cause within the meaning of section 626 of the german civil code, payments due may not surpass the equivalent of two years’ total remuneration (three years’ total remuneration in the event of acquisition of a controlling interest or change of control within the meaning of section 29 para. 2 of the german securities acquisition and takeover act) and may not cover more than the remaining period of the employment contract. the calculation is to be based on the overall remuneration for the past financial year and, if necessary, on the probable overall remuneration for the current financial year.
board members who had already reached the age of 55 at the conversion date were not transferred to a defined contribution system and remain members of the previous sys­ tem’s defined benefit plan.
owing to the increase from 25% to 30% in the share of basic remuneration in overall remuneration as at 1 January 2010, there was a change in the assessment basis for the board members’ pensions. an unintended rise in the pensions would otherwise have been the consequence. from 1 January 2010 onwards, the defined benefits are fixed on the basis of “pensionable basic remuneration”, which corresponds to 25% of the target overall direct remuneration (= basic remuneration + variable remuneration on the basis of 100% achievement of objectives). in the case of the defined contribution plan, the rate is fixed on the basis of the target overall direct remuneration.
// for board members transferred from the old system to the new: vested pension from the defined benefit plan up to 2008 and annuity or lump sum from the policy reserve under the defined contribution plan
// in the case of defined benefit plans: defined benefit of between 30% and 60% of pensionable basic remuneration
// for board members transferred from the old system to the new: entitlement of between 30% and 60% of pensionable remuneration, reduced by 2% for each year or part thereof short of the board member’s 65th birthday; the company assumes payment of the difference between the monthly occupational pension and the monthly incremental pension from the external insurance. the policy reserve avail­ able at the date the pension benefit is claimed can be paid out as an annuity or as a lump sum.
// in the case of defined benefit plans: defined benefit of between 30% and 60% of the pensionable basic remuneration, reduced by 2% for each year or part thereof short of the board member’s 65th birthday
Vested benefits under the German Employers’ Retirement Benefits Act // board members have vested benefits under the german employers’ retirement benefits act if they leave the company before reaching the age of 60 and the pension commitment has existed for at least five years before.
Munich re group annual report 2011 benefit amount: // under the defined contribution plan for new members as from 2009: annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum at the date the insured event occurs
// for members of the board of Management transferred from the old system to the new: the entitlement under the vested pension is a proportion of the vested pension based on the ratio of actual service with the company to the period the board mem­ ber would have worked for the company altogether up to the fixed retirement age (section 2 para. 1 of the german employers’ retirement benefits act). the entitle­ ment from the incremental pension comprises the pension benefits fully financed under the insurance contract up to the occurrence of the insured event based on the pension contributions made up to the date of leaving the company (section 2 para. 5a of the german employers’ retirement benefits act). this entitlement is paid out as an annuity or a lump sum.
Improved vested benefits // improved vested benefits are granted if the contract ends owing to non­extension of the board member’s appointment (by the company) but not due to gross violation of duties or to the board member giving notice. a further precon­ dition is that the board member leaves the board before reaching the age of 60 and has at least ten years’ service with the company.
the improved vested benefits do not apply to board members appointed as from 2009. for board members transferred from the old system to the new, the improved vested benefits apply only to that part of their pension resulting from the vested pension under the defined benefit plan.
benefit amount: // for a period of six months after leaving the board, previous monthly basic remuner­
ation (only for board members appointed prior to 2006) // for the share from the defined benefit plan: defined benefit of between 30% and 60% of the pensionable basic remuneration, reduced by 2% for each year or part thereof short of the board member’s 60th birthday 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 as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. if the board member’s death occurs after retirement, the surviving dependants receive the previous monthly occupa­ tional 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. if the board member’s occupational pension was reduced owing to early retirement, benefits for surviving dependants are based on the reduced occupational pension.
subsequently, surviving dependants of a board member who dies during active service or after retirement receive the following benefits:
// Widow(er)’s pension or pension for registered civil partner amounting to 60% of the defined benefit or insured occupational pension. if the spouse or registered civil partner is more than ten years younger than the board member, the surviving dependant’s pension will be reduced by 2% for each year or part thereof of age difference, but by not more than 50%.
// doubling of the orphan’s pension if no widow(er)’s pension or pension for registered civil partner is payable.
the benefits for surviving dependants are not payable for widow(er)s or registered civil partners if the marriage or registered civil partnership was not contracted until a point in time when the board Member was already drawing the occupational pension, and for orphans if they were not born until after such a point in time. the entitlement for orphans ceases on their reaching the age of 18 (or 20 for orphans of board members transferred from the old system to the new). for orphans who are in full­time education or vocational training, doing military or civilian service, or unable to support themselves owing to a physical or mental disability, the entitlement is extended until they reach the age of 25 (or 27 for orphans of board members transferred from the old system to the new). the entitlement to a surviving dependant’s pension under the defined contribu­ tion plan ceases if the board member draws the pension in the form of a lump sum. pensions for surviving dependants cease upon their death.
pension adjustment in the case of board members appointed before 2009, occupational pensions and pen­ sions for surviving dependants are reviewed for adjustment if salaries payable under pay­scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay­scale categories) since the pensions were last fixed or more than three years have passed since that date. the adjustment made will at least be in line with the increase in the cost of living in the meantime according to the consumer price index for germany. this arrangement also applies to board members newly appointed as from 2009 and receiving a pension commitment from the company for the first time before 1 January 1999. for board members appointed as from 2009 who did not receive a pension commitment from the company before 1 Janu ary 1999, occupational pension and benefits for surviving dependants are adjusted by 1% annually in accordance with section 16 para. 3 item 1 of the german employers’ retirement benefits act from the date when the pension or benefit starts being drawn. vested benefits are not adjusted.
Total remuneration of the Board of Management the basis for reporting the remuneration of board members is german accounting standard no. 17 − drs 17 (revised 2010), according to which the amount shown as remuneration for annual performance is the provision established for that remunera­ tion, since the performance on which the remuneration is based has been completed by the balance sheet date and the requisite board resolution is already foreseeable. under the above­mentioned standard, remuneration for multi­year performance is not recognised until the year of payment. the members of Munich reinsurance company’s board of Management received remuneration totalling €9.8m (11.7m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. total remuneration thus shows a reduction of €1.9m compared with the previous year. the main reason for this is that, according to current estimates, the overall achieve­ ment of objectives for the annual performance in 2011 was lower than in the previous year.
Total amounts Name Annual performance1, 3 Multi-year performance2, 3 payable set for € set for € €
7 no transfer to defined contribution system, as board member had already reached 55 at the conversion date. entitled to an occupational pension in the event of premature or regular termination of employment.
the Mid­term incentive plan, with a duration of three years, is based on the same tar­ gets as the medium­term bonus of Munich reinsurance company’s board of Manage­ ment. in addition, the development of the total shareholder return is taken into account. besides the senior executives in Munich, the most important executives in Munich reinsurance company’s international organisation also participate in the Mid­term incentive plan.
the individual variable components are granted – subject to different weightings – at all management levels. for the first management level below the board of Manage­ ment, the share of aggregate variable remuneration is more than 50% of total remuner­ ation (fixed remuneration plus all variable components). proceeding down the manage­ ment hierarchy, this percentage decreases successively, making up around one­third at the lowest management level. there is a well­balanced combination of short­ and long­ term components. at the first management level below the board of Management, the Mid­term incentive plan makes up around 25% of total remuneration or more than 50% of overall variable remuneration, so that a longer­term incentive system is pro­ vided for. no guaranteed variable remuneration components are granted.
the total remuneration of each supervisory board member is limited to three times the fixed remuneration, thus ensuring that the overall remuneration of individual supervisory board members remains appropriate even if further committees are set up.
1 plus turnover tax in each case, in accordance with article 15 para. 6 of the articles of association. 2 in the case of members of the audit committee and/or nomination committee, the amount includes attendance fees in accordance with article 15 para. 4 of the articles of association.
Remuneration of Supervisory Board members for membership of supervisory boards at Munich Reinsurance Company subsidiaries, in accordance with the companies’ respective articles of association1
Munich re 052 Business environment 067 Business performance 072 Financial position 103 other success factors 112 risk report 120 prospects 141
Business performance 072 overview and key figures 072 reinsurance − life 076 reinsurance − property-casualty 079 primary insurance − life 086 primary insurance − health 088 primary insurance − property-casualty 090 Munich health 092 investment performance 094
Financial position 103 Financial strength 103 analysis of our capital structure 103 asset-liability management 105 capital management 105 information in accordance with section 315 para. 4 of the german commercial code and explanatory report of the Board of Management 106 group solvency 109 analysis of the consolidated cash flow statement 110
Prospects 141 overview 141 economic environment 141 Munich re’s development 143
Structure in order to make the spectrum of their business model and solution-oriented approach clearer, all our reinsurance units throughout the world generally operate under the uniform brand of Munich re. our primary insurance activities are for the most part combined in the ergo insurance group (ergo). our international health reinsurance business and health primary insurance outside germany are organised separately under the Munich health brand.
// reinsurance offers innovative insurance solutions // ergo continues to expand in asia
Munich health also operates on a global basis in reinsurance and exploits business opportunities in the field of health primary insurance outside germany in selected growth markets such as the gulf region, india, and the usa.
reinsurance in reinsurance, we operate in life and property-casualty business, the latter being subdivided into liability, accident, motor, marine, aviation, space, fire, engineering, credit and bonding, and other classes of business. the last heading comprises the remaining lines of property business, i.e. burglary, plate glass, hail (including agricultural reinsurance ), water damage, contingency, windstorm, livestock, householders’ and homeowners ’ comprehensive cover as well as fidelity guarantee business. under reinsurance, we include specialised primary insurance activities that are handled by the various divisions of the reinsurance organisation and business from managing general agencies (Mgas).
as reinsurers, we write our business in direct collaboration with primary insurers, but also via brokers and increasingly within the framework of exclusive, strategic partnerships. in addition to traditional reinsurance business, we participate via our operating field risk solutions in the primary insurance business of industrial clients, insurance pools, public-private partnerships, and business in specialist niche segments. our risk expertise and solution-focused approach under the motto “not iF, But hoW” are key to our success. We have organised our reinsurance business in divisions, as outlined below.
Reinsurance divisions our international life business is written in the life Division.
Munich health2 asset management 1 health primary insurance in germany and travel insurance business. 2 health reinsurance business worldwide and health primary insurance business outside germany.
Global Clients and american alternative insurance corporation, Wilmington, Delaware3 North America american Family home insurance company, Jacksonville, Florida american Modern home insurance company, amelia, ohio american Modern insurance company of Florida, inc., Jacksonville, Florida american Modern insurance group, inc., amelia, ohio american Modern select insurance company, amelia, ohio american Modern surplus lines insurance company, amelia, ohio american southern home insurance company, Jacksonville, Florida special and Financial risks is in charge of the classes of credit, aviation and space, agriculture, enterprise and contingency risks, and of alternative markets business. insurance risk securitisation and risk transfer to the capital markets are handled by our risk trading unit. in addition, the division attends to our own reinsurance requirements (retrocession).
global clients and north america handles our accounts with major international insurance groups (hence “global clients”) and globally operating lloyd’s syndicates as well as Bermuda companies. it also pools our know-how in the north american market. it is responsible for our property-casualty subsidiaries there and for international special lines business such as workers’ compensation, marine and the Watkins syndicate, which is a part of Munich re and operates within lloyd’s of london.
american Western home insurance company, oklahoma city, oklahoma Beaufort underwriting agency ltd., london First Marine insurance company, amelia, ohio global standards, llc, Wilmington, Delaware groves, John & Westrup limited, london hsB engineering insurance limited, london hsB group, inc., hartford, connecticut hsB solomon associates llc, Wilmington, Delaware hsB professional loss control, inc., tennessee Msp underwriting ltd., london Munich re capital limited, london Munich re holding company (uK) ltd., london Munich reinsurance america, inc., Wilmington, Delaware3 Munich reinsurance company of canada, toronto n.M.u. group limited, london the roanoke companies inc., schaumburg, illinois temple insurance company, toronto the Boiler inspection and insurance company of canada, toronto the hartford steam Boiler inspection and insurance company of connecticut, hartford, connecticut the hartford steam Boiler inspection and insurance company, hartford, connecticut the princeton excess and surplus lines insurance company, Wilmington, Delaware the Midland company, cincinnati, ohio Watkins syndicate hong Kong limited, hong Kong Watkins syndicate Middle east limited, Dubai Watkins syndicate singapore pte. limited, singapore 1 a detailed list of shareholdings can be found on page 277 ff. in the notes to the consolidated financial statements. 2 only subsidiaries and branches outside germany with equity capital generally exceeding €5m are listed by name. 3 units that also transact business in Munich health and are therefore allocated proportionately to reinsurance.
to benefit from the growth dynamics of the healthcare market, a flexible response to changing market conditions is called for. in 2011, Munich health reacted to the impact of the health reform in the us market, enhancing its competitiveness in the senior segment by acquiring the Windsor health group (Windsor) with effect from 1 January 2011. Following the successful integration of sterling life insurance company (sterling ), acquired in 2008, both companies now operate under the Windsor health group brand.
Life Bank austria creditanstalt Versicherung ag, Vienna ergo Direkt lebensversicherung ag, Fürth ergo lebensversicherung ag, hamburg ergo insurance n.V., Brussels ergo previdenza s.p.a., Milan hamburg-Mannheimer pensionskasse ag, hamburg san Marino life impresa sammarinese di assicurazione sulla vita s.p.a., san Marino sopockie towarzystwo ubezpieczen na Zycie ergo hestia spolka akcyjna, sopot Victoria lebensversicherung aktiengesellschaft, Düsseldorf ergo pensionskasse ag, Düsseldorf Victoria-VolKsBanKen Versicherungsaktiengesellschaft, Vienna Vorsorge lebensversicherung ag, Düsseldorf Vorsorge luxemburg lebensversicherung s.a., Munsbach
Property-casualty D.a.s. Deutscher automobil schutz allgemeine rechtsschutzVersicherungs -aktiengesellschaft, Munich D.a.s. Österreichische allgemeine rechtsschutz-Versicherungsaktiengesellschaft, Vienna D.a.s. société anonyme belge d’assurances de protection Juridique, Brussels Das legal expenses insurance company limited, Bristol Das nederlandse rechtsbijstand Verzekeringmaatschappij n.V., amsterdam ergo assicurazioni s.p.a., Milan ergo Daum Direct general insurance co. ltd., seoul ergo Direkt Versicherung ag, Fürth ergo sigorta a.s., istanbul ergo Versicherung ag, Düsseldorf Mtu Moje towarzystwo ubezpieczeniowe s. a., sopot sopockie towarzystwo ubezpieczen ergo hestia spolka akcyjna, sopot ergo general insurance company s.a., athens 1 a detailed list of shareholdings can be found on page 277 ff. in the notes to the consolidated financial statements. 2 only subsidiaries with premium volume exceeding €50m are listed.
Munich re’s objective is to analyse risks from every conceivable angle and to assess and diversify them, thereby creating lasting value for shareholders, clients, and staff. a guiding principle of our entrepreneurial thinking and activity is to increase Munich re’s share price on a sustained basis. this is also the aim of our active capital management, on which we report on page 105 f. the main features of our shareholder value approach in practice are the consistent application within the group of value-based management systems, which we constantly review and refine where appropriate.
the framework for any business activity is our risk strategy (see page 121 ff.), from which we derive a detailed network of limitations and reporting thresholds. Besides value-based parameters, we observe a range of important additional conditions in managing our business. these conditions may be reflected in supplementary targets or may even determine a unit’s short-term orientation in a particular situation. they include rules of local accounting systems, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
// We clearly assign responsibilities and make the levers for adding value transparent for both management and staff.
combined ratio and added value the combined ratio is regularly reported for treaties that are of a short-term nature. this mainly applies to property-casualty business and health reinsurance. the combined ratio, which is calculated as the percentage ratio of the sum of net expenses for claims and benefits plus net operating expenses to net earned premiums, corresponds to the sum of the loss ratio and the expense ratio. put simply, a combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. net aspects of our value-based management
Munich re group annual report 2011 expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses. not included in the expenses are insignificant portions of other underwriting expenses such as german fire brigade tax. net operating expenses chiefly comprise the costs arising in the acquisition of new business (e.g. commission) and for the ongoing administration of insurance contracts.
When interpreting the combined ratio, the particular circumstances of the class of business in question have to be taken into account. the composition of the portfolio, for example, is of great significance. the following factors (among others) are important: // the more the claims burden fluctuates over time, the greater the risk is, and so the premiums needed to cover the risk must be higher. this means that the loss ratios in good years are low, as are the average loss ratios that provide the reinsurer with an adequate return for assuming the risk. this is particularly true in the case of natural catastrophes, which may occur rarely, but are often very severe when they do.
therefore, while we aim to keep our combined ratio as low as possible, it is not our only target. since there are different ways of calculating this figure, it is also only of limited suitability for comparing our financial performance with that of our competitors.
rather, the key factor we consider is economic value added, which cannot be properly reflected by the combined ratio. We pursue this target internally through the performance indicator of value added, which measures value creation not only on the basis of current and forecast profits but also taking into account the size of the risks assumed.
=–adjusted result cost of equity Value added the adjusted result consists of the technical result (derived from the income statement ), the investment result, and the remaining non-technical result. in each case, value-based adjustments are made, including the smoothing of expenditure for major losses, the normalisation of investment income, and the recognition of future claims expenses at present value.
We compare the result adjusted in this way with the requisite cost of equity. a significant factor in calculating the cost of equity is the risk-based capital, which we determine using our internal model. For property-casualty business and health reinsurance, value is added to the extent that, measured on the basis of one calendar year, the adjusted result exceeds the cost of equity.
Market consistent embedded Value the products of life primary insurance and the bulk of our health primary insurance business are characterised by their long-term nature and the distribution of results over the duration of the policies. For valuing such long-term portfolios, whose performance cannot be reasonably measured on the basis of a single year, we follow the principles of Market consistent embedded Value (MceV)©1, the current version of which was published by the european insurance cFo Forum in october 2009.
MceV comprises a company’s equity and the value of in-force covered business. the latter is the present value of future profits (where profits are post-taxation shareholder cash flows from the in-force covered business and the assets backing the associated liabilities) calculated using financial and actuarial methods, taking into consideration the time value of the financial options and guarantees and the explicitly determined costs of capital.
the development of the insurance portfolio is modelled by applying the current expectations for biometrics (e.g. mortality and morbidity), lapses and costs. in primary insurance, the participation of policyholders in surplus is modelled according to the current planning and in line with statutory regulations. For the individual companies, the tax rates and calculations used are based on national regulations; in addition, tax loss carry-forwards are included in the calculation. Withholding taxes on dividends paid by group companies are disregarded. the cost of capital includes not only the costs of investment management and taxes but also the not explicitly modelled risks of the business and, for health primary insurance, the participation of policyholders in surplus.
Dr. rer. nat. Torsten Jeworrek (chairman of the reinsurance committee) reinsurance Development corporate underwriting accounting, controlling and central reserving for reinsurance information technology global Business architecture geo risks research/corporate climate centre
Dr. jur. Hans-Jürgen Schinzler (chairman) Member since 2 January 2004, last re-elected 22 april 2009 Former chairman of the Board of Management of Munich reinsurance company
Hans Peter Claußen (Deputy chairman) Member since 22 april 2009 employee of D.a.s. allgemeine rechtsschutz Versicherungs-ag
Annika Falkengren Member since 20 april 2011 president and chief executive officer of skandinaviska enskilda Banken aB (publ)
Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann Member since 22 July 1999, last re-elected 22 april 2009 president of acatech – german academy of science and engineering
Silvia Müller Member since 22 april 2009 employee of ergo Versicherungsgruppe ag
Dr. phil. Ron Sommer Member since 5 november 1998, last re-elected 22 april 2009 chairman of the supervisory Board of Mts oJsc, russia
Membership of the Supervisory Board Committees standing committee Dr. jur. Hans-Jürgen Schinzler (chairman) Herbert Bach Hans Peter Claußen Wolfgang Mayrhuber Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder personnel committee Dr. jur. Hans-Jürgen Schinzler (chairman) Herbert Bach Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder audit committee Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann (chairman) Christian Fuhrmann Marco Nörenberg Anton van Rossum Dr. jur. Hans-Jürgen Schinzler nomination committee Dr. jur. Hans-Jürgen Schinzler (chairman) Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder conference committee Dr. jur. Hans-Jürgen Schinzler (chairman) Herbert Bach Hans Peter Claußen Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder a report on the remuneration of the Board of Management and the supervisory Board is provided on page 32 ff.
coMMerZBanK ag ergo Versicherungsgruppe ag2 (chairman) Munich health holding ag2 (chairman)
georg Daschner – – Dr. rer. nat. torsten Jeworrek – –
Dr. rer. pol. peter röder eXtreMus Versicherungs-ag Munich re america corp., Wilmington2 (chairman) Munich reinsurance america, inc., Wilmington2 (chairman)
Dr. oec. publ. Wolfgang strassl – apollo Munich health insurance company ltd., hyderabad, india
Bayerische Motoren-Werke ag Deutsche Bank ag Deutsche post ag nokia corporation, Finland Wipro ltd., india peter löscher – – Wolfgang Mayrhuber Bayerische Motoren-Werke ag infineon technologies ag (chairman) lufthansa-technik ag aua austrian airlines, austria Österreichische luftverkehrsholding gmbh, austria heico corporation, usa uBs ag, switzerland silvia Müller ergo Versicherungsgruppe ag2 – Marco nörenberg ergo Versicherungsgruppe ag2 – reinhard pasch – – Dr. e.h. Dipl.-ing. Bernd pischetsrieder
General parameters our business environment is being shaped by a number of global trends with a longterm impact. Demographic shifts are leading to fundamental changes in many parts of the world, posing enormous challenges for social security and healthcare systems, particularly in industrialised countries. in developing and emerging countries, we are witnessing not only rapid population growth but also a swift rise in prosperity among large sections of the population. as a result, the emerging economies in asia especially are gaining in global importance. conversely, the economic and also geopolitical weight of western industrial nations is decreasing in relative terms. technological progress and digitalisation are accelerating the globalisation of capital flows and supply chains, and increasing the complexity of the world economy. in this environment, we are seeing a growing number of insurance-relevant major events, with a disproportionate rise in insured losses in relation to economic activity. We see climate change as partly responsible for this, in addition to urbanisation and concentration of values in exposed regions. this is producing new risk potentials and accumulation risks that make it imperative to constantly refine our underwriting.
Munich re group annual report 2011 having developed considerable momentum in 2010, also in some industrialised countries, the recovery of the global economy slowed down in 2011, as expected. the divide in growth between economies increased: while economic growth stagnated in the usa at the beginning of the year and in the eurozone in the second half of the year especially, most emerging and developing countries posted high growth rates, albeit somewhat lower than in the previous year. among the emerging countries, china again recorded particularly strong economic expansion.
the sovereign debt crisis in the peripheral countries of the eurozone worsened again, threatening to develop into a banking crisis as well, and unsettling companies and consumers. economic momentum in the eurozone was restrained: the italian and spanish economies hardly grew at all, while growth in the French economy was moderate and even the economy in germany lost impetus towards the end of the year, owing to the deterioration in the international business environment. the annual average unemployment rate in germany nevertheless fell to 7.1%.
in the usa, the economy had already begun to cool in the course of 2010 and remained subdued in 2011, with the unemployment rate staying stubbornly high at around 9% for most of the year and only falling to 8.5% towards the end of the year.
the natural and nuclear disaster in Japan intensified the reduction in economic activity in the first half-year, but government assistance measures and interventions by the central bank aided the recovery, so that Japanese industrial production had nearly returned to its pre-earthquake level by July.
there was a surprisingly marked increase in inflation rates worldwide in 2011, mainly due to the rise in the oil price. against the background of political unrest in north africa and the Middle east, the price per Brent barrel rose from us$ 95 at the beginning of January to us$ 127 in april, subsequently remaining at over us$ 100 for the rest of the year.
1 national economic output weighted for aggregation with purchasing power parities. source: international Monetary Fund
Faltering recovery of global economy inflation rates driven by oil price worldwide
as anticipated, monetary policy in the industrial nations remained expansive. owing to the weak state of the economy, the us Federal reserve kept the range of its key interest rate between 0% and 0.25%. the Japanese central bank also maintained interest rates within a range of 0% to 0.1%. While the ecB initially heralded a cycle of rising inflation rates, raising its key interest rate both in april and in June, it reversed this trend in november and lowered the rate again in December to 1%. our expectation of a slight rise in the yield level of long-term government bonds was not fulfilled, however. given the uncertainty on the financial markets, yields on us and german government bonds fell strongly in the third quarter and closed the year at well below their beginning-ofthe -year level.
Jan. Feb. Mar. apr. May Jun. Jul. aug. sep. oct. nov. Dec.
Jan. Feb. Mar. apr. May Jun. Jul. aug. sep. oct. nov. Dec. germany usa
especially in the first half-year, reinsurers had to absorb an exceptional accumulation of major losses. on the other hand, market terms and conditions for reinsurers improved in 2011, particularly for natural catastrophe covers. prices rose slightly on average in the renewals at the beginning of the year, at 1 april and at 1 July.
according to preliminary estimates, premium income written by the primary insurance industry in germany decreased by 1.2% in 2011. this was due to the decline in singlepremium business in life insurance, which had enjoyed exceptionally strong growth in 2009 and 2010. thus whereas regular-premium life insurance business grew by around 3%, overall premium in life insurance showed a reduction of 5.7%. premium growth in private health insurance was again very high at 4.9%, while property-casualty insurance recorded its highest growth rate since 2003, a solid 2.5%.
// Very high major-loss burden // investment result impacted by sovereign debt crisis // Return on risk-adjusted capital (RoRac) of 3.2% after tax // Dividend of €6.25 per share planned the past year was marked by very high claims expenditure, in particular for natural catastrophes, and by capital market turmoil triggered by the sovereign debt crisis. We report on our investment performance on page 94 ff.
our return on risk-adjusted capital (RoRac) totalled 3.2% for the 2011 financial year, compared with 13.5% in the previous year. the figure was thus far below our long-term target of 15%, mainly due to very high major-loss expenditure and significant writedowns of investments. Because the deterioration in the result was attributable to the difficult environment rather than a sustained impairment of our profitability, we aim to maintain our dividend unchanged, at €6.25 per share. our profit distribution thus remains at a high level.
Munich Re gRoup annual RepoRt 2011 the rise in gross premiums is attributable to strong organic growth, especially in the life and property-casualty reinsurance segments and Munich health. given the heavy burden from natural catastrophes, the combined ratio in property-casualty reinsurance was significantly above the previous year’s level. in property-casualty primary insurance, the slight increase in the combined ratio is attributable to numerous weather events involving heavy rainfall and severe storms in germany.
for the reporting on individual fields of business, the following principle applies: volumes and results that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intragroup reinsurance cessions from primary insurers to reinsurers) are included.
Group premium income 1 1 after elimination of intra-group transactions across segments.
Munich Re gRoup annual RepoRt 2011 the life reinsurance segment developed pleasingly. property-casualty business, by contrast, was affected by high costs for natural catastrophes. in addition, the results of life reinsurance and property-casualty reinsurance suffered from currency translation effects. Detailed information on business performance in the life and property-casualty segments can be found on page 76 ff.
the development of profits in the primary insurance segments was heavily influenced by the investment result. We report on primary insurance on page 86 ff.
currency translation losses were responsible for the low consolidated result posted by Munich health. further details of Munich health’s business performance are available on page 92 f.
in May, the media reported extensively on a sales event organised by the structured sales section of hMi in Budapest in 2007, where very serious breaches of existing corporate guidelines and values had been committed, in particular against eRgo’s code of conduct applicable to all employees, managers and Board members of all entities of the eRgo group in and outside germany. to ensure that an incident of this kind is not repeated, eRgo has adopted a package of measures to strengthen compliance in the group. these also include committing eRgo’s independent agents to adhere to a code of conduct that stipulates clear rules governing dealings with companies, sales partners and clients. further measures are aimed at achieving greater transparency in product materials and documentation and ensuring a consistently high level of quality in consultancy. in addition, a package of measures was presented for a quality offensive at hMi. as a visible sign that the sales organisation hMi is subject to the same high quality standards as the other sales organisations, hMi was renamed eRgo pro in January 2012.
the allegations, mistakes made and negative reports in the german media have tarnished eRgo’s reputation. however, as at the end of December, the media reports had not had any significant negative impact in terms of cancellations or new business. eRgo will continue to closely monitor developments, remedy any damage done and strive to convince clients and the general public of its outstanding products and services.
eRgo takes measures to improve the quality of its sales advice and to strengthen compliance
With a gross volume of €9,602m (7,901m), premium income in life reinsurance was up 21.5% on the previous year. the main driver of this gratifying development was a number of large-volume treaties where reinsurance primarily serves as a capital substitute. since the beginning of the capital market crisis in 2008, the demand for these solutions has increased dramatically and remains at a high level. especially business generated in north america, asia and continental europe led to further premium growth in 2011. on the other hand, growth was curbed by the consequences of the global recession, which partially impacted our clients’ business development and thus also reduced the volume of business available in reinsurance.
Munich Re gRoup annual RepoRt 2011 an important growth driver for our business is the dynamic development of life insurance in asia, in which we participate in all key markets. We expect further growth impulses for our future new business to come from the continuing privatisation trends in provision for old age, long term care and disability. additional demand should be generated by the new regulatory solvency capital requirements in the eu (solvency ii). under solvency ii, capital requirements for risks, including risks from investment, will become more extensive and demanding. this is a challenge, particularly for small, medium-sized and less diversified primary insurers. We see increasing demand for the management of investment risks in life insurance products, and have therefore created the infrastructure necessary to provide our clients with comprehensive solutions for covering options and guarantees dependent on the capital markets, thus protecting them against the corresponding exposure in the capital markets. Besides this, we are successively expanding the spectrum of services we offer our clients with the aim of thus obtaining access to profitable reinsurance. of particular significance in this regard are consulting services and products to enhance the efficiency of our clients’ core processes. in this area, our subsidiary allfinanz limited provides modern internetbased software solutions for automated underwriting in life insurance. in addition to sharing our underwriting expertise, we can thus also help our clients achieve leaner application and underwriting processes.
Development in individual key markets in germany, demand for mortality risk coverage has been stagnating in recent years. We anticipate that the discussion revolving around the introduction of unisex pricing will generate new impulses. an important part of our business in germany is occupational disability reinsurance, and we assist our clients in underwriting, managing claims and, above all, developing future-oriented product concepts in this area.
in the usa, the gross premium posted by our subsidiary Munich american Reassurance company remained stable at €1.7bn (1.7bn), enabling it to retain its position among the leading life reinsurance companies in this important market for us. Despite the intense competition, we see good opportunities for moderate growth arising in the area of pure mortality covers from the provision of reinsurance capacity tailored to our clients’ requirements. the result developed well.
our subsidiary Munich Reinsurance company of australasia ltd., which writes life reinsurance business in australia and new Zealand, has recorded strong growth in recent years. in 2011, it increased its premium income by a further 26.8% to €487m (384m). While claims experience in our core business – mortality risks coverage – was favourable, cases of disability are becoming more expensive market-wide due to a significant lengthening of benefit payment periods. for strengthening the reserves of portfolios largely in run-off, we therefore incurred expenses of around €150m. the increase is largely due to the provision for annuity claims, the remainder being apportionable to the provision for future policy benefits and the iBnR reserve.
// growth in premium income of 7.7% to €16.9bn // combined ratio of 113.6%, mainly due to severe losses from natural catastrophes // investment result of €2,157m // consolidated result of €371m
at €5,126m (2,228m), the total burden from major losses was significantly higher than the projected amount and the multi-year average. aggregate losses from natural catastrophes came to €4,544m (1,564m), representing 28.8 (11.0) percentage points of net earned premiums and thus well above the expectation basis. 2011 produced the highest bill for natural catastrophe losses ever for the reinsurance industry. the March earthquake in Japan was the largest individual loss in 2011 at around €1.5bn. in terms of Munich Re’s loss burden, the earthquake was one of the largest losses in our history, alongside the attack on the World trade center in 2001 and hurricane Katrina in 2005. there were other major natural catastrophes as well, the most notable being the two earthquakes in new Zealand in february (€1,307m) and June (€161m). these figures include the reserve strengthening of €386m we undertook in the fourth quarter. We were also affected by the widespread flooding in thailand (€547m), which reached its peak in october and november. in australia, we incurred high claims expenditure from the January floods in Brisbane (€204m) and cyclone Yasi in the northeast of the country in february (€91m). in the usa, we were hit by losses from hurricane irene on the east coast in august (€144m) and from tor nadoes in april (€133m) and May (€69m). also significant was the storm-induced shipping accident involving an oil production and storage vessel in the north sea.
Key figures gross premiums written €m 16,903 15,701 14,987 share of gross premiums written in reinsurance % 63.8 66.5 68.8 thereof: natural catastrophes1 percentage points 28.8 11.0 1.4 consolidated result of €371m 1 the figure for 2011 is not adjusted for relief of 1.3 percentage points from economic risk transfer to the capital markets.
premium at €16.9bn (15.7bn), we posted higher premium income in property-casualty reinsurance in 2011 than in the previous year, representing growth of 7.7%. if exchange rates had remained the same, premium would have risen by 10.2%. approximately €14.1bn or 84% of premium was written in foreign currency, of which 42% was in us dollars and 13% in pounds sterling. 16% of our premium volume was generated in euros. in contrast to the previous year, the development of the euro against other currencies had a negative effect of €395m on our premium income.
the renewal negotiations for reinsurance treaties in 2011 produced satisfactory outcomes in a difficult market environment. thanks to our capital strength and our risk expertise, we succeeded in achieving good terms and conditions, slightly increasing the profitability of our portfolio. capacity continues to be available in sufficient quantities in most lines and regions. overall, pressure on prices persisted, but the slight downward trend was not maintained and a stabilisation of prices was evident. particularly in loss-affected classes and regions, considerable price increases were possible. the events in australia and the earthquake in Japan, for instance, meant that prices for natural hazard covers there rose by up to 50%. Besides this, prices in us natural catastrophe business showed improvements of around 10% in the July renewals. Marked rate increases were also implemented in the offshore energy sector, which had been hit by the Deepwater horizon loss in 2010.
Combined ratio by property-casualty division germany, asia pacific and africa 195.3 102.5 100.1 106.5 106.0 global clients and north america 95.9 99.6 88.8 101.4 95.8 premium growth of 7.7%
1 the figure for 2011 is not adjusted for relief of 6.6 percentage points from economic risk transfer to the capital markets.
a portion of our treaty business was written at differential terms, i.e. at better terms and conditions than those obtained by other reinsurers, or in the form of exclusive treaties where we were the sole reinsurer.
trends and growth in selected markets and at our subsidiaries premium income in germany fell, totalling €1,030m (1,303m) in 2011. With declines in original rates persisting and resulting in inadequate prices in reinsurance, we withdrew from business where we could not obtain risk-commensurate terms of trade.
in motor insurance, the class of business with the largest premium volume, initial trends towards rate increases are apparent, but these are not sufficient to reverse the negative market result. Margins are still at a very low level and under further pressure from the persistently low interest rates and the claims frequency, which has not fallen further. as a consequence, we reduced our motor business again in 2011, above all in the non-proportional liability segment.
Gross premiums written in property-casualty germany, asia pacific and africa 4,231 3,268 2,836 3,152 2,917 global clients and north america 5,756 6,140 6,058 5,086 5,751
Regulatory developments in india continue to give cause for hope that the market will be opened to international reinsurers. given the medium- and long-term growth potential – also in the reinsurance sector – Munich Re is continuing to keep all its strategic options open.
in latin america, we remain the market leader, with premium income climbing to €838m (691m). this positive development was due in particular to natural catastrophe covers, where we were able to achieve organic growth and another increase in rates. Beyond this, we succeeded in expanding our profitable motor own damage business. as in the previous years, the result benefited from our profit-oriented underwriting policy and, in particular, a low claims burden in the caribbean.
our subsidiary Munich Re do Brasil Resseguradora s.a. increased its premium volume again to €273m (163m), thus maintaining a leading position among the international reinsurers in the market. at 93.8%, the combined ratio was higher than in the previous year (83.2%).
in our global clients and north america Division, we registered an overall reduction in premium. We took advantage of growth opportunities in existing client accounts and selected products, but terminated treaties that no longer met our pricing requirements.
Results in us business were influenced by natural catastrophes in 2011, especially tornadoes in spring and hurricane irene in august. Despite these loss events, both Munich Reinsurance america, inc. and the american Modern insurance group (aMig) posted a positive result. the extensive measures to improve efficiency launched two years ago are having a favourable effect on the companies’ expense ratio. at €117m, the hsB group’s result for the year was again very pleasing. Besides this, a.M. Best also raised the hsB group’s rating from a+ (superior) to a++ (superior) in autumn. our strategy of combining insurance and reinsurance activities in the usa again proved successful, and we intend to continue along this path in future. thanks to good results in the previous years, our us operations were able to pay a dividend of us$ 700m to Munich Reinsurance company in 2011.
the Munich Reinsurance canada non-life group – Munich Reinsurance company of canada and temple insurance company – again made a positive contribution to the result, despite a large loss at slave lake in alberta, involving the destruction of several hundred houses in the town by a wildfire. our primary insurance subsidiary temple insurance company currently has a premium income of can$ 158m (182m), thus contributing 44.6% to the premium volume of our canadian non-life group.
Munich Reinsurance Canada Non-Life Group 2011 Prev. year Change % gross premiums written can$ m 354 399 –11.3 property-casualty can$ m 354 399 –11.3 net earned premiums can$ m 282 298 –5.4 property-casualty can$ m 282 298 –5.4 loss ratio property-casualty % 62.8 60.7 expense ratio property-casualty % 32.6 34.6 combined ratio property-casualty % 95.4 95.3 Result for the year can$ m 66.1 59.6 10.9
in marine reinsurance, premium income was higher than in 2010. premium development in reinsurance was negative due to our consistent focus on profitability in a competitive market with a generally inadequate price level. By contrast, we are expanding our profitable business in primary insurance, especially via our lloyd’s Watkins syndicate in london. some €475m (392m) of the total premium income of €1.3bn was earned by Watkins. the numerous natural catastrophes and additional losses from single risks particularly affected the results of traditional marine reinsurance business and should lead to appreciable rate increases for 2012.
the significantly reduced number of insolvencies after the financial crisis enabled us to release reserves, especially from underwriting years 2009 and 2010. as a consequence,
New Reinsurance Company Ltd.1 2011 Prev. year Change % gross premiums written sfr m 1,402 1,289 8.8 thereof property-casualty sfr m 772 702 10.0 net earned premiums sfr m 1,148 1,162 –1.2 thereof property-casualty sfr m 641 590 8.6 loss ratio property-casualty % 75.9 57.2 expense ratio property-casualty % 21.9 26.9 combined ratio property-casualty % 97.8 84.1 Result for the year sfr m 108.9 136.3 –20.1 1 financial statements in accordance with national accounting law.
Risk trading places insurance risks on the capital and retrocession markets. We provide this unit’s services primarily for our clients but we also use them for our own purposes when it is expedient to lay off insurance risks from the risk management perspective. in one client transaction in the first half of 2011, we placed us hurricane capacity of us$ 200m with investors, while in three transactions of our own we acquired protection for the scenarios european windstorm and us hurricane (Queenstreet ii−iV, with volumes of us$ 100m, 150m and 100m). We are now one of the largest european investors in insurance-linked securities (ils), i.e. instruments which transfer insurance risks to the capital markets. the earthquake in Japan triggered the total loss default of such a security in May – the Muteki catastrophe bond through which earthquake risks had been placed on the capital markets for a Japanese client. as a consequence of the loss event, the client received the catastrophe bond’s nominal amount of around €200m. While the payout to the client is included in the technical result, relief from the capital market cover is contained in the investment result. so in this topical case, the catastrophe bond proved to be an efficient risk-hedging instrument for Munich Re and its client.
the consolidated result in life primary insurance for the past financial year amounted to €113m (172m), largely reflecting the write-downs of greek government bonds that clearly exceeded the write-ups of our interest-rate hedges. our operating result decreased by 42.0% to €206m (355m). the technical result was also down.
New business in life insurance 2011 Prev. year Change €m €m % Germany single premiums 1,454 1,609 –9.6 annual premium equivalent1 497 492 1.0
// growth in premium income of 4.0% to €5.7bn – substantial increase in new comprehensive health insurance business // investment result of €1,301m // consolidated result of €244m // Market consistent embedded Value (MceV) at €1,747m
the 2007 health reform in germany changed the conditions in comprehensive health insurance with effect from 1 January 2009. on the one hand, policyholders are now able to switch from one provider to another and take ageing reserves with them to some extent. on the other hand, insurers cannot cancel the policies of clients who have failed to pay their premiums and must continue to indemnify them for certain treatment. this is taken into account in the MceV model on the basis of current, as yet very limited experience, but future client behaviour is still difficult to estimate. Discussions regarding the german healthcare system are ongoing, and future legal reforms could naturally lead to significant changes in our MceV figures. further explanations regarding MceV are available on page 60.
Munich Re gRoup annual RepoRt 2011 premium as from the beginning of 2011, premium volume in health climbed by 4.0% to €5.7bn (5.5bn). Business with supplementary benefit covers rose by 4.1%, whilst premium income in comprehensive health insurance expanded by 3.4%, reflecting the abolition as at 1 January 2011 of the three-year waiting period for switching to private health insurance, which had a stimulating effect on new business. new comprehensive insurance business increased by 18.4% year on year. By contrast, new business in supplementary health insurance was down 30.6%, the previous year’s figure having been boosted by the conclusion of a major contract. in travel insurance, which is included in the health segment, we registered a rise in premium volume of 13.5% in 2011. the unrest in the arab world and earthquake in Japan hardly had an impact on the travel insurance sector.
// premium volume of €5.6bn, an increase of 2.5% // combined ratio of 97.8% impacted by severe weather events // investment result of €711m // consolidated result of €405m
Key figures gross premiums written €m 5,637 5,498 5,131 share of gross premiums written in primary insurance % 32.0 31.4 30.9
Munich Re gRoup annual RepoRt 2011 premium in the past financial year, premium volume was up by 2.5% to €5.6bn (5.5bn). We posted growth of around the same level in german and international business. in the case of the latter, there were significant increases, above all in poland. But the sale of eRgo’s portuguese subsidiary, whose premium income was no longer included in the income statement for the fourth quarter of 2011, and rehabilitation measures in turkey and south Korea, had a curbing effect. in german business, our premium income in the year under review totalled €3.3bn (3.2bn), an increase of 2.4%. as in the previous year, overall growth was driven by commercial and industrial insurance, with premium volume up 8.1%. this increase was partly attributable to industrial cover in the netherlands and austria, which we transact from germany. in personal accident insurance, we recorded a decline of 3.3% for the past financial year. Motor insurance, by contrast, saw a rise of 3.6% in premium from January to December, reflecting our rehabilitation measures and rate increases at the beginning of the year. in legal protection insurance, we were able to achieve slight premium growth of 0.4% in germany.
// Marked increase in premium income of 19.3% to €6.1bn in the year under review // combined ratio of 99.4% from January to December // investment result of €164m // consolidated result of €45m in the year under review; heavy burden from foreign exchange losses in recent years, the global health market has become one of the fastest-growing sectors of the economy in terms of both care provision and insurance. this trend will become even more pronounced in the future due to advances in medicine, improved life expectancy and the development of healthcare markets in emerging countries. in order to maximise the opportunities this presents, Munich Re has pooled its specialists for international health business in a separate business field: Munich health.
the combined ratio for the Munich health segment was 99.4% (99.7%). this ratio relates only to short-term health business, not to business conducted like life insurance, which made up 10.9% (12.5%) of gross premiums written in the year under review. in reinsurance, the lower combined ratio is attributable to an overall improvement in claims experience owing to business restructuring and new business. in primary insurance, the combined ratio was higher than in the previous year, primarily because business performance at sterling deteriorated.
Gross premiums by market region 64% (53 %) north america (na)
Designated as at fair value through profit or loss fixed-interest – – – – 161 233 non-fixed-interest – – – – 4 8
Developments on the capital markets have recently been shaped by uncertainty over the further course of the debt crisis. on the stock markets, the euRo stoXX 50 lost around 17% in the period under review. the performances of the bond markets varied greatly: whilst yields on german and us government bonds fell to historically low levels, risk spreads rose both on government bonds from countries such as portugal, greece and ireland, and on corporate bonds. the carrying amount of our investments showed a rise since the beginning of the year, partly due to increases in deposits re tained on assumed reinsurance business and favourable effects from the translation of our portfolios in foreign currency into euros (especially our investments in us dollars) and partly due to improved market values of our fixed-interest securities. the positive impact of the strong price gains in our large portfolio of bonds from germany and the usa clearly outweighed the price losses on southern european government bonds. there were decreases in the value of our relatively small investment volume in equities. our return on investment totalled 3.4%1 (4.5%).
Distribution of investments by type 1.9% (2.2%) Real estate equity funds 57.7% (58.7%) fixed-interest securities 0.6% (0.6%) participating interests investments
We gear the selection of our investments, based on economic criteria, to the characteristics of our technical provisions and liabilities. in addition, we use derivative financial instruments for portfolio management and hedging against fluctuations on the interest-rate, equity and currency markets. the high volatilities in the markets are currently resulting in substantial changes in the values of derivatives, which under ifRs accounting we recognise in profit or loss, i.e. as income or expense in our income statement.
our on-and off-balance sheet valuation reserves (without owner-occupied property), which could be turned into realised gains upon disposal of the relevant investments, climbed from €7.4bn to €11.2bn.
at the reporting date, our investment portfolio continued to be dominated by fixedinterest securities, loans and short-term fixed-interest investments. some 48% of these are government bonds or government-guaranteed securities, of which 56% are from eurozone countries.
in the interests of optimising the structure of our portfolio, we hold a small quantity of credit default swaps, thus increasing our exposure to france and the netherlands by around €100m in each case.
Valuation reserves not recognised in the balance sheet 31.12.2011 Prev. year Valuation Fair Carrying Valuation Fair Carrying €m reserves value amount reserves value amount tangible assets in renewable energies 7 267 260 – 46 46 1 including owner-occupied property.
We generally base fair values on quoted prices in an active market (level 1). in cases where these are not available, and for our loans, the fair value is based on recognised valuation methods in accordance with the present-value principle (level 2).
Available for sale germany 11,730 12,572 12,572 842 other eurozone countries 2,518 2,441 2,441 –77
portugal – – – – spain – – – – other eurozone countries 4 4 4 –
further information on the criteria for allocation to the individual levels of the fair value hierarchy can be found in the notes to the financial statements in the section on asset items under B – investments, Determining fair values.
our overall portfolio of eurozone government bonds has a good rating structure. as at 31 December 2011, 95% were rated a to aaa.
Rating of eurozone government bonds and government-guaranteed securities according to carrying amounts1 €m AAA AA A BBB Lower No rating Total 1 presentation based on economic view and not fully comparable with ifRs figures.
Period to maturity of eurozone government bonds and government-guaranteed securities according to carrying amounts1 €m Carrying amounts up to one year 5,075 over one year and up to two years 2,423 over two years and up to three years 3,070 over three years and up to four years 3,908 over four years and up to five years 2,581 over five years and up to ten years 10,558 over ten years 18,946 Total 46,561 1 presentation based on economic view and not fully comparable with ifRs figures.
Munich Re gRoup annual RepoRt 2011 around €17.1bn or 60% of the government bonds and government-guaranteed securities with a contractual period to maturity of more than five years are german government bonds. the following table shows the contractual period to maturity of our bonds from greek, irish, italian, portuguese and spanish issuers: information on the risks arising from eurozone government bonds and governmentguaranteed securities can be found in the risk report on page 136 f.
at the reporting date, 28% of our interest-bearing investments were in pfandbriefs and other securities and debt instruments with collateralisation, around 41% of which were german pfandbriefs.
We further reduced our limited exposure to banks to 8% of our fixed-interest portfolio. at the reporting date, our proportion of bank bonds from southern european states and ireland totalled only 2% of our bank portfolio. nearly half our receivables from banks were deposits, while a major portion of the remainder were senior bonds, i.e. bonds that
Period to maturity of government bonds and government-guaranteed securities of Greek, Irish, Italian, Portuguese and Spanish issuers according to carrying amounts1 €m Greece Ireland Italy Portugal Spain Total over one year and up to two years 11 60 29 – 56 156 over two years and up to three years 4 – 39 3 127 173 over three years and up to four years 4 38 23 32 38 135 over four years and up to five years 71 260 59 – 101 491 over five years and up to ten years 75 712 617 155 455 2,014 1 presentation based on economic view and not fully comparable with ifRs figures.
Munich Re gRoup annual RepoRt 2011 are not subordinated or subject to loss participation. subordinated bonds and lossbearing bonds made up only 1% of our fixed-interest portfolio.
our portfolio of asset/mortgage-backed securities, which are held chiefly by our reinsurance com panies, increased slightly by €0.1bn to €6.2bn. around 64% of these secur ities are rated aaa.
particularly in reinsurance, we have significantly increased the duration of our fixedinterest portfolio, thus gearing the duration position of the whole group more closely to our liabilities.
the carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies and associates at market value) decreased to €6.7bn (7.9bn), or 3.2% (4.0%) of our total investments. the volatile market conditions also caused us to extend our hedging against falling share prices at an early stage. at the reporting date, our equity exposure after hedging was 2.0% (4.4%) of our total investments. We hold inflation-indexed bonds with a volume of €6.1bn (7.2bn). these bonds, like investments in inflation swaps with a nominal amount of €4.0bn (0.9bn) and in real assets such as equities, real estate and commodities, diversify our portfolio and simultaneously increase the level of protection against inflation. We expanded our investments in the area of renewable energies. these investments totalled around €0.5bn at the reporting date.
in view of the planned participation of private creditors in a rescue package for greece, we have written down the value of our portfolio of greek government securities, amounting to €1,178m, to the market value. some €1,135m of this is assignable to our fixed-interest securities available for sale. the remaining amount is assignable to “loans”. no write-downs had to be made on our investments from the remaining eurozone countries. nevertheless, the continuing political discussion regarding a permanent euro rescue fund and the downgrading of several eurozone countries by rating agencies are fuelling uncertainty on the capital markets and harbour the risk of further write-downs.
after the price slumps on the stock markets, we had to make write-downs of €544m (277m) on our non-fixed-interest securities.
Total assets under management 31.12.2011 Prev. year Change % third-party investments €bn 10.4 10.2 2.0 2011 Prev. year Change % group asset management result €m 59 37 59.5
management report // Financial position munich re group annual report 2011
Analysis of our capital structure our primary insurance and reinsurance operations have a significant influence on our balance sheet: investments on the assets side serve mainly to cover technical provisions (75.4% of the balance sheet total). equity (9.4% of the balance sheet total) and bonds classified as strategic debt (2.0% of the balance sheet total) are the most important sources of funds.
Development of Group equity issued capital and capital reserve 7,388 7,388 7,388 consolidated result attributable to equity holders of munich reinsurance company 702 2,422 2,521 non-controlling interests 247 245 229
management report // Financial position munich re group annual report 2011 the increase in equity was attributable not only to the consolidated result but also to a rise in the reserve for currency translation adjustments and to higher net unrealised gains, which derived mainly from our fixed-interest securities available for sale. the dividend payment and share buy-back programme, on which we report on page 106, had a lowering effect on equity. our off-balance-sheet valuation reserves totalling €5.7bn (3.6bn) are dealt with on page 96.
technical provisions reinsurance business accounts for approximately 35% of technical provisions, primary insurance for about 64% and munich health for some 1%. in contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. this is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. the currency distribution of our provisions reflects the global orientation of our group. Besides the euro, our main currencies are the us dollar and pound sterling. We ensure that our business is sufficiently capitalised at all times by monitoring the situation continuously and taking suitable measures, which are dealt with in the section on capital management.
in addition, there were contingent liabilities, which are described in the notes to the financial statements under (49) contingent liabilities, other financial commitments.
Asset-liability management the structure of our technical provisions and other liabilities is the basis for munich re’s investment strategy, the main focus of which is asset-liability management: our aim is to ensure that economic factors influence the value of our investments and that of our technical provisions and liabilities in the same way, thus cushioning the effect of capital market fluctuations. For this purpose, we mirror important features of the liabilities, such as maturity patterns, currency structures and inflation sensitivities, on the assets side of the balance sheet by acquiring investments with similar characteristics if possible. in terms of currency positioning, exchange-rate fluctuations thus affect assets and liabilities in equal measure. currency translation losses on assets are largely offset economically by currency translation gains on underwriting liabilities. in this approach, any deviations from the structure of our liabilities are made consciously, taking due account of our risk tolerance and the risk spreads. Due to the unresolved debt crisis in 2011, we have again reduced the proportion of our investments in equities accordingly and have thus been affected less by the price correction on the stock markets. in addition, we are endeavouring in our asset-liability management to partially structure our investment portfolio in such a way that investments increase in line with rising inflation rates.
to configure our economic asset-liability management as effectively as possible, we also use derivative financial instruments to hedge against fluctuations on the interestrate, equity and currency markets. under iFrs accounting, we recognise these in profit or loss, i.e. as income or expense in our income statement. however, such recognition in the income statement is not provided for with regard to the related underlying transactions themselves. Despite our economically well-balanced underwriting and investment portfolios, these inconsistencies and other differences between the economic and balance-sheet perspectives give rise to considerable fluctuations in our iFrs investment, currency and consolidated result in connection with the high volatility currently prevalent on the capital markets. We explain the derivative financial instruments in the notes to the consolidated financial statements under (9) other securities at fair value through profit or loss.
management report // Financial position munich re group annual report 2011 also define an appropriate level of group economic capital as one which does not exceed that required for our operations. such a needs-based, risk-commensurate capital level makes a decisive contribution to financial discipline in all our business processes.
We derive our economic capital from iFrs equity by means of various adjustments. these are described on page 134 f.
We return surplus capital to equity holders mainly through attractive dividends, within the scope permitted by munich reinsurance company’s revenue reserves as determined under german commercial law, and provided this does not impair our strategic flexibility or overall capital strength. alongside dividend payments, we still generally consider share buy-backs an important instrument of active capital management, even if we have currently discontinued these in view of the difficult environment.
Information in accordance with Section 315 para. 4 of the German Commercial Code and explanatory report of the Board of Management composition of the issued capital as at 31 December 2011, munich reinsurance company’s share capital of €587,725,396.48 was divided into 179,341,212 registered, no-par-value, fully paid shares. the rights and obligations deriving from them follow from the pertinent statutory requirements and articles of association. the shares are endowed with full voting and dividend rights, with the exception of the 1,752,462 shares held by munich re itself at 31 December 2011 (section 71b of the german stock companies act). each voting share carries one vote at the annual general meeting. With respect to the company, the only parties deemed shareholders in accordance with the german stock companies act (section 67) are those entered as such in the company’s register of shareholders.
restrictions on voting rights or the transfer of shares the listed registered shares are subject to transfer restrictions. the issuing of restrictedly transferable registered shares by munich reinsurance company dates back to the company’s foundation in 1880 and is a very common phenomenon in the insurance industry. restricted transferability means that these shares may be transferred to another holder only with the company’s consent, which, according to article 3 para. 2 of munich reinsurance company’s articles of association, is granted at the company’s discretion. since the share-trading processes have been made very efficient, the consent requirement does not lead to any delays in entry in the register. in recent decades, it has been granted without exception.
Warren e. Buffett and companies in his group informed us in accordance with section 21 of the german securities trading act (Wphg) that they hold a total share of 10.244% of munich reinsurance company’s voting rights. they notified us most recently, as at 12 october 2010, of the following direct or indirect shareholdings exceeding 10% of the voting rights: Shareholdings exceeding 10% of the voting rights
Direct indirect % holding holding Warren e. Buffett, usa 0.053 10.191 Berkshire hathaway inc., omaha, usa 10.191 oBh llc, omaha, usa 10.191 national indemnity company, omaha, usa 10.191
powers of the Board of management with particular regard to the option of issuing or buying back shares the powers of the members of the Board of management are defined in sections 71 and 76–94 of the german stock companies act. the Board of management has the following powers to issue and buy back shares (the complete wordings of the relevant resolutions and provisions in the articles of association can be viewed on our website): // the annual general meeting of 20 april 2011 authorised the company under agenda items 7 and 8, pursuant to section 71 para. 1 item 8 of the german stock companies act, to buy back shares until 19 april 2016 up to a total amount of 10% of the share capital at the time of the annual general meeting resolution (€587,725,396.48). the shares acquired plus other own shares in the possession of the company or attributable to the company in accordance with section 71a ff. of the german stock companies act may at no time amount to more than 10% of the share capital. the shares may, in accordance with the provisions of the authorisation, be acquired in various ways: the company may buy back shares amounting to a maximum of 5% of the share capital using derivatives. the Board of management is authorised to use shares thus acquired for all legally admissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights. among other things, the Board of management is empowered under section 71 para. 1 item 8 of the german stock companies act to retire the shares without requiring further approval from the annual general meeting.
the above-mentioned authorisations to issue or buy back shares are within the range of what is customary in the market and allow the company to engage in active capital management. they enable it to cover any capital needs, even at short notice, for taking swift and flexible advantage of market opportunities in different fields of business. as demonstrated by the company’s share buy-backs, the authorisations also offer the opportunity to return to the equity holders capital that is no longer required.
significant agreements which take effect, alter or terminate upon a change of control following a takeover bid, and resultant implications
Group solvency munich re is subject not only to the supervisory requirements applying to individual insurance companies but also to supervision at group level. Furthermore, munich reinsurance company as the parent has introduced suitable control methods and, when reporting to BaFin, which is also responsible for the group, includes supplementary aspects at group level, such as shareholdings, consolidated financial data and intragroup transactions.
solvency in the case of insurance companies is generally understood to be the ability of an insurer to always meet the obligations assumed under its contracts. in concrete terms, this means an insurance company must fulfil specific minimum capital requirements. the aim of the “adjusted solvency” rules is to prevent the multiple use of equity to cover risks from underwriting business at different levels of the group hierarchy. to calculate the adjusted solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the iFrs consolidated financial statements. to determine the eligible capital elements, the iFrs equity is adjusted; in particular, it is increased by portions of the subordinated liabilities and reduced by intangible assets. munich re’s eligible capital is more than 2.4 times the legal requirement.
in the consolidated cash flow statement, the consolidated profit of €712m is used as the starting point for determining the cash inflows from operating activities. the consolidated result is adjusted by €9,857m to take account of the higher technical provisions. in reinsurance, the provision for outstanding claims increased owing to high claims costs for major losses. the net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows – are essentially attributable to the disposal of securities available for sale and to derivatives.
the cash outflows for investment activities were determined by payments for the acquisition of investments. they exceeded the inflows from the sale and/or maturity of investments by €3,223m. in 2011, ergo sold its shares in the fully consolidated capital square pte. ltd. for €465m. ergo also sold its shares in its fully consolidated subsidiaries Victoria-seguros de Vida s.a. and Victoria-seguros s.a. the sale took place indirectly via the sale of the parent company of these subsidiaries. the sales price prior to final determination is €69m. in the cash flow statement, we have reduced the sales prices by the cash held by the companies sold. on 1 January 2011, munich re acquired 100% of the shares in Windsor health group, inc. via our subsidiary munich health north america, inc. for a total of €99m. also in the 2011 financial year, via its subsidiary mr rent-investment gmbh, munich, munich re acquired 100% of the voting shares in 11 wind park com panies in germany and in two photovoltaic solar park
Adjusted solvency 31.12.2011 Prev. year change % eligible capital of the group €bn 22.8 22.2 2.7 adjusted solvency ratio % 245.3 260.5 consolidated cash flow statement 2011 Prev. year change €m €m % cash flows from operating activities 6,075 8,836 –31.2 cash flows from investing activities –3,525 –7,696 54.2 cash flows from financing activities –2,974 –1,384 –114.9 cash flows for the financial year –424 –244 –73.8
// munich re as clients’ first port of call for all risk matters // step-by-step implementation of ergo’s brand proposition “to insure is to understand” // ongoing development of innovative coverage concepts for new and complex risks // corporate responsibility for employees, society and the environment other success factors
reinsurance as reinsurers, we apply our extensive risk knowledge to find individual solutions that meet our clients’ diverse requirements and to add value. Knowing our clients’ needs, we devise innovative risk transfer solutions with them, and aim to expand risk competence through strategic partnerships, thus providing our cedants with the full range of underwriting products. We regularly assume a pioneering role in new coverage concepts – for example, in preparing european cedants for the introduction of solvency ii. in addition, we offer our clients consultancy and other risk-related services. We reach new client groups through our operating field risk solutions, where we provide customised solutions for corporate clients and industrial firms. predominantly in north america, but also in asia, we generate business via managing general agencies (mgas). Beyond this, our target groups include public-private partnerships and insurance pools.
With branches and subsidiaries around the world, we ensure that our clients can always find us where they need us.
munich health munich re’s global healthcare insurance and reinsurance expertise is combined under the munich health brand. munich health devises integrated solutions specifically tailored to clients’ needs, thus realising the growing business potential in each market. We react flexibly and logically to changing market conditions. in response to the changes resulting from the us healthcare reform, munich health acquired the Windsor health group at the beginning of 2011 in a strategic realignment geared to integrated provision of health cover in the senior segment.
asset management meag is present in europe, asia and north america and centrally manages all important asset classes such as bonds, equities and real estate. our investment experts adopt a stringent, risk-based approach with the aim of achieving above-average performance over the long term. Key factors in this regard are the close cooperation and trust they enjoy with clients in the group and with other institutional investors, the good service they provide to private investors, and meag’s long-standing experience in handling investment risks.
Research and development an in-depth understanding of risks is the basis of our business. that is why we analyse known risks on an ongoing basis to determine whether there have been any changes in their structure or occurrence probability. We focus on identifying new risks at an early stage and offer solutions for known risks that have hitherto been uninsurable.
last but not least, in many countries we also work closely with governments and specialist insurance providers on such projects as setting up catastrophe funds for property risks. the most recent example is an insurance solution devised by munich re for the mexican government to cover infrastructure damage from natural catastrophes.
primary insurance to meet consumer requirements as extensively as possible, we are also taking an in novative approach in our primary insurance product development. in 2011, ergo Direkt launched an insurance for dental prostheses in germany which, for the first time, enables clients to make provision retroactively rather than prospectively: the cover includes the costs of treatment that is scheduled or has already begun.
During the financial year, we defined the group-wide cornerstones for our future diversity management. active diversity is conducive to commercial success. We promote and value different mindsets, mentalities, experience and specialist knowledge throughout the group: that is the core of our new global diversity policy. the practical implementation of our ambitious programme is reflected in many current initiatives. in expansion of innovative coverage concepts
Munich Reinsurance company eRGO MeAG % 2011 Prev. year 2011 Prev. year 2011 Prev. year over one year and up to five years 21.2 20.6 11.3 9.7 27.1 36.5 over five years and up to ten years 25.1 28.7 14.2 17.0 27.0 30.8 over ten years and up to 20 years 33.9 29.1 38.6 41.3 32.4 23.3 group
Percentage of female staff at main Group companies in Germany 1 as from 2011, only management positions with line management responsibility are captured in the data; the percentage for 2010 has been adjusted accordingly.
We have refined our strategic human resources planning and, at our munich location, successfully introduced a method for gaining a differentiated picture of the status and demographic trend of our employee portfolio. this produces valuable findings for further personnel requirements and the competences needed – findings of fundamental importance in view of the growing challenge of staffing positions with the right specialists.
With the renewed internal company agreement on family and career, munich re (munich) has improved the conditions for parental or care leave. going beyond the legal requirements, we guarantee parents who return to work within 12 months rein tegration in their previous positions, also in a part-time capacity. Besides this, we have expanded company-sponsored childcare provision, giving financial support to childcare organised by parents on their own initiative. at our international locations, too, a range of programmes are in place, such as paid family leave, flexible part-time arrangements and financial assistance.
primary insurance in 2011, guiding principles were introduced to improve leadership culture and establish a common understanding of leadership. the guiding principles were communicated nationally and internationally and will be gradually integrated into ergo’s human resources toolbox. We have, for example, devised “upward feedback” for assessing leadership behaviour and introduced this for top management. With the project “uniform hr systems for ergo”, we have harmonised working time agreements, remuneration systems, fringe benefits and appraisal interviews for non-executive desk staff in germany – a further step towards strengthening employees’ identification with ergo as one “family”.
We see it as a central task of our human resources work to promote the diversity of our staff and use this as an asset to create value. With the ergo project “Diversity – promoting equal opportunity”, we are currently implementing systematic diversity management. in 2011, the project focused on significantly increasing the proportion of women in leading positions.
Corporate responsibility a forward-looking and responsible approach is an integral part of munich re’s corporate strategy. our understanding of corporate responsibility is underlined by our membership of the un global compact, whose ten principles on environmental protection, labour rights, human rights and anti-corruption have formed the framework of our corporate responsibility strategy since 2007.
our current strategy, revised in 2011, has three main focal areas. Firstly, our aim is to integrate ecological, social and governance factors (so-called esg factors) in our core business and investments to a greater extent. secondly, in order to minimise the impact we have on the environment, we have in place a group-wide environmental management system and are successively making our business operations carbon- neutral. thirdly, in the area of corporate citizenship, we are committed to serving the communities in which we work and operate. our corporate responsibility portal provides details of our activities throughout the group in the field of sustainability, in compliance with the international guidelines of the global reporting initiative. our inclusion in internationally recognised sustainability indices, such as the Dow Jones sustainability and the Ftse4good, as well as our first place in the newsweek green ranking, attest to the successful realisation of our strategy.
in our core business, we accept global challenges ranging from climate change and demographic trends to combating poverty in developing countries, offering innovative insurance solutions wherever possible. For loss prevention in connection with extreme weather events, munich re supports its clients with such tools as the nathan (natural hazards assessment network) risk suite. Besides this, munich re and ergo participate in public-private partnerships to help provide solutions for people whose economic existence would be ruined by events such as natural disasters because they lack insurance cover. in the philippines, we protect the loan portfolio of smallholder cooperatives against extreme weather events like typhoons. and via ergo, our group
Risk governance and risk management system risk management organisation, roles and responsibilities
Organisational structure to ensure that our risk management operates efficiently and effectively, we have established specific risk management functions and bodies. our integrated risk management (irm) Division supervises risk management group-wide with the support of decentralised structures in all units of the group. it is headed by the chief risk officer (cro), who, like the local cros at individual companies, is supported by interdisciplinary teams of highly qualified staff. our extensive documentation, guidelines and instructions ensure that staff in our risk management structure and the group as a whole are kept informed of our risk strategy, organisation and processes, enabling the risks incurred to be actively controlled.
the group risk committee and the group investment committee are extensions of the group committee
// munich re’s risk situation in 2011: manageable and under control // solvency ratio still comfortable // integrated system worldwide for managing risks risk report
management report // risK report munich re group annual report 2011 in the 2011 financial year, the remuneration committee was set up in accordance with the new german statutory order on remuneration in the insurance industry (VersVergV ) and is respon sible for designing, reviewing and enhancing the systems for remunerating staff, with a particular focus on variable incentive components.
segment level For reinsurance, a dedicated risk committee – the global underwriting and risk committee (gurc) – has been formed from within the ranks of the reinsurance committee.
risk management for primary insurance is mainly decentralised to ergo irm, and supported by risk management structures in all areas of ergo. the ergo Board of management has established the ergo risk committee as a decision-making body.
Implementation of strategy and the risk management cycle the risk appetite defined by the Board of management is reflected in our business planning and integrated into the management of our operations. in the event of capacity shortages or conflicts with the systems of limits and rules, there are fixed escalation and decision-making processes which ensure that business interests and risk management aspects are reconciled. if necessary, risks are ceded or hedged by means of reinsurance, derivatives or other forms of risk relief.
We are constantly enhancing our risk measurement tools, which are tailored to each segment. our lead risk measure is based on economic principles. We regularly compare the results produced by our risk model with those of supervisory authorities, rating agencies and commercial modelling companies at a number of levels, including group, segment, legal entity and risk type. We also regularly perform benchmarkings of our risk-model results and participate in industry surveys to constantly challenge and refine our risk measurement tools.
our financial strength is an important criterion for the success of our business. as far as our financial strength ratings are concerned, our aim for the present is the secondhighest rating from each of the main agencies that rate us. meeting this objective is a supplementary parameter of our corporate management and is monitored at regular intervals. We currently assume that our financial strength, our good competitive position and our sophisticated risk management will continue to be recognised through correspondingly high ratings.
risk analysis and assessment are carried out at the highest level in irm, in the form of a consolidated group view, taking into account limitations on capital fungibility. they are based on the analyses prepared in the risk management units of our reinsurance, ergo, munich health and asset management operations. Besides this, irm is responsible for checking and validating the analyses of downstream units, working closely with numerous units and experts within, and in some cases outside, the group. this provides us with a quantitative and qualitative assessment that considers possible interactions between risks.
control and monitoring systems our internal control system (ics) is a uniform worldwide system for managing operational risks integrated across all risk dimensions and areas of the group that both meets group management needs and complies with local regulations.
the Board of management has group-wide responsibility for the ics, which falls structurally under the responsibility of the cro. experts and staff in our specialist areas are responsible for the detailed content of the system and perform the risk and control assessments at least annually.
For each of munich re’s business segments, the ics delivers a risk map, which systematically links the significant risks and processes and shows all relevant risk control points. By making our risk situation transparent in this way, we can focus on and react rapidly to possible weaknesses or changes in internal and external requirements. this means that we are able to identify risks at an early stage, address control shortcomings immediately and take effective remedial action.
our financial accounting and reporting is subject to carefully defined materiality thresholds to ensure that internal controls are appropriate. significance, risk experience and compliance are taken into account in determining the thresholds. all risks significant for financial reporting from a group perspective are integrated into the ics in accordance with uniform criteria.
By means of an accounting manual and regular circulation of information on changes required, munich re ensures that uniform rules are applied throughout the group for the treatment, valuation and disclosure of all items in the balance sheet and income statement. any amendments are subject to a stringent procedure as regards timing, responsibilities and circulation of information.
management report // risK report munich re group annual report 2011 risk reporting internal risk reporting provides all members of the Board of management with regular information on the risk situation, as regards both the individual risk categories (on going ) and the entire group (quarterly). the audit committee of the supervisory Board and the german Federal Financial supervisory authority (BaFin) also receive the quarterly internal risk report. early-warning mechanisms thus ensure that negative trends are identified in sufficient time for countermeasures to be taken.
significant risks according to our classification, significant risks are risks that could have a long-term adverse effect on munich re’s assets, financial situation or profitability. We have applied this definition consistently to the individual business units and legal entities, taking account of their individual risk tolerance. there are significant risks in the following risk categories: Underwriting risk: Property-casualty insurance this is defined as the risk of insured losses in property-casualty business being higher than our expectations.
in particularly critical areas, the underwriting authorities granted to the operating units are restricted by mandatory group-wide instructions or limited capacity budgets.
reserve risk the estimation of reserves is subject to uncertainty due to the fact that the settlement of claims that have arisen before the balance sheet date is dependent on future events and developments. unforeseen loss trends resulting from court rulings, changes in the law, differences in loss adjustment practice, medical and long term care, and economic factors such as inflation can have a considerable impact on loss experience.
Underwriting risk: Life and health insurance the underwriting risk in this case is defined as the risk of insured benefits payable in life or health insurance business being higher than expected. of particular relevance are the biometric and lapse risks. We differentiate between risks that have a short-term or long-term effect on our portfolio.
random annual fluctuations in insurance benefits or lapse behaviour can lead to shortterm falls in the value of the portfolio. this applies particularly to expenses, which can rise as a result of exceptional one-off events such as a pandemic. For pandemic scenarios, limits are derived from the risk strategy.
changes in client biometrics or lapse behaviour can give rise to risks that have a longterm effect on the value of a portfolio, making it necessary to adjust the actuarial assumptions. in health insurance, morbidity risks understandably dominate, whereas in life insurance mortality, longevity and disability risks are most important. the latter particularly affected us in australia in 2011. We calculate limits, derived from the risk strategy, for longevity scenarios as well as for pandemic scenarios.
if there is a lasting change in the actuarial assumptions applied in health primary insurance, it is generally possible to adjust the premiums for long-term contracts. however, under the new regulations for policyholders in germany, it is no longer possible for an insurer to terminate insurance contracts on the grounds of non-payment of premiums by the policyholder.
the remarks on underwriting guidelines and limits (see “property-casualty” section) also apply to life and health reinsurance business. in primary insurance, regular reviews of the actuarial assumptions by actuaries and the requisite amendment of rating rules ensure that risks and processes are effectively controlled.
our investments must comply with group-wide minimum standards as defined in our general investment guidelines. We also take account of risk-relevant restrictions on investments resulting from our risk strategy.
in addition to credit risks arising out of investments and payment transactions with clients, we actively assume credit risk through the writing of insurance and reinsurance business, for example in credit and financial reinsurance.
limit and early-warning systems and asset-liability management used to manage market risks group-wide counterparty limit system to monitor and control credit risks
management report // risK report munich re group annual report 2011 in order to take account of country risks other than the credit risk on government bonds, our advisory unit for strategic and economic issues, group Development, also produces specific country scores in addition to the pure default ratings. these cover the significant political and economic risks and those relating to a country’s internal se curity, and thus enable us to assess comprehensively additional country risks of varying importance for different business segments.
in the area of retrocession, we control the default risk through the retro security committee. the experts on the committee review the quality of our main retrocessionaires independently and on the basis of various criteria (e.g. minimum ratings, market data and capital requirements) and allocate appropriate limits for the counterparties based on underwriting guidelines laid down by the risk management function.
Operational risk munich re defines operational risks as potential losses resulting from inadequate processes, technical failure, human error or external events. these include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations, and disagreements with business partners.
our objective in managing liquidity risk is to ensure that we are in a position to meet our payment obligations at all times.
Strategic risk munich re defines strategic risk as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment. the existing and new potential for success in the group and the segments in which it operates creates strategic risks, which can lead to a significant long-term reduction in corporate value.
We monitor reputational risk through processes we have established in various internal units to identify it. as soon we become aware of the possibility of such a risk, our reaction is determined by the compliance officer and, if appropriate, the reputational risk committee, which was set up specifically for the purpose. the committee is made up of experts from various units and is headed by the compliance officer.
a further reputational risk arose when our internal audit unit uncovered a case of fraud in which an external service provider had used false information and manipulated statements of account to receive unjustified payments. When the suspected fraud had been confirmed by a full special investigation, munich re immediately filed criminal charges with the public prosecutors’ office in munich against the service provider, former employees and persons unknown.
We use our risk management to assess our risk situation on the basis of qualitative and quantitative factors. throughout the entire period under review, munich re’s risk situation was manageable and under control. our carefully implemented, modern risk management processes combined with our solid level of capitalisation at all times ensured the solvency and viability of the group expected by our clients and shareholders. in addition to the underwriting and capital market risks inherent in our business model, which we are able to assess very well so that we can be fully aware of the implications of taking them, there are inevitably a large number of other risks to which munich re – like every other undertaking – is exposed. the incidence of these risks is random and their occurrence probability and impact are generally difficult to estimate. We therefore closely monitor our environment and our own group to identify even these risks in good time and to take suitable measures to avert loss or damage.
management report // risK report munich re group annual report 2011 the table shows munich re’s economic risk capital and risk categories as at 31 December 2011. over last year, the economic risk capital rose by €3.7bn. the following factors contributed to the increase: // the economic risk capital for the property-casualty risk category, which includes credit reinsurance and bond business, increased by €0.6bn. significant factors were higher exposure in euros in nearly all natural catastrophe scenarios than in the previous year and new modelling for the “atlantic hurricane” scenario and for the earthquake scenarios in north america.
Prev. year change Segment Primary Munich diversifi­ €bn Group Reinsurance insurance Health cation Group
Diversification effect –9.3 –8.1 –2.0 – – –1.7 €3.7bn increase in risk capital
Diversification effect –3.4 –3.4 –0.1 – –3.6 –3.4 –0.2 – 0.2
in addition to the simple risk of random fluctuations resulting in higher claims expenditure in a particular year, the countervailing developments with a short-term impact that we model notably include the risk of above-average claims that could arise on the occurrence of rare but costly events such as pandemics.
however, particularly the products of life primary insurance, and a large part of our health primary insurance business, are characterised by their long-term nature and the distribution of results over the duration of the policies. We show the value of business in force and value sensitivities for such long-term portfolios in the notes to the consolidated financial statements under (37) risks in life and health insurance business. the countervailing development of risk drivers with a long-term impact, such as changes in the forecast mortality and disablement trends, can cause the value of the insured portfolio to fall (trend risks). in the notes to the consolidated financial statements (37), we show the effect on the values if they are calculated for individual risk drivers using specific modified assumptions. the risk modelling then attributes probabilities to each modified assumption and produces a complete profit and loss distribution.
Storm europe aggregate Var (return period: 200 years) €bn (before tax)
Atlantic Hurricane aggregate Var (return period: 200 years) €bn (before tax)
the market value of our investments in fixed-interest securities and loans as at 31 December 2011 was €173.3bn, representing 83.7% of the market value of munich re’s total investments. these securities thus made up the bulk of the portfolio. a detailed presentation of our fixed-interest securities and loans, including short-term investments, on a market-value basis can be found on page 99. ratings for these investments are provided in the notes to the consolidated financial statements under (5) loans, (6) other securities held to maturity, (8) other securities available for sale, and (9) other securities at fair value through profit or loss.
in our internal risk model, we calculate and allocate risk capital even for highly rated government bonds.
our provisions ceded to reinsurers and retrocessionaires were assignable to the following rating categories as at 31 December 2011: the shifts are mainly due to the change in rating of a small number of reinsurers/ retrocessionaires.
We compare the economic risk capital, which equates to munich re’s capital requirement, with the available financial resources that can be used to cover losses that exceed expectations. the available financial resources are calculated as the sum of the economic equity and the available hybrid capital. the economic equity is based essentially on munich re’s iFrs equity, modified by various economically appropriate adjustments.
the valuation reserves include adjustments to items in the property-casualty segment and for munich health that are not accounted for at fair value under iFrs, in particular to land and buildings and loans. We perform various valuation adjustments for property -casualty and life and health. in property-casualty reinsurance, we project future claims payments using actuarial methods. We discount estimated cash flows in property -casualty and for munich health, and add a risk margin derived in accordance with strict economic principles. in the case of business for which we show a market-consistent embedded Value (mceV), we regard the embedded value as capital available to cushion risks and consider that part which is not already included in iFrs equity. on the other hand, capitalised goodwill and other intangible assets are included in the group’s iFrs equity. as they might not retain their value in crisis situations, we deduct ceded share of technical provisions according to rating
management report // risK report munich re group annual report 2011 them when calculating available financial resources. We treat deferred tax assets recognised for loss carry-forwards under iFrs in the same way if they are not covered by an excess of deferred tax liabilities over deferred tax assets at the respective company.
the economic capital buffer is the amount by which the available financial resources exceed the economic risk capital. the economic solvency ratio is the ratio of the available financial resources (less announced but not yet completed capital measures such as the dividend payment for the relevant past financial year) to the economic risk capital. the table below shows the changes in the figures: though the economic solvency ratio of 111% (136%) is 25 percentage points lower than for the previous year, it reflects munich re’s capital strength. munich re’s economic risk capital, which produces the solvency ratio described above, corresponds to 1.75 times the capital that is likely to be necessary under solvency ii according to our internal risk model. Were we not to apply the safety cushion of 75% to the value at risk with a confidence level of 99.5% and merely to comply with the solvency ii standard, the economic solvency ratio would be 195% (238%).
Effects of the sovereign debt crisis as an insurer and reinsurer, we are an institutional investor and when we invest we have to accept certain credit risks in addition to market risks. this is clearly the case for corporate bonds, but there are also considerable risks in government bonds, which were considered safe in the past. the eurozone is our home market and we thus have substantial investments in euros. these are broadly diversified and are natural assets to hold to match the euro liabilities arising out of our insurance businesses. We use government bonds to match the currencies of our underwriting liabilities, especially for insurances of the person.
in monitoring the country risks, we do not simply rely on the customary ratings, but perform independent analyses of the political, economic and fiscal situation in those countries in which investments might potentially be made. our experts also evaluate and draw conclusions from the movements in the market prices of the bonds issued by the country concerned. on this basis and taking account of the investment requirements of the fields of business in the respective currency areas and countries, proposals for limits or action to be taken are submitted to the group risk committee. in 2011, limits for certain countries were reduced significantly a number of times because of the continually deteriorating financial situation in some european states. these limits are mandatory throughout the group for investments and the insurance of political risks, and any exceptions must be approved individually by the group risk committee.
in 2011, we reduced our investment exposures in countries on the euro periphery. our close monitoring includes investments guaranteed directly or indirectly by the states concerned. in addition, the Board committees regularly receive an overview of our investments for each country, detailing the debtors resident there.
management report // risK report munich re group annual report 2011 on the basis of defined stress scenarios relating to further developments in the sovereign debt crisis, our experts forecast potential consequences for the financial markets, the market values of our investments, and the present values of our underwriting liabilities. at group level, the high degree of diversification in both our investments and our liability structure together with our active group-wide asset-liability management counter any negative effects.
Pandemic another example of an overarching accumulation is a large pandemic, which would expose munich re, like other companies in the insurance industry, to risks resulting from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk with a detailed analysis of our overall exposure (scenario analysis), defining suitable limits.
climate change climate change represents one of the greatest risks of change for the insurance industry.
in our corporate climate centre, we analyse and assess this risk and are developing a holistic strategic approach. the findings are made available to all business areas and our asset-liability management function.
however, changes in the physical environment and new regulations resulting from climate change also open up many business opportunities. applying the knowledge we have accumulated over decades, we exploit these opportunities – for example, through new insurance products for renewable energy technologies.
We identify trends and faint signals in many ways, including systematic trend research, using munich re’s knowledge management, and regular structured discussions in our “emerging risks think-tank”. to ensure that emerging risks are understood, a group of experts reports on the issues involved from various perspectives. the group derives conceivable scenarios and analyses their possible impact on munich re, also looking at climate change – risks and opportunities
as a consequence of increasing global dependencies and the rapid spread of technological innovations, events with impacts difficult to identify using traditional scenario processes are occurring with greater frequency. examples in 2011 were the earthquake in Japan and the floods in thailand. not only did both natural catastrophes have a devastating impact on the population, infrastructure and economy in the regions affected, but worldwide supply chains were also hit, with industrial production being interrupted in far-away countries. such chains of events will take on greater importance in future. We therefore adopt a system-based approach to analyse dependencies in complex risks, for which munich re has developed its complex accumulation risk explorer software (care), enabling it to identify, and at least partially quantify, the risks and correlations. With care, we can improve the identification and structuring of complex accumulation risks for our own risk management and provide support for our clients, placing us in a strong position to meet the rising demand for reinsurance of these risks.
investigations by several us federal and state authorities into certain loss-mitigation insurance products have now likewise been discontinued, also with no payment or other obligations ensuing for munich re.
after the federal legislative procedure for the us Fairness in asbestos injury resolution act foundered in February 2006, several us states adopted legislation initiatives (tort reform), which in our view may have a positive effect on the settling of asbestos claims. Following revelations about often questionable asbestos-related disease diagnoses and the resultant lawsuits, a number of investigation committees are at work. similar questionable practices have come to light in silicosis lawsuits. these developments indicate that us legal practice is contesting abusive liability claims with increasing resolve. however, it is too early to say whether and to what extent this will have favourable implications for future loss development in the insurance industry, particularly as plaintiff attorneys are trying hard to repel the tort reform initiatives. We are currently still being affected by late-reported claims – in some cases for high amounts – for asbestosrelated diseases and similar liability complexes. though the total number of asbestos claims is declining, the number of severe cases of mesothelioma and other types of cancer has remained relatively constant in recent years.
at national level, implementation of the solvency ii Directive will bring about changes in german supervisory law. We continue to monitor progress in the revision of the german insurance control act initiated in the middle of the second quarter of 2011. munich re has played, and will continue to play, an active role and submit regular feedback on the drafts. since there are still outstanding issues in the underlying parallel solvency ii project at european level, some uncertainties remain concerning the final translation into national law.
Work is still in going on at global level on additional supervisory requirements for systemically important financial institutions (siFis). systemic importance is determined not by the fundamental significance of a sector for the economy, but by the impact the insolvency of a company could have on the real global economy. the discussions, which are being held primarily by the Financial stability Board (FsB), are currently focusing on the banking sector. the investigations relating to the insurance industry are not following the same timetable as those for banking and will be led by the international association of insurance supervisors (iais). the insurance industry believes that its core business does not give rise to a systemic risk. munich re is actively participating in the consultations. We will probably have to wait until mid-2012 before we can say with any certainty whether the insurance industry as a whole, and reinsurance companies and munich re in particular, could be subject to additional requirements. specific requirements for siFis could range from additional reporting to higher capital requirements.
Other legal developments on 1 march 2011, the european court of Justice issued a fundamental ruling on sex discrimination in insurance, which repealed with effect from 21 December 2012 a european regulation allowing member states to permit differentiation between males and females for the purpose of calculating insurance benefits and premiums. this applies even if consideration of gender is based on accurate actuarial and statistical risk data. the relevant legislation in member states, including germany, must be amended to comply with the ruling, which will lead to significant changes in the calculation of insurance benefits and premiums. to clarify outstanding issues, we are in close contact with the relevant people in the scientific community, the economy and european committees and bodies. We will take all necessary action before the deadline set by the european court of Justice.
munich re group annual report 2011 management report // prospects predictions about the forthcoming development of our group are based primarily on planning figures, forecasts and expectations. consequently, the following assessment of munich re’s development merely reflects our imperfect assumptions and subjective views. it follows that we cannot accept any responsibility or liability in the event that they are not realised in part or in full.
Economic environment it is our assumption that the existing uncertainties with regard to the sovereign debt crisis and consolidation of state finances will continue to dampen the business climate and consumer confidence in most industrial nations. Besides this, it is anticipated that 2012 – like 2011 – will see slower economic momentum in many industrialised countries, owing to high unemployment and efforts to reduce high household debt levels. We anticipate a brief recession in the eurozone. in the emerging economies, especially china and india, growth should again be strong. inflation rates will consequently be moderate in most industrialised countries and will only remain relatively high in a few emerging countries.
// expected return on investment of around 3.5% // unchanged long-term result target of 15% on risk-adjusted capital (rorac)
after tax over the cycle // consolidated result in the region of €2.5bn envisaged for 2012 // Dividend continuity for 2011 prospects
Far-reaching changes are also on the horizon in the medium term for the accounting of insurance contracts and financial instruments in our consolidated financial statements. the international accounting standards Board (iasB) is scheduled to publish its revised proposals for the future accounting of insurance contracts in the second half of 2012, which are intended to achieve a consistent international approach to the way insurance contracts are accounted for in financial statements. the new requirements for the accounting and measurement of financial instruments under iFrs 9, which eu companies may not apply yet, are to be finally adopted by the end of 2012. in addition to the establishment of a new model for the recognition of impairments and new regulations concerning the recognition of hedging relationships, they also envisage another amendment to the measurement rules already adopted.
the projected moderate growth in the global economy should be reflected in generally stable worldwide demand for insurance, albeit subject to considerable differences between individual regions and segments. overall, we predict a growth rate for global premiums in property-casualty insurance that is equivalent to that of global economic growth. given the huge need for private provision, however, demand for life insurance cover is likely to grow faster than the economy itself.
if there was a surprisingly strong economic recovery, the substantial interventions of the central banks and related expansion of the money supply might result in higher inflation, with corresponding inflation in claims costs for insurers.
By nature, the insurance industry is also particularly exposed to the consequences of economic and social policy decisions, an example being healthcare policy, with its substantial implications for private health insurance. moreover, the planned tightening of supervisory regulations in the financial services industry also harbours significant risks for the insurance sector: after the financial crisis, there are particular concerns that some of the changes – mainly geared to banking – could be transferred indiscriminately to the insurance industry, irrespective of the differences between the two business models. conceivable in this context are exaggerated capital requirements, excessive reporting obligations, and restrictions on individual types of business.
Munich Re’s development limits to forecasting results it is not only the obvious fluctuations in the incidence of major losses that make an accurate forecast of iFrs results impossible. the pronounced volatility of the capital markets and exchange rates as well as the particular features of iFrs accounting described on page 105 also make it difficult to provide a result forecast. thus, there may be significant fluctuations in the investment result, currency result and consolidated result – despite the fact that our assets are geared to the characteristics of our liabilities. in particular, a rising interest-rate level will tend to lead to lower results, and falling interest rates to higher results, than those forecast in these prospects. major share price losses could require write-downs on equities which would only be partially
Target 2012 gross premiums written €bn 48–50 consolidated result €bn approx. 2.5 return on investment % approx. 3.5 return on risk-adjusted capital (rorac) % 15
management report // prospects munich re group annual report 2011 offset by gains on derivatives. rises in share prices lead to write-downs on derivatives, which would at best be compensated for by gains on the sale of equities.
We see further growth opportunities in life reinsurance, and we are experiencing continuing demand for large-volume capital substitute solutions. opportunities will also derive from the privatisation trends in provision for old age, long term care and disability, from the need for asset protection, and from the dynamic expansion of the asian life insurance markets. For 2012, we expect an increase in gross premiums written to around €10bn and a technical result of around €0.4bn.
in property-casualty reinsurance, which is influenced worldwide by partially divergent price trends in various segments and markets, munich re will adhere to its clear, profitoriented underwriting policy and accept risks only at commensurate prices, terms and conditions.
essentially, the generally solid capitalisation of providers and buyers is shaping prices, terms and conditions in the international reinsurance markets. no broad-based increase in prices in property-casualty reinsurance was therefore observable in the renewals at the beginning of the year, but prices did rise – in some cases significantly – in the classes of business and regions in which companies suffered high losses. For the further course of 2012, we anticipate a continuation of this trend.
management report // prospects munich re group annual report 2011 the renewals at 1 January 2012 took place in a competitive market environment. on the primary insurance side, demand was stable. By contrast, reinsurance capacity remained in sufficient supply, despite the high burden from natural catastrophes in 2011 and the reduction in capital buffers available to the insurance industry. competitors maintained a disciplined approach, writing natural catastrophe business on a selective basis. there were appreciable rate increases in the usa and in regions recently exposed to high natural catastrophe losses, e.g. australia and southeast asia. all other regions and classes of business (e.g. european natural catastrophe business) saw unchanged prices or marginal increases (e.g. uK motor insurance business). in aviation business, however, prices remained under pressure. since the end of the last financial crisis, a certain amount of pressure on rates has also made itself felt in credit and surety business but it is uncertain what impact the persisting euro crisis will have on the expected pricing level.
a premium volume of €8.5bn of our treaty business was up for renewal. overall, we were able to increase premium income by around €230m (+2.6%). in accordance with our profit-oriented underwriting policy, we refrained from renewing business that did not meet our pricing requirements. in particular, we reduced our european property business, traditional marine business and selected subportfolios in non-proportional casualty business. on the other hand, we were able to expand profitable business with strategic partners, particularly in uK motor insurance business. We achieved price increases in the low double-digit percentage range for us natural catastrophe covers and appreciably higher ones in australia and asia. all in all, the profitability of our entire portfolio was enhanced by around two percentage points thanks to our active portfolio management. our regional diversification enabled us to take specific advantage of business opportunities in attractive markets and segments.
management report // prospects munich re group annual report 2011 primary insurance
We see good opportunities for primary insurance not only in evolving foreign markets but also in various sectors of our german domestic market. in munich re’s consolidated financial statements, we post the business for which ergo is responsible in the three primary insurance segments life, health and property-casualty. For 2012, we expect premium development in these segments to be varied, with a positive trend overall.
in the health insurance segment, we are aiming for a moderate increase in gross premiums written to nearly €6bn. We should be able to achieve premium expansion in both comprehensive health insurance and supplementary health cover, with the increase in supplementary health cover probably being more pronounced.
We expect that total premium income in primary insurance will be slightly over €19bn in 2012. gross premiums written will probably range between €17bn and €18bn.
For the ergo group, we expect a consolidated result of around €400m for 2012.
management report // prospects munich re group annual report 2011 munich health there are a host of growth avenues in the international healthcare markets, in particular due to advances in medicine and improved life expectancy. We intend to take advantage of these opportunities.
gross premiums written by munich health are likely to be slightly over €6bn in 2012. the combined ratio should be around 99%.
large-volume capital substitute solutions and the acquisition of Windsor will ensure continued growth. For 2012, we project a consolidated result of between €50m and €100m.
investments given the currently uncertain political situation, we are planning to further diversify our portfolio in order to be prepared as well as possible for different developments in the capital markets and the political environment. as things stand at present and given a continuation of the currently highly volatile development of the capital markets, we are looking to reduce our portfolio of government bonds in developed countries and invest moderately in corporate bonds and emerging market bonds. We are already prudently expanding our existing credit exposure, but we are not prepared to counter the decline in interest rates on low-risk bonds by taking inappropriate risks. in addition, we intend to marginally increase our investment in commodities. our proportion of investments in equities is currently small, but we are keeping open the option of responding to opportunities and very moderately increasing our share portfolio.
the structure of our bond portfolio is generally geared to the periods of our liabilities in order to limit the interest-rate risk. the duration will tend to rise slightly in 2012, as a result of which, at group level, our overall duration position will match our liabilities even more closely. We plan to continue to keep our portfolio of investments in inflationindexed bonds/inflation swaps constant in 2012.
We do not anticipate any rapid and significant increase in capital market interest rates; regular income from our investments is therefore likely to be relatively low – at just under 4% overall – for the financial years 2012 and 2013. We expect an annual return on investment of around 3.5%, taking into account the result from the disposal of investments, write-ups and write-downs as well as other income and expenses.
Further expanding the portfolio of investments in renewable energies and new technologies
our long-term target of a 15% return on our risk-adjusted capital (rorac) after tax across the capital-market and insurance cycle applies unchanged, but it will be difficult to achieve given the current low-interest-rate environment. as soon as the requirements of solvency ii and the new iFrss for insurance contracts and financial instruments have been finalised, we will gear our target performance measures to the key indicators from this new framework with its strong economic focus.
subject to the approval of the annual general meeting, we aim to pay the same dividend amount for the financial year 2011 as for the previous year, i.e. €6.25 per share.
munich Re GRoup annual RepoRt 2011 consolidated financial statements // contents consolidated balance sheet 154 consolidated income statement 156 statement of recognised income and expense 157 Group statement of changes in equity 158 consolidated cash flow statement 160 notes to the consolidated financial statements 161
consolidated financial statements // contents application of international financial Reporting standards (ifRss) 161 declaration of conformity with the German corporate Governance code in accordance with section 161 of the German stock companies act 161 Recognition and measurement 161 consolidation 166
consolidated financial statements // contents 06 // other securities held to maturity 200 07 // hierarchy for the fair value measurement of investments 201 08 // other securities available for sale 203 09 // other securities at fair value through profit or loss 205 10 // deposits retained on assumed reinsurance 209 11 // other investments 209 12 // ceded share of technical provisions 210 13 // other receivables 210 14 // deferred acquisition costs 212 15 // deferred tax 214 16 // other assets 216 17 // non-current assets and disposal groups held for sale 217
List of shareholdings as at 31 December 2011 in accordance with Section 313 para. 2 of the German Commercial Code 277 munich Re GRoup annual RepoRt 2011
consolidated financial statements // consolidated Balance sheet munich Re GRoup annual RepoRt 2011
Notes 31.12.2011 Prev. year Change €m €m €m €m €m % A. Intangible assets ii. other intangible assets (2) 1,581 1,633 –52 –3.2
V. deposits retained on assumed reinsurance (10) 9,430 6,902 2,528 36.6 Vi. other investments (11) 2,655 3,199 –544 –17.0
Notes 31.12.2011 Prev. year Change €m €m €m €m % A. Equity (18) i. issued capital and capital reserve 7,388 7,388 – –
iV. consolidated result attributable to munich Reinsurance company equity holders 702 2,422 –1,720 –71.0
C. Gross technical provisions held for sale 24 – 24 – ii. provision for future policy benefits (21) 108,477 104,413 4,064 3.9 iii. provision for outstanding claims (22) 54,392 49,501 4,891 9.9 thereof: held for sale 16 – 16 –
munich Re GRoup annual RepoRt 2011 consolidated financial statements // consolidated income statement
Notes 2011 Prev. year Change €m €m €m €m €m %
thereof: attributable to munich Reinsurance company equity holders 702 2,422 –1,720 –71.0 attributable to non-controlling interests (18) 10 8 2 25.0
munich Re GRoup annual RepoRt 2011 consolidated financial statements // statement of RecoGnised income and eXpense €m 2011 Prev. year Consolidated result 712 2,430 currency translation
actuarial gains and losses on defined benefit plans –135 –50 other changes –3 –20 Income and expense recognised directly in equity 1,013 694 Total recognised income and expense 1,725 3,124 thereof: attributable to munich Reinsurance company equity holders 1,713 3,094 attributable to non-controlling interests 12 30
Issued capital Capital reserve €m Status at 31.12.2009 588 6,800 allocation to retained earnings – – consolidated result – – income and expense recognised directly in equity – –
currency translation – – unrealised gains and losses on investments – – change resulting from valuation at equity – – change resulting from cash flow hedges – – actuarial gains and losses on defined benefit plans – – other changes – –
–10 – 2 – – – – –8 – – – – –3 – – –3
– –1,268 – – – – – –1,268 –1,002 1,002 – – – – – –
munich Re GRoup annual RepoRt 2011 consolidated financial statements // consolidated cash flow statement €m 2011 Prev. year net change in technical provisions 9,857 7,141 change in deferred acquisition costs –249 –564 change in deposits retained and accounts receivable and payable –2,544 1,152 change in other receivables and liabilities –1,073 505 Gains and losses on the disposal of investments –1,244 –1,649 change in securities held for trading –1,120 –165 change in other balance sheet items –176 79 other income/expenses without impact on cash flow 1,912 –93 i. cash flows from operating activities 6,075 8,836 change from losing control of consolidated subsidiaries 498 –8 change from obtaining control of consolidated subsidiaries –310 –3 change from the acquisition, sale and maturities of other investments –3,223 –7,042 change from the acquisition and sale of investments for unit-linked life insurance –489 –657 other –1 14 ii. cash flows from investing activities –3,525 –7,696 inflows from increases in capital and from non-controlling interests – – outflows to ownership interests and non-controlling interests 345 1,301 dividend payments 1,119 1,076 change from other financing activities –1,510 993 iii. cash flows from financing activities –2,974 –1,384 Cash flows for the financial year (I + II + III) –424 –244 effect of exchange rate changes on cash 14 62 cash at the beginning of the financial year 2,900 3,082 cash at the end of the financial year 2,490 2,900 additional information income tax paid (net) 845 574 dividends received 416 308 interest received 7,144 7,083 interest paid 738 672
munich Re’s consolidated financial statements have been prepared on the basis of sec­ tion 315 a paragraph 1 of the german commercial code in conjunction with article 4 of Regulation (ec) no. 1606/2002 of the european parliament and of the council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with art icles 2, 3 and 6 of the aforementioned Regulation and with the commercial code rules designated in section 315 a para. 1 of the german commercial code. the consoli­ dated financial statements thus also meet all the requirements of ifRss. our presenta­ tion currency is the euro (€). amounts are rounded to million euros, with figures in brackets referring to the previous year.
in accordance with the rules of ifRs 4, underwriting items are recognised and meas­ ured on the basis of us gaap (united states generally accepted accounting prin­ ciples) at first­time adoption of ifRs 4 on 1 January 2005.
declaration of conformity with the german corporate governance code in accordance with section 161 of the german stock companies act in november 2011, the Board of management and supervisory Board of munich Re insurance company published an updated declaration of conformity with the german corporate governance code as per section 161 of the german stock companies act and made this declaration permanently available to shareholders on the internet.
Use of judgements and estimates in recognition and measurement in the course of preparing the consolidated financial statements, we have to use our judgement in applying accounting policies and to make estimates and assumptions that affect the year­end items shown in the consolidated balance sheet, the consoli­ dated income statement and the disclosures on contingent assets and liabilities.
particularly in insurance and reinsurance, the use of estimates for measuring technical provisions is of substantial significance, given that usually there are no market prices available and the development of future cash flows from insurance contracts cannot be conclusively predicted. But judgements and estimates play a significant role in the case of many other items as well.
owing to the uncertainties involved in estimates, the discretionary judgements to be made always include a subjective component. this may result in comparable items being measured differently by munich Re and another company, especially as the range of realistic assumptions can be relatively great in individual cases. however, this does not mean that the measurement is not appropriate – merely that it reflects differing knowledge and assessments of future developments.
in the financial year 2011, the following new ifRss had to be applied for the first time: the revision of IAS 24 (rev. 11/2009), Related Party Disclosures, simplifies the dis­ clos ure requirements for state­controlled entities. certain related parties that result from the participation of the state in private companies are exempted from some of the disclosure requirements of ias 24 specified in the amended standard. in addition, the overall definition of related parties has been revised. these changes are of subordinate importance for munich Re.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 the changes to IAS 32 (rev. 10/2009), Financial Instruments: Presentation, provide for certain subscription rights (also options or warrants) denominated in a foreign cur­ rency (i.e. a currency other than the entity’s functional currency) to be classified as equity and not as a liability by the issuer to whose equity instruments these rights apply. the amendments are of no relevance for munich Re.
the amendments published as part of the IFRS Annual Improvement Process in may 2010 concern 11 ifRss and the interpretation ifRic 13. With the exception of the change to ias 34, interim financial Reporting, these are not significant for munich Re. the change to ias 34 extends disclosure requirements in the notes to the financial statements. of particular relevance is that significant transfers between levels of the fair value hierarchy for financial instruments now have to be published in interim finan­ cial statements as well. munich Re has put in place a process to ensure that such trans­ fers are made transparent and can be disclosed in interim reports where necessary.
IFRS 10 (05/2011), Consolidated Financial Statements, will supersede the provisions of ias 27 and sic 12 and create a uniform definition for control, irrespective of whether this control is based on company law or on contractual or economic circumstances. there will be no independent provisions for structured entities (special purpose enti­ ties). a situation of control exists when an investor has the ability to direct an investee’s relevant activities, i.e. activities affecting the investee’s returns. furthermore, ifRs 10 addresses issues that have not been dealt with until now, including the regulation that a situation of control exists even if an investor holds less than a majority of the voting rights but regularly has a de facto majority of voting rights at the annual general meet­ ings. the effects of the new standard on the consolidated munich Re companies are currently being reviewed.
IFRS 13 (05/2011), Fair Value Measurement, provides guidance on measuring items at fair value if another standard prescribes fair value measurement or fair value disclo­ sure in the notes to the financial statements. the standard thus does not determine what items need to be measured at fair value. ifRs 13 revises the definition of fair
IFRS 9 (11/2009 and rev. 10/2010), Financial Instruments, will replace the current requirements of ias 39 relating to recognition and measurement of financial instru­ ments. given its complexity, the overall project has been subdivided into three phases. the new rules in ifRs 9 that have thus far been adopted from the first phase of the project mainly concern the classification and measurement of financial instruments. under these rules, financial assets will in future be divided into only two primary meas­ urement categories: amortised cost and fair value through profit or loss. the distinction is to be made on the basis of the reporting entity’s business model and the contractual cash flows of the assets. in addition, for equity instruments there will be the option of measurement at fair value without affecting the income statement, although then it will not be permissible for value changes recognised in other comprehensive income to be subsequently transferred to profit or loss. there also remains the possibility of volun­ tary measurement at fair value (fair value option). for financial liabilities, there are no changes in the measurement rules except that if the fair value option is applied, value changes attributable to a change in the entity’s credit risk must be recognised without impact on profit or loss in future.
the two other phases of the project are concerned with rules for recognising impair­ ments and for hedge accounting. these rules are still under discussion and are to be integrated into ifRs 9 after conclusion of the whole project. What is more, the new valuation principles are likely to be subject to further amendments, making it possible for certain debt securities to continue to be recognised at fair value with no impact on profit or loss.
originally, ifRs 9 provided for a mandatory first­time application of the new provisions from 2013. since discussions of the still outstanding project phases are taking longer than originally planned, first­time application of a standard amending ifRs 9 and ifRs 7 (rev. 12/2011) has been deferred to financial years beginning on or after 1 Janu­ ary 2015.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 satisfy the offsetting criteria. the new disclosures are mandatory for annual periods beginning on or after 1 January 2013 and the clarifications for annual periods beginning on or after 1 January 2014. the possible impact on munich Re is currently being examined.
IFRIC 20 (10/2011), Stripping Costs in the Production Phase of a Surface Mine, clar­ ifies when production stripping should lead to the recognition of an asset and how the resulting asset should be measured, both initially and in subsequent periods. this inter­ pretation has no practical significance for munich Re.
Consolidated companies in accordance with ias 27, the consolidated financial statements include munich Rein­ surance company (the parent) and all the entities in which munich Reinsurance com­ pany owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries). structured entities, e.g. special funds, are consolidated in munich Re’s financial statements in accordance with sic 12 if, from an economic point of view, they are controlled by munich Re.
cash flows and net assets from obtaining and losing control of consolidated subsidiar­ ies or other operations are shown in the tables below: Number of consolidated subsidiaries1
Cash flows arising from obtaining control €m 2011 Prev. year total consideration for obtaining control –348 –4 non­cash consideration for obtaining control – – Cash consideration for obtaining control –348 –4 cash over which control was obtained 38 1 Total –310 –3
Net assets obtained €m 2011 Prev. year other intangible assets 130 –
other assets 80 1 technical provisions (net) 29 –1 other liabilities –70 –
Windsor operates government­sponsored health plans for the senior segment through its subsidiary Windsor health plan, inc., Brentwood, tennessee, which provides specialty managed healthcare services in the senior segment to more than 75,000 members in the us states of alabama, arkansas, mississippi, south carolina and ten­ nessee. the acquisition of Windsor strengthens the position of our us subsidiary ster­ ling life insurance company, Bellingham, Washington state, in the sector of health insurance for seniors by sharpening our competitive edge for the challenges of the us health reform.
the acquired receivables consist mainly of amounts payable by centers for medicare and medicaid services (cms), from which Windsor receives its premiums. at the time of acquisition, these receivables amounted to €16.6m. this represents the fair value, as we do not expect any defaults from cms, given that it is a federal agency.
Based on the conclusion of the acquisition process and the related determination of the tax impact, the provisional figures for Windsor have been adjusted since January 2011. the adjustments mainly concern increases of €3.2m in the purchase price, €7.5m in deferred tax assets, and €3.2m in receivables from cms. altogether, there was a decrease of €6.8m in goodwill.
Via its subsidiary iK premium fonds gmbh & co. Kg, düsseldorf, on the basis of a placement guarantee, munich Re increased its stake in IDEENKAPITAL Metropolen Europa GmbH & Co. KG, Düsseldorf, by 60.60% for a purchase price of €25.7m on 30 may 2011. in the third quarter, a further 11.74% was acquired for a purchase price of €18.0m. following the two acquisitions, munich Re now holds 72.35% of the shares. ideenKapital metropolen europa gmbh & co. Kg, düsseldorf, is a closed real estate fund whose object is the acquisition and holding of units in the hines pan­european core fund.
the following acquisitions are part of the RENT programme (Renewable Energy and New Technologies), through which munich Re plans to invest in renewable energies and new environmental technologies.
the ifRs fair values of the assets and liabilities of the wind park portfolio at the time of acquisition are as follows: intangible assets of €23.8m, investments of €101.7m, other assets of €10.2m, liabilities of €90.7m, and other liabilities of €5.4m.
as the wind park portfolio was acquired with effect from 1 January 2011, the earnings and result included in the consolidated result for the financial year 2011 tally with the figures since the commencement of the current financial year.
the goodwill of €3.7m arithmetically resulting from the transaction was written off in full after we carried out an impairment test.
since 19 July 2011, the business of the acquired companies contributed €8.4m to the consolidated earnings and €3.7m to the consolidated result. if the business combin­ ation had taken place on 1 January 2011, the consolidated earnings would have increased by €17.3m. the change in the consolidated result cannot be accurately calcu­ lated owing to lack of data at the beginning of the year.
on 17 october 2011, via its subsidiary mR Rent­investment gmbh, munich, munich Re acquired 100% of the voting shares in the solar park operating company adelfa ser­ vicios a instalaciones fotovoltaicas s.l. (adelfa), santa cruz de tenerife, spain, from capital Riesgo global, Boadilla del monte, madrid, spain, and the photovoltaic plant of gestión instalaciones fotovoltaicas, s.l., Boadilla del monte, madrid, spain. the trans­ action makes the photovoltaic plant part of adelfa’s assets.
a purchase price of €32.3m was paid for adelfa and the photovoltaic plant. no contin­ gent purchase price adjustments were agreed. the purchase price comprises €2.5m for settlement of liabilities of the acquired company and a cash capital increase of €29.8m at adelfa for the acquisition of the photovoltaic plant.
the fair value of the receivables acquired as part of the transaction amounts to €1.1m and corresponds to the carrying amount. no defaults were expected at the time of acquisition.
Business combinations completed in prior years at the time of acquisition on 8 may 2007, the purchase price for the Bell & clements group contained various contingent components. in the third quarter of 2011, these had to be reduced by €3m, because their settlement amount was below the original estimate. this led to a reduction in goodwill of the same amount. all contingent pay­ ment obligations from the acquisition of the Bell & clements group have now been settled.
acquisitions are accounted for by the purchase method. in order to determine the equity capital at the time of acquisition, we measure the acquired identifiable assets and liabilities of the subsidiary or special purpose entity at fair value. the consideration transferred in exchange for the acquired shares is netted against the equity capital apportionable to the group at the time of acquisition. any residual positive amount is capitalised as goodwill. profits earned by the subsidiaries or special purpose entities after their first consolidation are included in group equity. amounts relating to intra­ group transactions (receivables and liabilities, expenses and income between consoli­ dated companies) are eliminated unless they are determined as not being material.
Land and buildings shown under investments comprise property used by third par ties and are carried at cost. maintenance expenses are recognised as an expense. struc­ tural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated on a straight­line basis in accordance with the component approach, depending on the weighted useful life for their specific building class. the underlying useful lives mainly range between 40 and 55 years. if the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount. impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income.
Securities at fair value through profit or loss comprise securities held for trading and securities designated as at fair value through profit or loss. securities held for trading are all fixed­interest and non­fixed­interest securities that we have acquired for trading purposes to earn short­term profits from price changes and differences; in addition, they include all derivative financial instruments with positive fair values which we have acquired for hedging purposes but which do not meet the requirements of ias 39 for hedge accounting, and the positive fair values of insurance derivatives and of de rivative components separated from the underlying insurance contract. securities designated as at fair value through profit or loss comprise structured securities. this designation may only be made at the time of acquisition; reallocation to this category in later periods is not possible.
securities at fair value through profit or loss are accounted for at fair value at the bal­ ance sheet date. if no quoted prices in an active market are available, fair values (par­ ticularly with derivatives) are based on recognised valuation methods. munich Re uses a range of valuation models for this purpose, details of which may be obtained from the following table:
Other investments comprise deposits with banks and tangible assets in renewable energies and forestry investments. deposits with banks are measured at cost in accord­ ance with the effective interest method. tangible assets in renewable energies are generally accounted for at amortised cost. the items in question are amortised on a straight­line basis at a rate of 5% over a useful life of 20 years. forestry investments are measured at fair value less estimated costs to sell.
Determining fair values ias 39 defines the fair value of a financial instrument as the amount for which a finan­ cial asset could be exchanged, or a financial liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Impairment at each balance sheet date, we assess whether there is any substantial object ive evi­ dence of impairment in a financial asset or group of financial assets. impairments in value are recognised as an expense in the income statement. ias 39.59 contains a list of factors providing substantial objective evidence of impairment of such financial assets. in addition, ias 39.61 states that for equity investments, a significant or pro­ longed decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. these rules are given more concrete form by means of internal guidelines. for equities quoted on the stock exchange, we assume a significant decline in fair value if the market value at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. in the case of fixed­interest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 f // cash at banks, cheques and cash in hand cash and cheques are accounted for at face value.
h // deferred tax assets under ias 12, deferred tax assets must be recognised in cases where asset items have to be valued lower, or liability items higher, in the consolidated balance sheet than in the tax accounts of the group company concerned and these differences will be elim­ inated at a later date with a corresponding effect on taxable income (temporary differ­ ences). also included are tax assets deriving from tax loss carry­forwards. We take into account the tax rates of the countries concerned and the consolidated company‘s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries. changes in tax rates and tax le gislation that have already been adopted by the government at the balance sheet date are taken into account. deferred tax assets are recognised if a realisation is probable.
Non-controlling interests are accounted for in the balance sheet as part of equity. these are the shares of third parties in the equity of subsidiaries that are not wholly owned directly or indirectly by munich Reinsurance company. direct minority interests in special funds are recognised under “other liabilities“. the portion of the result attrib­ utable to non­controlling interests is shown in the consolidated result.
c // gross technical provisions the technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; cf. the explanatory remarks on assets item d. the ceded share is calculated and accounted for on the basis of the individual reinsurance agree­ ments. acquisition costs for insurance contracts are capitalised and amortised over the terms of the contracts; cf. notes on assets item g. the measurement of technical pro­ visions is based on fas 60, fas 97 and fas 120. credit insurance contracts are ac counted for in accordance with the rules of ifRs 4.
in primary insurance, measurement is generally carried out individually for each risk. for german life primary insurance, biometric actuarial assumptions based on the tables of the german association of actuaries are used. We also largely use the tables of the national actuarial associations for the rest of the primary insurance business. the actuarial interest rate employed for discounting in life primary insurance is limited by the respective maximum actuarial interest rate prescribed by the supervisory author­ ities. in health primary insurance, discount rates are chosen that reflect the best esti­ mate of expected investment income, less a safety margin.
the actuarial assumptions are adjusted if this is shown to be necessary by a liability adequacy test in accordance with ifRs 4.
Other technical provisions mainly include the provision for premium refunds in pri­ mary insurance and the provision for profit commission in reinsurance. provisions for premium refunds are posted in life and health primary insurance for obligations involv­ ing policyholder bonuses and rebates that have not yet been irrevocably allocated to individual contracts at the balance sheet date. Where these provisions are posted on the basis of national regulations, a retrospective approach is usually taken based on supervisory or individual contract regulations. the provision for premium refunds based on national regulations relates only to german primary insurance business. the provision for premium refunds also incorporates the provision for premium loadings and the provision for future premium reductions in german health primary insurance. for life insurance companies, health insurance companies and pension funds subject to supervision by the german federal financial supervisory authority, the supervisory rules in accordance with the german insurance control act and with the respective statutory orders have to be observed.
Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the valuation differences between ifRs and local gaap on the basis of the expected future participation quotas. for unrealised gains and losses on investments available for sale, which are recognised directly in equity (see assets item B), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in the pro­ vision for deferred premium refunds are recognised in the income statement.
e // other accrued liabilities this item includes provisions for post-employment benefits. munich Re companies generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. the type and amount of the pension obligations are determined by the conditions of the respective pension plan. in general, they are based on the staff member’s length of service and salary. under defined contribution plans, the com­ panies pay fixed contributions to an insurer or a pension fund. this fully covers the companies’ obligations. under defined benefit plans, the staff member is promised a particular level of retirement benefit either by the companies or by a pension fund. the companies’ contributions needed to finance this are not fixed in advance. if pension obligations are covered by assets held by a legally separate entity (e.g. a fund or a con­
the interest rate at which the pension obligations are discounted is based on the yields for long­term high­quality bonds (e.g. commercial or government bonds). actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. they are recognised directly in equity, without impact on profit or loss.