Munich Re’s market capitalisation at 31 December5 €bn 17.0 21.4 21.5 22.9 29.0
// Reinsurance: We have been in the business of insuring insurers since 1880. // Munich Health: We have a strong footing in the international health market. // Primary insurance: Our primary insurers offer security mainly for private clients and for small and medium-sized businesses. // Our subsidiary MEAG manages our assets and offers investment products for private clients and institutional investors.
To our shareholders 001 letter to shareholders 003 notable events in 2011 007 the Board of Management 008 Munich Re shares 010 our strategy 015
Munich Re GRoup annual RepoRt 2011 to ouR ShaReholdeRS // contentS
We look back on a year that placed great demands on us. Our industry faced an unprecedented cluster of severe natural catastrophes. On top of this, we had to contend with upheavals in government bond markets and persistently low interest-rate levels due to the continuing financial crisis. Against this backdrop, the expectations we had at the beginning of the year were not fulfilled. It became apparent after the first quarter of 2011 that the consolidated result of €2.4bn we had originally envisaged could no longer be attained.
In this exceptional situation, our integrated business strategy – combining primary insurance and reinsurance under one roof – and our management philosophy once again proved their worth. For we were able to conclude the year with a positive annual result: a notable achievement and impressive testimony to the Group’s resilience.
With our still robust capitalisation and favourable earnings prospects, we will be able to propose an unchanged dividend of €6.25 a share at the Annual General Meeting, thus expressing our thanks to you, our shareholders, for your confidence in us. Altogether, we will then have
paid over €5bn in dividends since the beginning of the crisis, that is in the period from 2007 to 2011. In terms of dividend yield, this puts us at the head of the field among DAX 30 stocks.
energies, in which we see medium-term business potential for premium income in the mid three-digit billion euro range. In addition, we anticipate that demand for reinsurance will continue to rise as a consequence of the financial crisis and the introduction of Solvency II. The solutions we offer our clients in this area are flexible, customised, and provide capital relief.
Munich Health has continued its consolidation and achieved a solid result. The build-up of our companies in Saudi Arabia and Qatar provides the basis for further growth in health business in this region. A potential liberalisation of the markets in the wake of the Arab Spring may also make private-sector solutions more accessible to the population and open up further opportunities for us. One thing is certain: the international healthcare market is growing and we are prepared for a rise in demand.
On behalf of my colleagues on the Board of Management and all employees in the Group, may I take this opportunity to thank you, our shareholders, for the trust you placed in us in a turbulent year. We will continue to make every effort to fulfil the justified expectations you have of your investment in our shares.
Munich Re successfully concludes the acquisition of the uS Medicare provider Windsor health Group inc., thus strengthening Munich health’s position in the uS healthcare market. in 2008, Munich Re had acquired Sterling life insurance company. Windsor and Sterling operate under the roof of the Windsor health Group, providing services to more than 200,000 members in the uSa.
the strongest earthquake ever recorded in Japan triggers a massive tsunami that devastates the northeast coast of the main island honshu, claiming the lives of some 16,000 people. the tsunami leads to severe damage at several blocks of the Fukushima 1 nuclear power plant. according to independent estimates, the economic losses caused by the quake and the tsunami (without considering the consequences of the nuclear accident) come to uS$ 210bn. it is the costliest natural catastrophe of all time. the share of insured losses may be as much as uS$ 40bn.
Q2 / 2011 eRGo direkt is the first company in the insurance industry to offer cover for dental prosthetic treatment that is imminent or already ongoing. “Zahnersatz Sofort” is one of the product initiatives launched by eRGo as part of its new brand mission “to insure is to understand”.
the Munich Re annual General Meeting approves payment of a dividend of €6.25 per share. the overall dividend payout is €1.1bn. as successor to thomas Wellauer, who resigned from the Supervisory Board on 30 September 2010, annika Falkengren is elected to the Supervisory Board as a representative of the shareholders. Falkengren has been president and ceo of Skandinaviska enskilda Banken aB (publ) since 2005.
Q4 / 2011 eRGo’s customer advisory board meets for the first time to discuss services, processes and products from the clients’ perspective, and make suggestions for improvement. the 25 members of the new board are elected for a period of two years and comprise clients of all German eRGo companies. the meetings are held twice a year and chaired by the eRGo customer advocate.
Munich Re GRoup annual RepoRt 2011 to ouR ShaReholdeRS // the BoaRd oF ManaGeMent
Jörg Schneider Group Reporting; Group controlling; corporate Finance Mergers & acquisitions; integrated Risk Management; Group legal, compliance; Group taxation; investor and Rating agency Relations
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
Munich Re GRoup annual RepoRt 2011 to ouR ShaReholdeRS // Munich Re ShaReS
We succeeded in clearly limiting the financial impact of the upheavals on the capital markets, thanks to the solid performance of large sections of our core operational business, our prudent risk management and our investment decisions based strictly on economic criteria. But our earnings position was substantially impaired by the record losses from an exceptional accumulation of severe natural catastrophes. closing the year 16.5% down, Munich Re shares were outperformed in the year under review by the daX 30 (–14.7%) but performed better than the european insurance index dJ euRo StoXX insurance (–18.4%). however, taking into consideration the dividend paid for the financial year 2010, Munich Re shares even outperformed the benchmark indices, with a change of –11.8% in the total return.
our share price reached its year high of €125.20 on 17 February. the spring uprisings in many arab countries then triggered a trend reversal on the financial markets. Munich Re’s share price was also depressed by the grave consequences of the earthquakes in new Zealand and Japan, and a series of tornadoes in the uSa. the second half of the year was dominated by turbulence on the international financial markets. a worsening of the debt crisis in the eurozone and fear of recession in the uSa, with possible global impact, added to capital market uncertainty. Munich Re shares could not escape this trend, and our share price hit its year low of €79.55 on 12 September.
// Financial stocks hit by the sovereign debt crisis and upheavals on the financial markets
// Munich Re’s shares were unable to match the performance of the daX 30 but outperformed the european insurance index dJ euRo StoXX insurance
// Munich Re underlines dependability and capital strength: Board of Management and Supervisory Board to propose payment of an unchanged dividend of €6.25 per share at the annual General Meeting
despite the substantial financial burdens of the past year, Munich Re shares continued to be generally rated an attractive investment in 2011, owing to our clear and predictable opportunity and risk profile. More than 40 analysts from banks and brokerage houses regularly evaluate our shares. at the end of december 2011, some 41% of the analysts gave our shares a positive assessment, 49% a neutral one, and 10% a negative rating.
Munich Re shares daX 30 dJ euRo StoXX insurance Source: datastream
With a dividend yield of approximately 6.6% (in relation to the year-end share price), Munich Re shares remain an attractive equity investment, which is also included in the divdaX, a subindex of deutsche Börse aG featuring the 15 daX companies with the highest dividend yields.
as announced, between May 2010 and april 2011 we bought back and retired more than nine million shares with a volume of around €1bn as part of our share buy-back programme. For the period 2005 to 2011, Munich Re thus returned nearly €12bn to its shareholders via share buy-backs and dividends.
Reuters MuvGn ISIN de 000 843 002 6 Bloomberg Muv2 WKN 843 002
to our shareholders // munich re shares munich re Group annual report 2011 at the end of december 2011, a total of 151,000 shareholders were entered in our share register. the vast majority of shares were held by institutional investors such as banks, insurers or investment companies; around 12.6% were in the hands of private investors. at around 72%, the percentage of international investors was at the same level as in the previous year.
our largest shareholder at the end of 2011 continued to be Warren e. Buffett who, according to the voting rights notification of october 2010, holds a stake of around 10.2% in munich reinsurance company via several companies in his group, Berkshire hathaway inc., oBh inc., national indemnity co. Warren e. Buffett and the aforemen­ tioned companies in his group also informed us in october 2010 that the objective of their investment is to generate trading profits, not to implement strategic objectives. they do not seek to exercise an influence on the composition of munich re’s man­ agement or supervisory boards or to fundamentally change the company’s capital structure. second­largest shareholder is asset manager Blackrock with around 6.2%, followed by the people’s Bank of china/saFe, china, with around 3%.
Key figures for our shares share capital €m 587.7 587.7 number of shares at 31 december m 179.3 188.5
Year­end closing price € 94,78 113.45 annual performance (excluding dividend) % –16.5 4.4 Beta relative to daX (daily, raw) % 0.9 0.7 market capitalisation at 31 december €bn 17.0 21.4 market value/equity at 31 december1 0.7 0.9 average trading volume ’000 1,157 1,069 earnings per share € 3.94 13.06 dividend per share € 6.25 6.25 dividend yield at 31 december % 6.6 5.5 dividend payout (status at 28 Feb. 2012) €bn 1.1 1.1 1 including minority interests.
Regional distribution 1 28% Germany 33% north america 1% other countries 13% uK
at the same time, we ensure that due account is taken of our investors’ opinions and preferences in internal decision-making processes. our investor relations work continues to meet with a positive response. in several cross-sector analyses of the quality of investor dialogue, Munich Re once more achieved leading positions in 2011, with our business partners particularly appreciating the consistency and transparency of our reporting. all the presentations we use in our meetings with analysts and investors and in our conferences and roadshows are published on the internet and are sent to inter ested shareholders on request. Many of these events are transmitted live via webstream i ng. enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team. additionally, the service pages of our shareholder portal on the internet provide our registered shareholders with a wide range of information and communication options.
the confidence in our financial strength is reflected in trading in credit default swaps (cdSs), which are used on the capital market to hedge against the risk of an issuer’s default – the lower the cdS spread, the higher the assessment of the issuer’s security. By both national and international standards, Munich Re continues to be among the companies with a very low spread.
Turning risk into sustainable value our business as an insurer and reinsurer is the professional handling of risk. We create value by using our extensive risk knowledge and sophisticated underwriting techniques to make risks from many different areas of private and economic life manageable – for our clients and for us.
our business model is supported by disciplined financial management, based on Group-wide risk management, an investment policy geared to the structure of our liabilities, and active capital management.
Munich Re’s primary insurance operations are concentrated in the eRGo insurance Group. eRGo offers a comprehensive range of insurances, provision products and services, and is one of the leading insurance groups in Germany and europe. it is represented in over 30 countries, focusing mainly on europe and asia. over 40 million clients place their trust in the competence, security and assistance it provides in various fields of business.
eRGo offers the appropriate sales channel for every client. over 20,000 full-time selfemployed agents service private clients and firms. these are supplemented by direct sales staff, brokers and strong cooperation partners in Germany and abroad. eRGo also has a range of sales partnerships with banks in Germany, various other european countries and india.
Munich Re operates worldwide in virtually all classes of reinsurance. our products range from traditional reinsurance, extensive services and consultancy to complex individual solutions for assuming risks and optimising our clients’ capital. in our business, we pursue an underwriting policy consistently based on risk-commensurate prices, terms and conditions. the transfer of risks to the capital markets is another service we offer to clients.
We write our business directly with primary insurers and also via brokers. in addition to traditional reinsurance business, we participate in insurance pools, public-private partnerships, and business in specialist niche segments. through our operating field Risk Solutions, we offer our clients in industrial and major-project business a wide range of specialised products, customised insurance solutions and services, which we manage from within our reinsurance organisation. these clients thus have direct access to the expertise and capacity of a leading global risk carrier.
tapping earnings potential through innovations primary insurance – to insure is to understand
Munich Re GRoup annual RepoRt 2011 our extensive knowledge in identifying and assessing risks and in structuring insurance solutions enables us to create value in a highly dynamic and global environment and to stand out from our competitors. thanks to our capital management expertise, we are also a sought-after partner for products geared to the balance-sheet and solvency position of our clients. our reputation in the market and our client-focused set-up give us quick and direct access to all clients.
the international healthcare market will continue to grow at an above-average rate. the ageing of whole societies and medical advances are leading to rising healthcare costs, often putting immense pressure on social security systems and increasing the need for private insurance solutions. We tap this profitable growth potential in our business field Munich health, where our specialists for international health business from primary insurance and reinsurance are pooled in a separate organisation. We support our clients with needs-based products and innovative solutions in risk management. to this end, we frequently collaborate closely with those in charge of social secur ity systems, together making it possible for high-quality medical care to remain affordable.
Corporate governance report and corporate governance statement 026 corporate governance report 026 remuneration report 032
between the meetings, the board of Management reported to us on an ad­hoc basis concerning important matters in the group – for example the effects of the earthquake in Japan on the business, the incidents at ergo/hMi reported in the press and the necessary corrective measures, and the initial loss estimates for hurricane irene and the floods in thailand.
Focal points of the meetings of the full Supervisory Board at five of the six meetings, we obtained detailed reports on Munich re’s performance. together with the board of Management, we concerned ourselves with the strategic risks and opportunities of the individual fields of business and gave detailed consider­ ation to the effects of the exceptional accumulation of very severe natural catastrophes and the continuing global financial crisis on the group’s assets and results. in addition to obtaining regular reports on the development of the group’s investments, at one of our meetings we received a presentation by Meag’s Managing director on how asset management is organised at Munich re, and on Meag’s tasks and role. the incidents at ergo reported in the press, their investigation and the changes necessary in this context were also a focus of our consultations. furthermore, we engaged in discussions with the board of Management on economic risk capital requirements and risk­bearing capacity, on the effects of pending reforms to key parameters such as those deriving
at our meeting in april, we concerned ourselves with matters relating exclusively to the board of Management. We assessed the extent to which the board of Management had achieved its financial objectives, and determined the amount of bonus payments for the members of the board of Management based on their annual performance in 2010. as usual, at another meeting immediately prior to the annual general Meeting, the board of Management gave us an account of business performance thus far in the year under review.
at its last meeting in december, routinely attended by two representatives of the ger­ man federal financial supervisory authority (bafin) as guests, the supervisory board dealt with the board of Management’s remuneration from 2012 onwards. We decided on the weightings of the individual target categories and measurement bases for annual and multi­year performance for the financial objectives in connection with the variable remuneration for 2012. the chief risk officer gave his assessment of the risk situation and the group’s risk­bearing capacity and discussed the group’s risk strategy in detail with us. We also concerned ourselves with the group planning for 2012 to 2014 presented by the board of Management, in connection with which we also con­ sidered deviations in business performance from the planning for the year under review. a presentation on Munich health gave us an impression of the development of this business field, and we looked into the current challenges in health primary insur­ ance in germany.
Munich re group annual report 2011 the personnel committee met six times in 2011. it prepared the proposals to be sub­ mitted to the full supervisory board regarding the individual variable remuneration tar­ gets for the members of the board of Management in the year under review. Moreover, it adopted proposals to the supervisory board regarding the extension of three board members’ contracts, the assessment of the individual and financial objectives of the members of the board of Management, and the bonus payments from the 2010 annual performance. the committee obtained comprehensive reports on the fringe benefits and remuner ation in kind for the board of Management as disclosed in the 2010 annual report, and on the status of succession planning for the board of Management. the personnel committee approved the acceptance of several seats on supervisory, advisory and similar boards by members of the board of Management. at the end of the reporting period, the committee very closely considered the proposal submitted to the full supervisory board regarding the board of Management’s remuneration from 2012 onwards. it also prepared submissions to the full board on the weightings of the indi­ vidual target categories and measurement bases for the financial objectives in connec­ tion with the variable remuneration for 2012.
at its four meetings in 2011, the standing committee devoted itself mainly to the prep­ aration of supervisory board meetings and to topics of corporate governance. the report on the share register was another regular item on the agenda.
the head of group audit routinely provided information on the result of the 2010 audits and the audit planning for 2011. as usual, the compliance officer also reported to the committee. in fact, the audit committee dealt regularly with compliance topics, following in particular the events at ergo, their investigation and the measures subse­ quently resolved; at an extraordinary meeting, the audit committee received an in­ depth report on these matters from the chairman of the board of Management and additionally – at another meeting – from the pwc representative tasked with perform­ ing the external review as well as the chairman of ergo’s board of Management. in this context, the committee also conferred about the group’s compliance system, ultim ately specifying more precisely the tasks and monitoring functions it has to per­ form in respect of matters involving group subsidiaries, in particular with regard to the delimitation of these tasks from those of the subsidiaries’ own bodies, especially where ergo is concerned. the development of the embedded values in life reinsurance busi­ ness and in life and health primary insurance business was a periodic item of discus­ sion. furthermore, the audit committee obtained detailed information from Munich re’s head of information technology on it security.
the conference committee as per item 7.5 of the rules of procedure for the supervis­ ory board did not need to be convened in the financial year ended.
a “first” in 2011 was an internal information event offered by Munich re for all members of the supervisory board. as warranted by concrete circumstances, this was devoted to various aspects of the topic “natural catastrophes”, and was attended by the majority of the members of the supervisory board, as recommended in item 5.4.1 of the german corporate governance code.
Munich re group annual report 2011 the audit committee examined the company and group financial statements, the management reports and the board of Management’s proposal for appropriation of the net retained profits. it discussed these at length with the auditor present at the meeting and gave detailed consideration to the auditor’s reports. the chairman of the audit committee briefed the full supervisory board about the outcome of its consultations at the balance sheet meeting on 12 March 2012.
it is our conviction that good corporate governance creates lasting value. We there­ fore apply the highest standards to our operations and activities, complying with all the recommendations and proposals of the german corporate governance code. the declaration of conformity is permanently accessible on our internet website (www.munichre.com).
Munich reinsurance company is a joint­stock company (“aktiengesellschaft”) within the meaning of the german stock companies act. it has three governing bodies: the board of Management, the supervisory board and the annual general Meeting. their functions and powers derive from the relevant legal provisions, the co­determination agreement and the articles of association, which are published on our website.
the principle of parity co­determination on the supervisory board has been main­ tained in the co­determination agreement, and strengthened by taking into account staff employed in the rest of europe.
Duties and responsibilities the board of Management is responsible for managing the company, setting object­ ives and determining strategy. in doing so, it is obliged to safeguard company interests and endeavour to achieve a long­term increase in the company’s value. the board of Management must ensure compliance with statutory requirements and internal com­ pany directives, and is responsible for effecting adequate risk management and risk control in the company.
Internal regulation and working procedure pursuant to article 16 of the articles of association, the board of Management must comprise a minimum of two persons; beyond this, the number of members is deter­ mined by the supervisory board. Munich reinsurance company’s board of Manage­ ment had nine members in the 2011 financial year. an overview of its composition and distribution of responsibilities can be found on page 63. additional information on indi­ vidual members of the board of Management is available on our website. rules of pro­ cedure issued by the supervisory board regulate the work of the board of Manage­ ment, in particular the allocation of responsibilities between the individual board members, matters reserved for the full board of Management, and the required major­ ity for resolutions. the full board of Management decides on all matters for which the law, the articles of association or the rules of procedure prescribe a decision by the board of Management. in particular, it is responsible for matters requiring the approval of the supervisory board, for items which have to be submitted to the annual general Meeting, and for tasks which constitute fundamental management functions or are of exceptionally great importance, including significant personnel issues at top manage­ ment level.
Meetings of the board of Management take place as required, but at least once a month. the members of the board of Management cooperate closely to the benefit of the company and aim to reach unanimous decisions.
the committee meetings are held as needed, and usually take place every two weeks. only the members of the board of Management are entitled to vote. further details are regulated by the rules of procedure adopted by the full board of Management.
Subcommittees both the group committee and the reinsurance committee have set up subcommit­ tees, whose members include other senior executives from Munich reinsurance com­ pany and the group. they comprise the group investment committee, the group risk committee, the global underwriting and risk committee, and the strategy committee. only members of the board of Management have voting rights on these committees, each of which – apart from the strategy committee – has its own written rules of procedure. the group investment committee deals with all significant issues affecting the investments of the group and of the individual fields of business. both the group risk committee and the global underwriting and risk committee deal with risk management, albeit in different contexts.
Collaboration between Board of Management and Supervisory Board the board of Management and supervisory board cooperate closely to the benefit of the company. the board of Management coordinates the company’s strategic approach with the supervisory board and discusses the current state of strategy imple­ mentation with it at regular intervals. it reports regularly to the supervisory board about all questions relevant to the company. the supervisory board has defined the board of Management’s information and reporting requirements in detail. specific types of transaction such as investments and divestments of substantial size and indi­ vidual capital measures (e.g. according to article 4 of the articles of association) gen­ erally require the supervisory board’s consent. beyond this, the board of Management reports to the audit committee on specific topics falling within the latter’s scope of responsibility.
the supervisory board is quorate if all its members have been invited to the meeting or called upon to vote and if ten members including the chairman or alternatively 15 members participate in the vote. if the chairman of the supervisory board so deter­ mines, meetings of the supervisory board may be conducted using telecommunica­ tions.
the chairman of the supervisory board is authorised to make declarations on the supervisory board’s behalf based on prior resolutions.
// all members of the supervisory board should be free of relevant conflicts of interest. // in selecting candidates for membership, the supervisory board should pay due regard to diversity, especially in terms of age, internationality and gender. by the beginning of the next term of office (scheduled for 2014), at least 20% of the mem­ bers should be female, with this figure increasing to at least 30% by the start of the following term of office (scheduled for 2019).
in addition, the supervisory board’s rules of procedure provide for a recommended age limit of 70 for candidates.
Nomination Committee comprising solely representatives of the shareholders, the nomination committee suggests suitable candidates to the supervisory board for the latter’s election pro­ posals to the annual general Meeting. it has drawn up and adopted a list of criteria on which these proposals are to be based. Members of the personnel committee are hans­Jürgen schinzler (chairman), henning Kagermann and bernd pischetsrieder.
Conference Committee the conference committee makes personnel proposals to the supervisory board if the requisite two­thirds majority is not achieved in the first vote when it comes to appoint­ ing or dismissing members of the board of Management. its responsibilities have remained the same after application of the co­determination agreement and are now laid down in the articles of association and the supervisory board’s rules of procedure. Members of the conference committee are hans­Jürgen schinzler (chairman), her­ bert bach, hans peter claußen and bernd pischetsrieder.
at the company’s annual general Meeting, the principle of “one share, one vote” applies. insofar as shareholders are entered under their own name as being the holders of shares which belong to a third party and exceed the upper limit of 2% of the share capital as stated in the articles of association, the shares entered do not carry any voting rights. the aim of this provision is greater transparency of the share register. besides this, it is intended to facilitate direct contact with the shareholders, especially in connection with the convening of the annual general Meeting and the exercising of voting rights.
declaration of the board of Management and supervisory board of Munich reinsurance company in accordance with section 161 of the german stock companies act, dated november 2011
in our code of conduct we clearly state our views on corporate integrity, i.e. legally impeccable behaviour based on ethical principles. the code of conduct contains regu­ lations that are binding on all Munich re employees including the management.
Remuneration report1 structure of the remuneration system for the Board of management in conformity with the german corporate governance code, we here explain the principles of the remuneration system for munich re‘s Board of management and the structuring of the individual remuneration components.
in accordance with item 4 of the german corporate governance code, the remuner­ ation system for the Board of management is determined by the full supervisory Board. the personnel committee of the supervisory Board, comprising the chairman of the supervisory Board, one shareholder representative and one employee representative, prepares the resolution for the full supervisory Board.
Global Compact to make clear munich re’s understanding of important values – and thus also its cor­ porate responsibility – inside and outside our group, munich re joined the united nations global compact in 2007. the ten principles of this declaration form the bench­ mark for our actions throughout the group and thus provide the fundamental frame­ work for our corporate responsibility. our annual communication on progress for the un global compact is integrated into the corporate responsibility portal on our web­ site.
30% function responsibility length of service on board fixed contractual stipulations
70% corporate performance result contribution of organisational unit(s) personal performance group objective company objective divisional objectives individual objectives 0–200% (fully achieved = 100%)
achievement of annual objectives in the second year, on condition that 50% of the net amount paid out is invested by the Board member in Munich Re shares that must be held for at least a fouryear period 70% multi-year performance (for 100% achievement of objectives)
Pension a) Defined benefits plan (board members appointed before 2009 who had reached the age of 55 in 2008)
1 for the variable remuneration, the share shown presupposes 100% achievement of the objectives.
Fixed components basic remuneration the fixed annual basic remuneration is paid in the form of a monthly salary.
remuneration in kind/fringe benefits remuneration in kind and fringe benefits are granted according to function, and are commensurate with market conditions (daX 30 companies). income tax on the benefits in question is paid individually for each member of the board of Management, with the company bearing the amount due. remuneration in kind and fringe benefits are valued on the basis of expenditure for disclosure in the annual report.
variable remuneration based on annual performance annual performance targets for the variable remuneration component geared to annual performance are set on the basis of divisional results and individual objectives as well as the company result (property­casualty reinsurance) and group result. 30% of the target amount for variable remuneration can be earned in the event of full achievement (= 100%) of the objectives. the targets and scaling for group, company and divisional objectives are geared to particular indicators, while individual objectives form the basis for the achievement of personal targets. the key indicator used for the group result is rorac (return on risk­adjusted capital), which is derived from key figures in external accounting and from other important portfolio and performance data. information on the definition of rorac is provided on page 61. the performance measures embodied in value­based management are used for the company result and the divisional results. the objectives are weighted individually according to the responsibilities of the individ­ ual members of the board of Management.
variable remuneration based on multi­year performance for the multi­year performance remuneration component, three­year targets based on the performance of the reinsurance, Munich health and primary insurance segments and on individual objectives are fixed every year. 70% of the overall target amount for variable remuneration can be earned in the event of full achievement (= 100%) of the objectives. the targets and scaling for the business field targets are geared to vbM performance indicators, and the individual targets are based on individual objectives. the objectives are weighted individually according to the responsibilities of the individ­ ual members of the board of Management.
the variable remuneration for the multi­year performance is reviewed and decided on by the full supervisory board and then paid out in the year after the three­year period under consideration. payment is effected on condition that 25% of the net payout amount is invested in Munich reinsurance company shares that must be held for at least a two­year period.
Share-based remuneration agreements in force during the reporting period Mid­term incentive plan 2009–2011 this plan is based on performance over a three­year period. it promotes the medium­ and long­term increase in Munich re’s value in terms of internal value creation (value­ based success factors) and improvement in the total shareholder return (tsr) of Munich re shares. the plan provides for the granting of performance share units, free of charge, to members of the board of Management for the first and last time for 2009. plan participants have the opportunity to share in the development of Munich re’s value if they achieve their performance targets and increase the tsr.
the tsr represents the total return on shares, comprising both the rise in the share price and the dividends paid over a period of three years. further information on the Mid­term incentive plan can be found in the notes to the financial statements under (45) Mid­term incentive plan.
Weighting of remuneration components in the case of 100% achievement of objectives (annual performance and multi­year performance), the weightings of the individual components in terms of total remuner­ ation for 2011 were as follows: basic remuneration around 30% and variable remuner­ ation around 70%, of which 30% was based on annual performance and 70% on multi­ year performance. annual objectives, multi­year objectives and investment in shares together form a well­balanced and economic, i.e. strongly risk­based, incentive system, designed to ensure that the targets set for the members of the board of Management do not have undesirable effects. no guaranteed variable salary components are granted.
beyond the actual remuneration system, the level of total remuneration is set and regu­ larly monitored by the full supervisory board, acting on recommendations from the supervisory board’s personnel committee. the consideration of what is appropriate remuneration takes into account data from peer­group companies and the relation to remuneration of other Munich reinsurance company employees. criteria also include the respective board member’s duties, the board member’s personal performance, the performance of the board as a whole and the financial situation, performance and future prospects of Munich re. new board members are generally placed at a level which allows sufficient potential for development in the first three years.
Other remuneration in the case of seats held on other boards, remuneration for board memberships must be paid over to the company or is deducted in the course of regular remuneration com­ putation. exempted from this is remuneration for memberships explicitly recognised by the company as private.
in the event of a change of control, only the conditions of the long­term incentive plan (under which stock appreciation rights were granted to members of the board of Man­ agement for the last time in 2009) provide for special exercise options. details of this are available in the notes to the financial statements under (44) long­term incentive plan.
Pensions up to and including 2008, the members of the board of Management were members of a defined benefit plan, providing for payment of a fixed pension amount depending on their basic remuneration and years of service on the board. the pension level started at 30% and could reach a maximum of 60% of annual basic remuneration.
beginning in 2009, pension plans for board members were changed to a defined con­ tribution system. the main aim of this change was the fullest possible outsourcing of all pension­specific risks from the company’s balance sheet. this major risk transfer was achieved by financing increases in entitlements exclusively by paying premiums
Munich re group annual report 2011 into insurance policies concluded to cover these benefit obligations. this means the company is no longer liable for the pension benefits, as these are covered by the afore­ mentioned insurance policies. the longevity risk, the biometric risks of premature occurrence of a pensionable event (e.g. disability or death of a member of the board during active service), and the capital market risk were thus transferred to the insurer and the individual board members.
benefits on termination of employment Occupational pension board members are entitled to an occupational pension on retiring from active service with the company after reaching the age of 60 or, at the latest, 65.
Disability pension board members are entitled to a disability pension if, due to permanent incapacity to work, their contract ends by mutual agreement, is terminated by the company, or their appointment is not extended or revoked. permanent incapacity to work means that the board Member is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him.
benefit amount: // for a period of six months, previous monthly basic remuneration (only for board members appointed prior to 2006) // under the defined contribution plan for new members as from 2009: 80% of the insured occupational pension up to the age of 59, with subsequent occupational pension
// for board members transferred from the old system to the new: vested pension from the defined benefit plan up to 2008 and 80% of the insured occupational pension benefit up to age 59 with subsequent occupational pension based on the defined contribution plan
Reduced occupational pension on early retirement board members are entitled to an occupational pension if the contract of employment is terminated as a result of non­extension or revocation of the board member’s appoint­ ment without the board member having given cause for this through a gross violation of his duties or at his own request. the precondition is that the board member has already passed the age of 50, has been in the employment of the company for more than ten years when the contract terminates, and has had his appointment to the board of Management extended at least once.
Vested benefits for occupational pension, disability pension and surviving dependants vested benefits are paid upon the board member reaching the age of 60, in the case of incapacity to work, or in the event of the board member’s death.
// in the case of defined benefit plans: defined benefit of between 30% and 60% of pensionable basic remuneration. the vested benefits are a proportion of the occupa­ tional pension, based on the ratio of actual service with the company to the period the board member would have worked for the company altogether until his 65th birthday (section 2 para. 1 of the german employers’ retirement benefits act).
// surviving dependants’ pensions together may not exceed the occupational pension of the board member. if necessary, the orphans’ pensions will be reduced proportion­ ally.
Munich re group annual report 2011 1 at the time of preparation of this report, no board resolution had yet been passed on the amounts to be paid for 2011. the amount shown for annual performance remuneration is based on estimates and the relevant provisions posted. for the 2010 annual performance, a total of €485,172 more was paid out than had been reserved. the additional expenditure breaks down as follows: von bomhard €122,304, arnoldussen €40,144, blunck €56,856, daschner €73,016, Jeworrek €42,787, röder €29,400, schneider €57,330, strassl €36,875, Wenning €26,460. the amounts for the 2011 annual performance remuneration have been increased accordingly.
the total expenditure recognised in 2011 (reserve allocations/releases due to the development in value of performance share units from the 2009–2011 plan) for the Mid­term incentive plan 2009–2011 breaks down as follows: von bomhard –€177,955, arnoldussen –€13,870, blunck –€14,846, daschner –€16,317, Jeworrek –€20,787, röder –€12,089, schneider –€127,180, strassl –€37,468, Wenning €10,273. the total expenditure recognised in 2011 (reserve allocations/releases due to the development in value of performance share units from the 2004–2009 plans) for the long­term incentive plans breaks down as follows: von bomhard –€1,123,077, arnoldussen –€243,011, blunck –€327,611, daschner –€521,826, Jeworrek –€650,760, röder –€226,877, schneider –€991,056, strassl –€391,806, Wenning –€157,439.
Remuner- Basic ation in Annual Financial remuner- kind/fringe performName year ation benefits ance1 Total
Munich re group annual report 2011 the following table shows the amounts payable for the variable remuneration.
Amounts payable for the variable remuneration of the individual Board members in the event of full achievement of objectives (= 100%) as per DRS 17 (revised 2010) Corridor 0–200%
1 at the time of preparation of this report, no board resolution had yet been passed on the amounts to be paid for 2011. the amount shown for annual performance remuneration is based on estimates and the relevant provisions posted in the table on page 41.
2 the remuneration set for multi­year performance for 2011 is payable in 2014, that for 2012 in 2015. 3 the information on the calculation bases and parameters on page 34 f. for the amounts set for 2011 also apply to the amounts set for 2012.
Pension entitlements personnel expenses of €4.5m (4.1m) were incurred in the financial year 2011 to finance the pension entitlements for active members of the board of Management. of these, €1.2m was apportionable to defined benefit plans and €3.3m to defined contribution plans. as a consequence of the risk transfer to an external insurer under the defined contribution system, the visible pension costs since 2009 are noticeably higher. the company accepts this increase in order to avoid higher costs in future and to eliminate long­term pension­specific risks. the following defined benefits, present values, contri­ bution rates and personnel expenses result for the individual members of the board of Management: Pension entitlements
Dr. Joachim Wenning6, 8 2011 – – 16,169 see table on next page for footnotes.
Georg Daschner7, 8 2011 – – – – 2010 – – – –
1 in the case of board members transferred from the old system to the new, the amount corresponds to the value of the vested pension at 31 december 2008; in the case of Mr. daschner, it corresponds to the defined benefit at 31 december.
2 expenses for defined benefit plan, including provision for continued payment of salary for surviving dependants. 3 entitled to a reduced occupational pension on early retirement in the event of premature or regular termination of employment. 4 entitled to vested benefits under the german company pensions act in the event of premature or regular termination of employment. 5 entitled to vested benefits under the german company pensions act in the event of premature termination of employment, and to improved vested benefits in the event of regular termination of employment.
6 entitled to vested benefits under the german company pensions act in the event of premature termination of employment, and to a reduced occupational pension on early retirement in the event of regular termination of employment.
8 entitled to occupational pension in the event of termination of employment owing to incapacity to work. 9 defined contribution plan within the meaning of ias 19, employee benefits, so no present value shown.
Munich re group annual report 2011 remuneration structure for senior executives the fixed components for Munich reinsurance company senior executives comprise a fixed annual basic remuneration, paid out as a monthly salary, plus customary market fringe benefits and remuneration in kind (most notably a company car and a company pension scheme). the variable components are made up of the short­term components “performance­related bonus” and “company result bonus”, and the longer­term share­ price­linked component Mid­term incentive plan.
the performance­related bonus is based on quantitative and qualitative objectives. We use indicators from operative planning for the quantitative objectives, while personal objectives are agreed on for the qualitative portion.
the key indicator used for the company result bonus is rorac (see page 61). the tar­ gets correspond to the group objective for the variable remuneration of members of the board of Management. the company result bonus basically takes the form of a “bonus pool” model. depending on corporate performance, an aggregate amount is cal­ culated that can be distributed between all staff as a bonus. the higher the manage­ ment level, the higher the target range under the company result bonus. the way this bonus works ensures that the performance of Munich re as a whole is systematically reflected in the remuneration of all staff and that the bonus amount bears a reasonable relationship to overall corporate performance.
Munich re group annual report 2011 total remuneration of the supervisory board the rules in place since the financial year 2009 provide for a fixed remuneration com­ ponent of €50,000 for each member of the supervisory board, plus a variable result­ related component and a component based on long­term corporate performance. the chairman of the supervisory board receives two­and­a­half times, and the deputy chairman one­and­a­half times, the fixed remuneration and the variable remuneration.
the variable result­related remuneration is based on the undiluted earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with international financial reporting standards (ifrss): each supervisory board member receives €4,000 for each full euro by which earnings per share exceed €12, but a maximum of €40,000. based on earnings per share of €3.94, no variable result­related remuneration is payable for the financial year 2011. the performance­ related remuneration component with long­term incentivisation was introduced in accordance with the german corporate governance code. this amounts to €10,000 and is paid out if earnings per share in the remuneration year exceed earnings per share in the third financial year preceding the remuneration year by at least 30%. no long­ term remuneration component is payable for the remuneration year 2011.
Members of the supervisory board committees receive an additional 50% of their fixed remuneration, with the chairmen of the committees receiving 100%. this takes account of the substantial workload involved.
Result- related Fixed remuneration remuneration For committee Name Financial year Annual work2 Annual Total 2010 – – – –
Munich re group annual report 2011 share trading and shares held by members of the board of Manage­ ment and the supervisory board the company has to be notified promptly of the acquisition or sale of company shares (or financial instruments based on these) by members of the board of Management and supervisory board and by specified persons closely related to or connected with them. this notification must take place for acquisition and sales transactions totalling €5,000 or more in a single calendar year.
under section 10 para. 1 of the german securities prospectus act, Munich reinsurance company is obliged to publish information of this kind on its website without delay as well as in an annual document.
the total number of Munich reinsurance company shares and financial instruments based on these held by all members of the board of Management and supervisory board amounts to less than 1% of the shares issued by the company.
Result- based Fixed remuneration remuneration For committee Name Financial year Annual2 work2 Annual Total 1 plus turnover tax in each case, in accordance with the relevant provisions of the respective group companies‘ articles of association. 2 including attendance fees in each case insofar as provided for under the relevant provisions of the articles of association.
Munich Re 052 structure 052 important tools of corporate management 058 governing bodies of Munich re 063
Other success factors 112 clients and client relationships 112 research and development 114 staff 114 corporate responsibility 118
Risk report 120 risk governance and risk management system 120 economic risk capital 128 available financial resources 134 regulatory solvency requirements 136 selected risk complexes 136 summary 140
With its integrated business model consisting of insurance and reinsurance, Munich re can cover the whole value chain in the risk market. this enables the group to leverage synergies in revenue and costs, whilst reducing the risk-based capital required through better diversification. Munich re is also active in the field of asset management.
the reinsurance companies of the group operate globally and in virtually all classes of reinsurance. We offer a full range of products, from traditional reinsurance to innovative solutions for risk assumption, increasingly using our extensive risk knowledge to develop customised solutions to meet the diverse needs of our clients. our companies conduct their business from their respective headquarters and also via a large number of branches, subsidiaries and affiliated companies. the reinsurance group also includes specialty primary insurers in niche segments, whose business requires special competence in finding appropriate solutions.
Domination and profit-transfer agreements are in place with many group companies, especially between ergo Versicherungsgruppe ag and its subsidiaries.
all Munich re’s primary insurance business is combined in ergo with the exception of health primary insurance business outside germany, which is handled by Munich health. ergo is active in nearly all lines of life, health and property-casualty insurance. approximately 76% of its gross premium income derives from germany, the remaining 24% stemming from international business, in particular from eastern europe. ergo has increasingly been looking to extend its activities to asian markets such as india, china and Vietnam.
Munich Re life reinsurance property-casualty reinsurance life primary insurance health primary insurance1 property-casualty primary insurance
Europe and Latin America Bell & clements (london) ltd, london Munich re do Brasil resseguradora s.a., são paulo3 Munich re, Madrid3 Munich re, Milan Munich re, paris Munich re, london (general Branch)
Germany, Asia Pacific and Africa great lakes australia Branch, sydney great lakes reinsurance (uK) plc new Zealand Branch, auckland Munich re, sydney Munich holdings of australasia pty. ltd., sydney Munich Mauritius reinsurance co. ltd., port louis Munich re, Kuala lumpur (retakaful Branch) Munich re, Beijing3 Munich re, hong Kong3 Munich re, seoul3 Munich re, Kuala lumpur Munich re, auckland Munich reinsurance company of africa ltd., Johannesburg Munich re, singapore3
Special and Financial Risks great lakes reinsurance (uK) plc., london3 great lakes switzerland Branch, Zurich Munich re of Malta p.l.c., Floriana3 new reinsurance company ltd., Zurich3
Munich re’s second pillar is primary insurance business, which is conducted by ergo. Via ergo, we offer products from all the main classes of insurance (with the exception of credit insurance). these products, in combination with the provision of assistance and other services and individual consultancy, cover the needs of private and corporate clients. ergo’s many different sales channels include not only its companies’ own successful intermediary organisations and direct selling but also a wide variety of broker relationships, marketing cooperations and extensive collaboration with the unicredit group.
Munich health the global health market is one of the fastest-growing sectors of the economy. this applies to healthcare and insurance alike. in order to maximise the opportunities involved, Munich re has combined its health reinsurance worldwide and health primary insurance outside germany under the brand of Munich health. it covers large stretches of the healthcare-sector value chain and has been shown as a separate segment since 2010.
Health DKV Deutsche Krankenversicherung ag, cologne ergo Direkt Krankenversicherung ag, Fürth europÄische reiseversicherung ag, Munich europaeiske rejseforsikring a/s, copenhagen europeiska Försäkringsaktiebolaget, stockholm
Meag combines the investment activities of our group. it also offers its comprehensive know-how to external institutional investors and private clients. Meag is present in europe, asia and north america and manages centrally all important asset classes such as bonds, equities and real estate. our investment experts adopt a stringent, riskbased approach with the aim of achieving above-average performance over the long term. Key factors in this regard are the close cooperation and trust they enjoy with clients in the group and with other institutional investors, the good service they provide to private investors, and Meag’s long-standing experience in handling investment risks.
Meag cash Management gmbh, Munich Meag hong Kong ltd., hong Kong Meag luxembourg s.à r.l., luxembourg Meag Munich ergo assetManagement gmbh, Munich Meag Munich ergo Kapitalanlagegesellschaft mbh, Munich Meag new York corporation, new York Meag property Management gmbh, Munich
1 only group companies with equity capital generally exceeding €5m are listed. a detailed list of shareholdings can be found on page 277 ff. in the notes to the consolidated financial statements.
Overview of Munich Health1 companies fully allocated to Munich health apollo Munich health insurance co. ltd., hyderabad DaMan – national health insurance company, abu Dhabi DKV Belgium s.a., Brussels DKV globality s.a., luxembourg DKV luxembourg s.a., luxembourg DKV seguros y reaseguros, sociedad anónima española, saragossa ergo generales seguros y reaseguros, s.a., Madrid ergo Vida seguros y reaseguros, sociedad anónima española, saragossa Marina salud s.a., alicante Mednet holding gmbh, Munich Munich health holding ag, Munich Munich health north america, inc., Wilmington, Delaware Munich re stop loss, inc., Wilmington, Delaware sterling life insurance company, Bellingham, Washington unión Médica la Fuencisla, s.a., compañía de seguros, saragossa Windsor health group, inc., Brentwood, tennessee companies that operate in more than one segment and are allocated proportionately to Munich health american alternative insurance corporation, Wilmington, Delaware great lakes reinsurance (uK) plc., london Munich re do Brasil reseguradora s.a., são paulo Munich reinsurance company, Munich Munich re of Malta p.l.c., Floriana Munich reinsurance america, inc., Wilmington, Delaware new reinsurance company ltd., Zurich
// With value-based performance indicators, we ensure an economic view and the ne cessary comparability of alternative initiatives and prioritise these.
all initiatives are ultimately geared to the overriding financial objective of enhancing our corporate value on a sustained basis.
in selecting suitable targets, contrasting aspects have to be considered and weighed. on the one hand, undue complexity should be avoided in order to ensure transparency for investors, staff, and the public. on the other hand, the challenge lies in reflecting economic realities as closely as possible, avoiding oversimplification, and enshrining added value as the group’s overriding guiding principle. the background is multifaceted, and the parallel use of different performance indicators unavoidable.
// another important point is the time-lag between premiums being received and claims being paid. the more extended these periods are, the longer the premiums received can be invested in the capital markets. high combined ratios in classes of business in which claims settlement takes a long time (e.g. casualty) therefore generally entail higher returns from investments with which the loss reserves are covered. these returns are not reflected in the combined ratio.
MceV relates to the portfolio existing at the valuation date. it encompasses 100% of our life reinsurance business and more than 94% of our life primary insurance and german health primary insurance business. By contrast, MceV does not include the value of future new business. however, the valuation is made under the assumption of continued operations. options and guarantees – especially for the policyholders – are explicitly valued using stochastic simulations. MceV reflects the present value of all cash flows for all important currency regions on the basis of the swap rates and the implicit volatilities at the valuation date of 31 December 2011. assets that are traded on the capital markets are valued on the basis of the market values observed at the valuation date. We refrain from applying high interest margins, e.g. illiquidity premiums and adjustments in the value of assets, even after the occurrence of capital market unheavals, thus opting for a deliberately conservative methodology for valuing our primary insurance portfolio.
the change in MceV within one year, adjusted for effects of exchange rate fluctuations, acquisition or sale of companies, dividends and capital injections, is shown by us as the total embedded value earnings. additional adjustments to eliminate the influences of changes in fiscal and capital market parameters result in the operating embedded value earnings, which are a measure of the operative business performance for one year. a detailed presentation of MceV is provided on Munich re’s website.
Munich re group annual report 2011 asset-liability management our steering of Munich re’s investments is strongly geared to the structure of the li abilities on our balance sheet, i.e. to our underwriting liabilities. as part of our asset- liability management, we determine the economic neutral position using a synthetic investment portfolio that best reflects the characteristics of our liabilities and takes into consideration significant parameters in the investment of capital. a benchmark portfolio is developed that reflects our own risk-bearing capacity and other investor preferences on the basis of long-term expectations of capital market yields. our asset manager Meag implements this strategic benchmark portfolio in the form of concrete investments, from which it deviates only within a carefully defined framework and taking into account its own market view. the target return, i.e. the expected income from the benchmark portfolio, is compared with the return from the actual portfolio. Meag’s performance is measured in terms of the excess return it achieves, taking into consideration the risks incurred.
return on risk-adjusted capital in order to also give more emphasis in external communication to Munich re’s value orientation – as implemented through our internal management tools – we take as our group target return on risk-adjusted capital (rorac) after tax. We derive this riskbased performance measure by placing the profit achieved or aimed at, expressed in euros, in relation to the necessary risk capital, the amount of which we determine using our internal risk model and publish once a year. information on the internal risk model is provided on page 129 ff. We thus take into account the economic standards currently underlying (at least to some extent) the requirements of supervisory authorities and rating agencies – standards that are set to play a decisive role in future.
rorac is defined as follows: the numerator in the formula comprises the published iFrs net income adjusted for post-tax income (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. the basis for the adjustment is the capital exceeding the necessary risk-based capital, which is referred to as additional available economic equity. its determination is described in detail on page 135. it is also necessary for rating and solvency purposes, as well as for profitable growth. the additional available economic equity in the system presented here only earns a risk-free interest rate. this is due to the fact that all the risk components of the investments and underwriting are covered with risk-based capital by the internal risk model, and thus assigned return requirements. if, in addition to economic equity, portions of our hybrid capital are also used for assuming risks, the “additional available economic equity” may be negative. in this case, the adjustment item in the preceding rorac formula is set at zero.
even though we take a risk-adjusted return as our target, we aspire to meet the high, but fair, expectations of our investors with regard to the return on total capital placed at our disposal.
Munich re group annual report 2011 non-financial performance measures in addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff-training level and client satisfaction play a part. in the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors as well. We closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards ”, from which we derive initiatives, performance measures and responsibilities. the scorecards have four perspectives: “financial”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and accountability, recognising how much the individual, unit or field of business contributes to increasing value. our incentive systems for staff, executives and Board support the clear orientation towards value creation. the higher a staff member or executive is positioned in the management hierarchy, the more strongly their remuneration is based on performance.
Dr. jur. Nikolaus von Bomhard (chairman of the Board of Management) (chairman of the group committee) group Development group investments group communications group audit
Dr. rer. pol. Ludger Arnoldussen germany, asia pacific and africa services
Dr. rer. pol. Thomas Blunck special and Financial risks reinsurance investments central procurement
Dr. jur. Jörg Schneider group reporting group controlling corporate Finance M&a integrated risk Management group legal, compliance group taxation investor and rating agency relations
Dr. oec. publ. 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
Herbert Bach Member since 9 December 1994, last re-elected 22 april 2009 employee of Munich reinsurance company
Frank Fassin Member since 22 april 2009 regional section head Financial ser vices, ver.di north rhine-Westphalia
Dr. jur. Benita Ferrero-Waldner Member since 12 February 2010 Former member of the european commission
Christian Fuhrmann Member since 22 april 2009 head of Divisional unit, Munich reinsurance company
Prof. Dr. rer. nat. Peter Gruss Member since 22 april 2009 president of the Max planck society for the advancement of science
Peter Löscher Member since 22 april 2009 chairman of the Board of Management of siemens ag
Wolfgang Mayrhuber Member since 13 December 2002, last re-elected 22 april 2009 Former chairman of the Board of Management of Deutsche lufthansa ag
Marco Nörenberg Member since 22 april 2009 employee of ergo Versicherungsgruppe ag
Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder Member since 17 april 2002, last re-elected 22 april 2009 consultant to the Board of Management of Volkswagen ag
Anton van Rossum Member since 22 april 2009 Former chief executive officer and former member of the Board of Fortis
Andrés Ruiz Feger Member since 22 april 2009 employee of Münchener rückversicherungs -gesellschaft sucursal de españa y portugal
Richard Sommer Member since 22 april 2009 Former trades union secretary and former head of the Federal specialist group, insurances, ver.di
Munich re group annual report 2011 2 own group company within the meaning of section 18 of the german stock companies act.
Dr. rer. pol. thomas Blunck – global aerospace underwriting Managers ltd. (gauM), london (chairman) new reinsurance company ltd., Zurich2 (chairman)
herbert Bach – – Dina Bösch – – annika Falkengren Volkswagen ag securitas aB (publ), sweden Frank Fassin ergo Versicherungsgruppe ag2 provinzial nordWest holding ag –
Dr. jur. Benita Ferrero-Waldner – gamesa corporación tecnológica. s.a., spain alpine holding gmbh, austria christian Fuhrmann – Munich re holding company (uK) ltd., united Kingdom2 prof. Dr. rer. nat. peter gruss siemens ag – prof. Dr. rer. nat. Dr.-ing. e. h. henning Kagermann
Metro ag tetra-laval international s.a. group, switzerland anton van rossum – credit suisse groupe ag, switzerland rodamco europe nV, netherlands royal Vopak nV, netherlands (chairman) solvay s.a., Belgium andrés ruiz Feger – – richard sommer ergo Versicherungsgruppe ag2 – Dr. phil. ron sommer – JsFc sistema, russia sistema shyam teleservices ltd., india tata consultancy services ltd., india
// recovery of global economy falters // Financial markets and real economy unsettled by sovereign debt crisis in europe // Market conditions for insurance and reinsurance slightly improved
Volatility in the international capital markets increased markedly in the second half of the year, mainly due to the escalation of the debt crisis in the eurozone and fears of a downturn in the growth of the global economy. in august, the european central Bank (ecB) intervened in the market for italian and spanish government bonds in order to prevent the crisis from spreading. neither the expansion of the european rescue fund eFsF and its successor, the esM, nor the eu summit resolution on more stringent deficit rules and better coordination of economic policy succeeded in calming the markets for long. on the other side of the atlantic, political disputes over austerity measures and a lifting of the debt limit, followed by a downgrading of the us credit rating by standard & poor’s, fuelled uncertainty and fears of a recession.
as expected, currency developments remained volatile in view of the debate concerning sovereign debt. the value of the euro fluctuated strongly against the us dollar over the course of the year. at the beginning of the year, strong economic growth in germany had been accompanied by an appreciation in the euro against other currencies. in the second half-year, however, many investors lost confidence in the euro again, source: international Monetary Fund, national statistical institutes and european statistical office
Munich re group annual report 2011 partly taking refuge in the Japanese yen as a comparatively safe haven. the euro fell considerably against the Japanese yen, moving down from over ¥120 in the second quarter to ¥100 at the end of the year. there was a similar development in the value of the euro against the pound sterling.
the capital base of insurers and reinsurers decreased in 2011, owing to the high losses in the first half-year. compared with the capital losses in the 2008 financial crisis, however, the reduction was only slight. losses from natural catastrophes and the decline in share prices were partially compensated for by the effects of the low interest rates for low-risk fixed-interest securities.
Key figures combined ratio non-technical result €m 894 2,013 1,974 1,078 operating result €m 1,180 3,978 4,721 3,834 5,573 1 the figure for 2011 is not adjusted for relief of 1.3 percentage points from economic risk transfer to the capital markets. 2 excluding health insurance conducted like life insurance.
Whereas in the reinsurance segments and Munich health we operate on a global basis, in the primary insurance segments the bulk of our premium comes from the german market.
Despite the positive pre-tax result of €160m (3,122m), we posted tax income (previous year: tax expenditure) of €552m (692m) in the year under review, mainly owing to the differences between results achieved in the usa and in the rest of the world. the severe natural catastrophe losses occurred primarily outside the usa and led to tax relief there. our subsidiaries in the usa, by contrast, achieved profits, which could be offset against tax loss carry-forwards from prior years, so that no current tax burden
Reinsurance property-casualty 371 1,806 –79.5 primary insurance life 113 172 –34.3 primary insurance health 244 165 47.9 primary insurance property-casualty 405 319 27.0 Munich health 45 63 –28.6 consolidation –928 –425 –118.4 1 after elimination of intra-group transactions across segments.
Munich Re gRoup annual RepoRt 2011 arose. given that no deferred tax assets had been posted for these loss carry-forwards in the past, these profits were realised without a tax burden.
owing to the improved earnings prospects in the usa, we posted deferred tax assets of €300m for the first time in 2011 for loss carry-forwards from prior years. this nonresults -related tax effect also contributed to the tax income.
in addition, eRgo published the findings of inquiries into various accusations levelled at the company in the year under review. these mainly concerned a flawed Riester proposal form in 2005, allegedly and faulty advice in company pension business, and the conversion of life policies into personal accident policies in 2009/2010.
events after the balance sheet date the accident involving cruise ship costa concordia is likely to result in a claims burden for us in the mid double-digit million euro range. Besides costs for the vessel under hull insurance, further losses may arise due to liability claims from passengers, salvage of the wreck, and potential environmental liability claims. therefore, it is not possible at this stage to put a final figure on the exact loss amount for Munich Re.
// Rise in premium income of 21.5% to €9.6bn, primarily owing to large-volume transactions
// investment result of €980m // consolidated result of €403m // Market consistent embedded Value (MceV) at €9,992m
Result the performance of our life reinsurance business in 2011 was pleasing, as evidenced by the consolidated result of €403m (293m). the operating result rose accordingly to €712m (434m), and the investment result totalled €980m (873m), also an increase compared with the previous year. our technical result of €367m (79m) fell slightly short of our target of around €400m, but adjusted to eliminate reserve strengthening for our australian business, the figure is positive overall. claims experience was good in many core markets, and primary insurers’ demand for reinsurance solutions providing capital relief through risk transfer remained brisk.
the Market consistent embedded Value (MceV) of life reinsurance business increased to €9,992m (8,284m) in the past financial year. in addition to the generally positive effects of the capital markets, especially the fall in interest rates, total MceV earnings of €1,513m (1,018m) again benefited from strong operating MceV earnings of €1,109m (751m). total MceV earnings also reflect high value added by new business of €643m (475m) based on sustainable new regular business from various markets and on a series of large individual transactions. further information on MceV is provided on page 60.
if exchange rates had remained unchanged, our premium income would even have climbed by 22.8%. approximately €8.2bn or 85% of premium was written in foreign currency, of which 39% was in canadian dollars and 18% in us dollars.
our branch in canada – Munich Re, toronto (life) – continued to expand its premium volume and result in 2011, mainly due to the conclusion of further large-volume transactions providing solvency relief to primary insurers. the branch is the market leader in all lines in which it conducts business: life, disability, health, critical illness and long term care. premium volume rose to €3.6bn (2.2bn). the dynamic growth in new business and favourable claims experience contributed to the outstanding result.
in asia, the positive trend in new business continued. With premium income totalling well over €1.0bn (1.0bn), we were able to maintain our business volume overall, despite the planned termination of a number of treaties. We still consider asia to be one of our most important and profitable growth regions.
Munich Re gRoup annual RepoRt 2011 in the united Kingdom, our branch Munich Re, london (life) kept its premium volume stable at €0.8bn (0.8bn). owing to an oversupply of reinsurance capacity, the pressure on the prices of pure mortality covers continued unabated. our business policy is strictly geared to writing business at risk-commensurate prices. Despite the keen competition, we succeeded in maintaining our strong position in the market. it is our strategy to offer our clients added value by expanding our product range. one example is the assumption of longevity risks, a segment in which we cautiously started writing business in 2011 to diversify our portfolio even better.
on the african continent, our subsidiary Munich Reinsurance company of africa ltd. achieved an increase in premium volume of 14.4% to €175m (153m). even if the market for life insurance is developing slowly, africa remains interesting for us. in the medium term, we expect economic growth to accelerate and hence the demand for insurance to rise.
Munich Re gRoup annual RepoRt 2011 at €582m (664m), major man-made losses were again down on the previous year. sizeable losses included fires in two production facilities in germany and a mine in australia, explosions in a canadian oil plant, the destruction of a power plant on cyprus, and the failure of a satellite’s power supply. We were also substantially affected by a large claim involving the liability of pharmaceutical manufacturers and an incident in a power plant in the usa.
the combined ratios of the individual divisions developed differently. in the germany, asia pacific and africa Division, it increased owing to the major losses in Japan, australia, new Zealand and thailand. the europe and latin america Division improved its combined ratio, which had been badly hit by the chilean earthquake in 2010. in the global clients and north america Division, the combined ratio fell. a whole range of natural catastrophes, which mainly impacted treaties providing worldwide cover, were more than offset by the positive run-off of prior underwriting years. the marked improvement in the special and financial Risks Division was attributable to two causes. after the financial crisis, there was a fall in the number of insolvencies and hence in the combined ratio of our credit and bonding reinsurance to 41.3% (82.4%), which included reserve releases with a volume of €289m, or 41% of the net earned premiums in this class of business. in addition, relief of 6.4 (–0.9) percentage points in relation to the net earned premiums of the special and financial Risks Division derived from the fact that income and expenses for retrocession cover for the whole of our reinsurance business are fully accounted for in the division, and this included high income in 2011.
We adhered to our focused and disciplined underwriting policy, reducing certain blocks of business for profitability reasons, e.g. in selected casualty segments in the usa. the profitable growth we achieved is attributable to Munich Re’s capacity to devise complex and customised solutions for its clients. We were able to write new business especially in strongly growing markets, with treaties providing capital relief through risk transfer – mainly in asia – contributing a substantial portion. in addition, we increased our premium income through the expansion of existing profitable client accounts.
in greater china, we expanded our premium volume to €1,494m (735m), participating in strong original growth in china and also acquiring new large-volume treaties.
Munich Re gRoup annual RepoRt 2011 our premium volume in Japan grew slightly to €371m (363m). notwithstanding the difficult economic situation, we kept the capacity we provided in Japan constant even after the severe earthquake, especially for coverage of the natural hazards earthquake and typhoon. as a result of the losses, rates for natural catastrophe covers were raised significantly in some cases. at the same time, we improved our portfolio further by forgoing business that failed to offer risk-commensurate prices, terms and conditions.
in australia and new Zealand, we extended our market leadership somewhat, increasing premium growth to €900m (788m) through profitable new business and substantial rate improvements for natural hazards covers, and optimising our portfolio further. the result was impacted by the earthquake losses in new Zealand and the floods and windstorm losses in australia.
the reinsurance market in the united Kingdom is characterised by persistently strong competition. We were nonetheless able to increase our premium volume again by 5.8% to €3,159m (2,985m). this growth was mainly due to a rise in original rates and organic growth in motor insurance business in cooperation with a strategic partner.
Munich Reinsurance America 2011 Prev. year Change % gross premiums written us$ m 4,055 3,621 12.0 thereof property-casualty us$ m 3,591 3,111 15.4 net earned premiums us$ m 3,032 2,881 5.2 thereof property-casualty us$ m 2,567 2,364 8.6 loss ratio property-casualty % 61.8 71.0 expense ratio property-casualty % 31.1 33.2 combined ratio property-casualty % 92.8 104.2 Result for the year us$ m 1,135.3 276.5 310.7 investments us$ m 14,589 15,611 –6.5
Munich Re gRoup annual RepoRt 2011 management. newRe’s result for 2011 was once more very satisfactory. the combined ratio increased compared with the exceptionally good figure for the previous year.
We continued to extend our leading position in agricultural reinsurance, our premium development in 2011 being additionally supported by rising commodity prices for agricultural goods. the business we wrote mainly comprised state-supported crop insurance programmes, with a large portion stemming from the usa. We are transferring our great experience and competence in this business to other regions with high earnings and growth potential, such as latin america and southeast asia, with the focus on china.
in the market for aviation and space risks, pressure on rates increased further. given falling prices, especially in aviation business, we withdrew from selected segments, causing our premium volume to decrease by 13.2% to €551m (635m). in space business, our position as market leader enabled us to write profitable new business and, through long-term treaties in our existing business, partially avoid the consequences of the pressure on rates. Despite the difficult market environment, we achieved a pleasing result of €206m (67m) thanks to our selective underwriting, reserve releases from prior underwriting years, and below-average expenditure for major losses. the combined ratio fell to 59.7% (87.7%).
in our financial risks segment, credit and bonding reinsurance is the most important class of business. here we reinsure financial risks primarily related to transactions of goods and services worldwide or emanating from bonds and guarantees. this segment is closely linked to global economic development but also to regional economic trends. particularly in an uncertain economic environment, credit insurance is a much soughtafter risk management instrument that gives companies security for the settlement of amounts owed by customers for deliveries or services.
Munich Re gRoup annual RepoRt 2011 the combined ratio for 2011 in credit and bonding business fell to 41.3% (82.4%). our premium volume decreased slightly to €696m (744m).
in our unit corporate insurance partner, we offer our clients in industrial and major project business a wide range of insurance products, customised solutions and services based on our recognised industry- and risk-related knowledge. the combined ratio for 2011 was burdened by investments for the expansion of these activities and by natural catastrophes.
// total premium volume down 3.2% to €7.9bn, especially due to low single-premium business
// investment result of €2,576m // consolidated result of €113m // Market consistent embedded Value (MceV) at –€872m
Result persistently low market interest rates present life insurance companies with considerable challenges because insurers have to offer their clients long-term interest-rate guarantees. We began early on to make substantial provision for prolonged phases of low interest rates by purchasing derivative financial instruments (“swaptions”) to hedge against the reinvestment risk. this hedging programme benefits policyholders and shareholders alike. the decline in interest rates since the beginning of the year led to write-ups of €368m in our interest-rate hedges that had an impact of €84m on the result. the low-interest-rate environment is also having an adverse impact on the profitability of conventional new business, despite the lower guarantees given to clients. higher margins are offered by unit-linked products, but their sales have declined.
the MceV of life primary insurance business decreased to –€872m (2,375m) in the financial year 2011, owing to the further strong fall in interest rates in combination with very high interest-rate volatility as well as the burden from losses in the value of our investments in bonds issued by peripheral countries of the eurozone. this situation is a challenge for the whole industry, given its long-duration contracts providing guarantees for policyholders. the strict rules of market-consistent valuation applied by us, as in previous years, led to significant result reductions at the reporting date of 31 December 2011, despite our hedging against prolonged phases of low interest rates. Valuation was based on swap rates without adjustments. in the current environment, especially in view of the exceptional capital market situation (euro crisis), this represents a decidedly conservative evaluation approach. total MceV earnings amounted to –€3,115m (–602m), but operating income, which excludes a large share of the effects from developments in the capital market, totalled €771m (317m). at –€13m (114m), the value added by new business was negative, given the rigorous application of adverse capital market data. further explanations regarding MceV are available on page 60.
Key figures total premium income1 €bn 7.9 8.2 7.9 gross premiums written €m 6,263 6,484 6,294 share of gross premiums written in primary insurance % 35.5 37.1 37.9 1 total premium income includes not only gross premiums written but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the statutory accounting guidelines applicable in the insurer’s home country.
Munich Re gRoup annual RepoRt 2011 premium overall premium income in life insurance (including the savings premiums from unitlinked life insurance and capitalisation products) totalled €7.9bn (8.2bn) in 2011, a reduction of 3.2% compared with the previous year. our international business showed a decline in single-premium business with unit-linked life insurance and capitalisation products, resulting in overall premium volume of €2.0bn (2.1bn). in particular in austria, single-premium business with unit-linked insurances fell owing to changes in tax rules. in germany, premium income totalled €5.9bn (6.0bn), also impacted by lower single-premium business, which decreased market-wide in the financial year, following an extended phase of strong growth. gross premiums written in and outside germany totalled €6.3bn (6.5bn). While in germany gross premiums written were down by 5.2% to €4.6bn (4.9bn), the figure for international business increased slightly by 2.0% to €1.7bn (1.6bn), especially thanks to good growth in Belgium.
By contrast, german new regular-premium business in 2011 expanded by 6.3% to €352m (331m) year on year, mainly owing to good new company pension business. on balance, new business volume in germany was down by 6.9% to €1.8bn (1.9bn). Measured in terms of annual premium equivalent (ape) – the customary international performance measure – new business rose by 1.0%. international new business declined by 4.6% to €935m (980m) but by less in terms of ape (1.2%), due to moderate growth in regular-premium business (+1.1%) and a higher volume of new business, particularly in Belgium and poland.
International single premiums 753 800 –5.9 annual premium equivalent1 257 260 –1.2 1 the annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
Result in the health insurance segment, the consolidated result for 2011 rose to €244m (165m). a positive contribution of €116m to the result came from an intra-group transaction. at the end of the year, eRgo sold its shares in the foreign health insurers of the DKV group to Munich health holding. the operating result increased to €325m (236m), and the investment result remained at the same level as in the previous year. the technical result totalled €568m (418m).
the MceV amounted to €1,747m (1,733m) at the end of the financial year. no interestrate guarantees are provided in health business. figures for interest rates included in the calculations can be changed whenever price increases become necessary, for instance because expenses for healthcare claims and benefits have risen. that is why the interest-rate environment has a different impact to that in life insurance. total MceV earnings grew to €137m (–122m), largely owing to operating MceV earnings of €547m (58m). Value added by new business amounted to €50m (28m).
Key figures gross premiums written €m 5,717 5,499 5,171 share of gross premiums written in primary insurance % 32.5 31.5 31.2 consolidated result climbs to €244m
owing to an adjustment of our strategic orientation in the health segment, our target in future – besides travel insurance – will be on the actual core business of private health insurance, namely high-quality comprehensive health insurance and flexible supplementary covers to complement state health insurance coverage. the main consequence in terms of product strategy in the past financial year was to discontinue specially priced reduced-benefit products for new clients.
Result the consolidated result in property-casualty insurance totalled €405m (319m). a positive effect derived from the sale of capital square pte. ltd., a consolidated company with a block of real estate in singapore, which produced a gain of €156m. the result was burdened by €36m in write-downs for impairments of goodwill and other assets of eRgo Daum Direct general insurance co. ltd. in south Korea, reflecting the persistently difficult market situation in Korean motor insurance business. Write-downs of equities and derivatives were also required, a fact that affected the consolidated result and produced a lower investment result. overall, the investment result in property- casualty insurance came to €711m (773m).
paid claims and the change in claims provisions totalled €3,149m (3,037m) and net operating expenses €1,686m (1,615m), compared with net earned premiums of €4,941m (4,806m).
Munich Re gRoup annual RepoRt 2011 premium gross premiums written were appreciably higher than in the previous year, climbing by 19.3% to €6.1bn (5.1bn). at unchanged exchange rates, premium volume would have even increased by 20.9%.
in reinsurance, gross premiums written were up by 29.5% to €4.2bn (3.2bn), mainly owing to the conclusion of a new large-volume quota share treaty in north america, which had already become effective in the first quarter of 2011. conversely, our premium income in asia declined because of the scheduled termination of a large capital relief treaty.
Munich Re gRoup annual RepoRt 2011 1 after elimination of intra-group transactions across segments.
Reinsurance Life Property-casualty Life €m 31.12.2011 Prev. year 31.12.2011 Prev. year 31.12.2011 Prev. year land and buildings, including buildings on third-party land 257 267 1,187 1,178 1,445 1,760 investments in affiliated companies 14 16 62 67 31 20 investments in associates 75 54 391 282 101 192 loans 14 47 56 188 33,910 31,045 other securities held to maturity – – – – 13 42 other securities available for sale fixed-interest 13,594 11,905 46,664 45,110 32,584 35,803 non-fixed-interest 895 974 4,691 5,419 1,768 1,892 other securities at fair value through profit or loss held for trading fixed-interest – – 508 424 59 50 non-fixed-interest – – 28 25 – 3 Derivatives 549 331 373 154 765 323
Deposits retained on assumed reinsurance 7,784 5,069 1,196 1,499 165 136 other investments 193 330 943 787 925 623 investments for the benefit of life insurance policyholders who bear the investment risk – – – – 5,092 4,953 Total 23,375 18,993 56,099 55,133 77,023 77,083
// german and us government bonds dominate our broadly diversified portfolio; investments in government bonds from southern europe and ireland significantly reduced
// Write-downs of €1,178m on portfolio of greek government securities // another good result from gains on disposals // investment result of €6.8bn
Primary insurance Munich Health Asset management Total Health Property-casualty 31.12.2011 Prev. year 31.12.2011 Prev. year 31.12.2011 Prev. year 31.12.2011 Prev. year 31.12.2011 Prev. year 1 3.3% excluding the earnings from economic risk transfer to the capital market that are posted in the investment result.
pursuing our risk-conscious investment policy, we reduced our investments in southern european and irish government bonds by €4.3bn to €5.8bn and invested in the eurozone, mainly in government bonds from germany and the netherlands. Bonds from portuguese, italian, irish, greek and spanish issuers made up 3% of our portfolio of fixed-interest investments at the balance sheet date.
at the reporting date, around 89% of the eurozone government bonds and governmentguaranteed securities measured at fair value are allocated to level 1 and 11% to level 2.
Portfolio of government bonds and state-guaranteed securities issued by eurozone countries1, 2
At fair value through profit or loss greece – – – – ireland – – – – italy – – – –
1 presentation based on economic view and not fully comparable with ifRs figures. 2 Besides greece, ireland, italy, portugal and spain, those eurozone countries are listed where our holdings of government bonds and state-guaranteed securities total more than €2bn in terms of carrying amounts. 3 concerns off-balance-sheet valuation reserves in the case of “loans” and unrealised gains/losses in the case of “available for sale” .
Munich Re gRoup annual RepoRt 2011 investments from the category “available for sale” allocated to level 2 mainly involved borrower’s note loans of german “länder”.
We invested more again in corporate bonds, which made up 10% of our fixed-interest portfolio at the reporting date. We continue to hold a small quantity of credit derivatives, thus increasing our exposure mainly to corporates by two percentage points.
3% (3%) policy and mortgage loans 48% (47%) government bonds thereof: 7% (9%) inflation bonds 3% (4%) structured products (credit structures)
Regular investment income rose slightly due to higher income from associates and divi dend payments, and to our larger investment portfolio. increased regular payments from our derivatives also contributed to this rise.
Investment result by type of investment 2011 Prev. year Change €m €m % Real estate 292 339 –13.9 investments in affiliated companies 251 9 >1,000.0 investments in associates 101 50 102.0 Mortgage loans and other loans 2,207 2,150 2.7 other securities 4,392 6,173 –28.9 Deposits retained on assumed reinsurance and other investments 229 114 100.9 investments for the benefit of life insurance policyholders who bear the investment risk –263 271 – expenses for the management of investments and other expenses 453 464 –2.4
also included in investments are securitisations by means of which we pass on or hold underwriting risks via capital market covers such as catastrophe bonds, weather de rivatives and special forms of unit-linked life insurance (variable annuities). Regular income or expenditure, realised gains and write-ups/write-downs arising from changes in the value of our capital market covers are shown as a result from derivatives in the investment result. these covers contributed around €210m to the investment result in the period under review. after the earthquake in Japan, we recorded net write-ups of approximately €200m from the Muteki catastrophe bond, by means of which we had transferred insurance risks from a major Japanese primary insurer to the capital market on a parametric basis.
altogether, Munich Re benefited from its conservative yet active asset management.
Financial strength munich re’s financial strength continues to be assigned the second-highest rating category by each of the leading rating agencies.
// Debt leverage down 0.7 percentage points // asset-liability management as basis for our investment strategy // group capital over 2.4 times the solvency requirement
We define as strategic debt all financial instruments with the character of outside financing that do not have a direct link to our operative business. strategic debt supplements our financial resources, is essentially designed to optimise the cost of capital and ensures that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we quantify our debt leverage, which is pleasingly low compared with that of our competitors: it is defined as the ratio – expressed as a percentage – of strategic debt to the sum of group equity and strategic debt. our technical provisions are not considered, even though they are mostly available to us on a very long-term basis as a source of financing for investment.
our subordinated bonds are recognised in part as own funds by the german Federal Financial supervisory authority (BaFin). When this is considered in calculating the strategic debt, the latter is reduced to €1,317m and the debt leverage amounts to only 5.3%.
Debt leverage 2011 Prev. year change €m €m % strategic debt 5,219 5,405 –3.4
management report // Financial position munich re group annual report 2011 restraints on disposal since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. supervisory authorities in some countries, for example, require foreign reinsurers to establish premium and reserve deposits to the benefit of primary insurers or set up trustee accounts or guarantees with certain financial institutions. at the reporting date, this involved investments with a volume of €11.0bn (10.4bn).
Capital management through active capital management, we ensure that munich re’s capital is maintained at an appropriate level. munich re’s available financial resources must always be sufficient to cover the capital requirements determined both by our internal risk model and the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of measured opportun ities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets, as we experienced in 2011. at the same time, we
in line with our active capital management, we bought back a nominal amount of €1.2bn of the subordinated bond 2003/2023 in the period under review, out of the total outstanding amount of €2.9bn as at the end of 2010. We also issued a new subordinated bond with a nominal volume of €1bn in the financial year 2011.
subject to the approval of the annual general meeting, we aim to pay our shareholders a dividend of €6.25 per share for the financial year 2011 from munich reinsurance company’s net retained profits.
shares with special control rights there are no shares with special control rights.
system of control for employee share scheme where the control rights are not exercised directly by the employees like other shareholders, employees of munich reinsurance company exercise control rights in accordance with statutory provisions and the articles of association.
the german stock companies act contains general provisions governing amendments to the articles of association (sections 124 para. 2 sentence 2, and 179–181 of the act). these state that only the annual general meeting can make resolutions on changes to the articles of association. in order to be carried, a resolution must receive at least three-quarters of the votes cast by the share capital represented in the vote. the articles of association may stipulate a different capital majority (higher or lower) or other requirements, but the company’s articles of association do not provide for any such special features.
management report // Financial position munich re group annual report 2011 the german stock companies act contains special regulations on amendments to the articles of association where increases and reductions in share capital are concerned (sections 182–240 of the act). under these regulations, resolutions on capital measures are generally to be made by the annual general meeting. Within a self-determined scope, however, the annual general meeting can authorise the Board of management to initiate certain (capital) measures. the authorisations relating to munich reinsurance company are listed below. in all such cases, a resolution of the annual general meeting is required that has been adopted by at least a three-quarter majority of the share capital represented in the vote. Where these resolutions are concerned, the company ’s articles of association again do not provide for other (i.e. higher) majorities or further requirements.
the annual general meeting is entitled to transfer to the supervisory Board the authority to make amendments to the articles of association that affect only the wording (section 179 para. 1 sentence 2 of the german stock companies act). this is the case with munich reinsurance company and has been regulated in article 14 of the articles of association.
// the annual general meeting of 28 april 2010 authorised the Board of management to issue, with the consent of the supervisory Board, convertible bonds or bonds with warrants on one or more occasions up to 27 april 2015 for a maximum nominal amount of €3bn with or without a limited maturity period. shareholders are generally entitled to a subscription right in respect of these bonds, but the Board of management is authorised, with the consent of the supervisory Board, to exclude this subscription right in the cases specified in the authorisation. the holders of such bonds may be granted conversion or option rights in respect of shares issued by the company up to a maximum amount of €117m of the share capital, in accordance with the respective bond or warrant conditions; as a precautionary measure, capital of €117m was conditionally authorised under article 4 para. 3 of the articles of association (contingent capital 2010).
// under article 4 para. 1 of the articles of association, the Board of management is authorised, with the consent of the supervisory Board, to increase the company’s share capital at any time up to 21 april 2014 by an amount of up to €280m by issuing new shares against cash or non-cash contribution (authorised capital increase
// under article 4 para. 2 of the articles of association, the Board of management is authorised to increase the share capital at any time up to 19 april 2016 by an amount of up to €10m by issuing new shares against cash contribution (authorised capital increase 2011). the subscription right of shareholders is excluded insofar as this is necessary to allow the shares to be issued to employees of munich reinsurance company and its affiliated companies.
Based on our underwriting guidelines, our reinsurance agreements generally include a clause that grants both parties to the agreement a right of extraordinary cancellation in the event that “the other party merges with another company or its ownership and control undergoes a material change”. such or similar clauses are typical of the industry. munich reinsurance company’s long-term incentive plan provides for special exercise options in the event of a change of control. this plan is for members of the Board of management, senior management and top executives in munich re’s international organisation, which is explained in detail in the remuneration report.
compensation agreements concluded with members of the Board of management or employees for the event of a takeover bid there are no compensation agreements with members of the Board of management or employees for the event of a takeover bid.
munich re’s eligible capital is more than 2.4 times higher than the legal requirement
management report // Financial position munich re group annual report 2011 the adjusted solvency ratio diminished from 260.5% in the previous year to 245.3% in 2011. this reduction was chiefly attributable to an increase in the solvency requirement.
Analysis of the consolidated cash flow statement our primary insurance and reinsurance operations have a significant influence on munich re’s cash flow. We generally first collect the premiums for the risks assumed and do not make payments until later, when claims need to be settled. cash flow statements of insurance companies are therefore of limited relevance. the cash flow statement is adjusted to eliminate the effects of fluctuations in exchange rates and changes in the entities consolidated.
ManaGeMent RepoRt // Financial position companies in italy for a total of €191m, as well as in a solar park operating company and photovoltaic facility in spain for €32m. in the cash flow statement, we have reduced the purchase prices by the cash held by the companies acquired.
the cash outflows for financing activities stem mainly from the share buy-backs with a volume of €323m and the dividend payment of €1,119m in 2011.
overall in the year under review, cash – which encompasses cash with banks, cheques and cash in hand – fell by €410m (including currency effects) to €2,490m; there were items pledged as security and other restrictions on title amounting to €45m (–).
management report // other success Factors munich re group annual report 2011
Clients and client relationships munich re has different client bases in reinsurance and primary insurance. in reinsurance, we do business with over 4,000 corporate clients from more than 160 countries. our primary insurers in the ergo group serve over 40 million (mainly private) clients in over 30 countries with the focus on europe and asia. the munich health business segment has over six million clients in primary insurance and 400 in reinsurance.
primary insurance in primary insurance, we attend to the needs of private, commercial and industrial clients, with private clients making up the bulk of our customers. ergo offers them products and services in connection with old-age provision and saving schemes, protection of property, health, legal cover and travel. clients can contact us through a wide range of channels: via one of the 20,000 full-time self-employed agents, through brokers, via the internet, by phone for direct insurance, or via various sales partners.
management report // other success factors munich re group annual report 2011 a major feature of 2011 was the implementation of ergo’s new brand proposition “to insure is to understand”, which expresses the primary insurance group’s aim of focusing systematically on customers’ actual requirements, thus setting itself apart from the competition.
With clear and comprehensible communication, ergo is addressing an important consumer concern and avoiding wording that is confusing to customers. as part of this “clear language” initiative, ergo has adopted standards for client communication that have been certified by independent communication experts. By the end of 2011, communications for nearly 20 million clients had already been revised. at the same time, insurance terms and conditions are being shortened: in personal liability insurance they have been reduced to around one-tenth of their previous volume. clients can use a free hotline if they have any questions, and good suggestions for greater clarity are rewarded.
a setback to the young ergo brand in germany last year was the revelation of severe misconduct by sales partners on an incentive trip to Budapest in 2007. to ensure that there is no repeat of such incidents, ergo has adopted a code of conduct for independent sales partners and significantly strengthened compliance in the group. other allegations regarding insurance business have been thoroughly investigated and dealt with by ergo, and errors remedied. in 2012, ergo is all the more determined to drive forward the realisation of its brand promise “to insure is to understand”.
reinsurance in 2011, munich re again developed and launched several innovative products related to climate change and the necessary expansion of renewable energies. in the field of geothermal energy, for example, munich re covers the exploration risk for investors and operators, providing cost and planning certainty by insuring against the risk of project failure. elsewhere, solvency ii and the current financial crisis present munich re not only with challenges but also with opportunities for profitable growth, as under cap italised insurers and their investors seek forms of capital relief. reinsurance provides a good means of capital optimisation, and we have consequently refined our strategy in this area.
ergo offers firms and organisations a novel product for crisis prevention and crisis management after traumatic events such as accidents, violent crimes or disasters. the rapid assistance supplied supports employees in dealing with the immediate aftermath of a crisis, mitigates the long-term consequences, and thus reduces costs for the insured company. Besides a 24-hour emergency assistance service, the cover also includes evacuation, indemnification of financial and material losses, rehabilitation, and travel and accommodation expenses for relatives.
munich health in this business field, we utilise the strategic pooling of many years’ experience and expertise in health reinsurance, health primary insurance and risk management to design new and innovative services. For the analysis of health risks, munich health offers its clients programmes and tools for standardised medical risk assessment. enhancing the efficiency of internal processes is a significant success factor for munich health and its clients. the use of new automation options and test algorithms, e.g. in the transmission of claims notification and claims processing data, can detect billing errors and fraud at an early stage and help to reduce medical and operating costs.
management report // other success factors munich re group annual report 2011 the ergo project “Diversity – promoting equal opportunity”, we have devised a programme in which members of top management mentor female staff with management potential. another example, in our reinsurance field of business, is the further improvement of the internal company agreement “family and career” at our munich location.
in keeping with our integrated business model, we have assigned responsibility for the recruitment, development and personnel support of our group’s top executives to a single unit that reports to the chairman of the Board of management. its tasks include overarching talent management and group-wide succession planning that enable us to retain and develop outstanding managers.
over 90% of the 753 (759) staff in asset management work in germany.
management report // other success Factors munich re group annual report 2011 length of service at main Group companies in Germany
Percentage of females in management positions at main Group companies in Germany
management report // other success Factors munich re group annual report 2011 reinsurance
under the heading “career @ munich re”, we have taken a number of measures to ensure even more targeted development of our staff in their current functions and to prepare them for assuming further responsibilities. We have communicated a uniform understanding of “career” group-wide, clearly formulating our expectations of managers and staff. in addition, we provide practical guidance for systematic and structured competence development and possible career stages.
Munich Reinsurance company eRGO MeAG 2011 Prev. year 2011 Prev. year 2011 Prev. year
asset management meag’s human resources strategy is based on three realigned core objectives: the sustained strengthening of meag as an employer brand, the introduction of diversity management, and the further expansion of hr systems. the objectives are designed to support meag’s high-performance organisation, i.e. create the parameters for top performances. some of the components of the new hr strategy have already been realised. recruitment of university graduates, for instance, has been enhanced through meag’s collaboration with munich’s main universities and also through the establishment of a new graduate trainee programme.
We are also actively working on formulating globally binding principles for the core business of insurance. together with other major providers of financial services, we are taking part in the development of internationally recognised principles for sustainable insurance under the auspices of the united nations environment programme. these principles, due to be signed in June 2012 at the rio+20 un conference on sustainable Development, include responsible conduct based on environmental, social and governance factors along the whole insurance value chain. through our asset manager, meag, we adhere to a commitment we entered into when we signed the un principles for responsible investment (pri) in 2006. at least 80% of our investments in shares, corporate bonds, government bonds, real estate (from construction year 2010 onwards) and rent (renewable energies and new technologies) satisfy sustainability criteria. We plan to achieve a target investment volume of up to €2.5bn in renewable energies and new technologies in the coming years. Furthermore, new internal guidelines, compulsory for all fields of business, govern the way we handle firms that produce or market internationally outlawed landmines and cluster bombs.
to keep our environmental impact and our co2 emissions as low as possible, we concentrate especially on making fewer business trips and reducing our consumption of paper, water and energy. so that we can measure progress, we are steadily expanding the scope of the environmental data we record, which already capture around 57% of our employees worldwide. our binding climate strategy group-wide includes the target of making the whole group carbon-neutral by 2015.
in addition to sustainable development and purposeful environmental and climate protection, corporate responsibility for munich re means assuming social responsibility. Besides location-based social and cultural projects, the emphasis in future is to be on business-related topics by promoting projects in areas such as catastrophe prevention, environment and demographic changes.
the group committee meets quarterly as the group risk committee, the membership of which additionally includes further specialists from our business segments, to deal with risk issues affecting the group as a whole.
Besides this, the group committee meets quarterly together with members of senior management responsible for investments in our business segments as the group investment committee. this committee is the central management committee for major group-wide issues affecting the group’s investments, including specific investment risks.
additionally, there is a reputational risk committee (see page 128 for further details).
the munich health risk committee is responsible for risk matters in the munich health segment.
// Whole portfolio criteria: relating to munich re’s entire portfolio of risks, designed to protect our capital and limit the likelihood of an economic loss for the year. particularly worth mentioning in this respect is the criterion “economic earnings at risk” (eear), which we use to manage the group’s risk profile in such a way that our riskbearing capacity does not fall below a defined threshold in the event of adverse business experience of the type that occurs statistically around every ten years. economic earnings at risk at 31 December 2011 total €4.1bn.
// supplementary criteria: to limit losses that can arise out of individual risk types or accumulations, such as natural hazards, terrorism and pandemics, and to limit market and credit risks that could endanger munich re’s ongoing viability were they to materialise.
// other criteria: aimed at preserving munich re’s reputation and thus protecting its future business potential. they encompass limits for individual risks that, though they would not necessarily threaten munich re’s existence, could cause lasting damage to the confidence of clients, shareholders and staff.
Risk strategy maintain our financial strength, thereby ensuring that our liabilities to our clients can be met protect and increase the value of our shareholders’ investment safeguard munich re’s reputation our risk criteria
management report // risK report munich re group annual report 2011 the risk appetite laid down ensures that an appropriate balance is maintained between business opportunities and risks incurred. our risk strategy process has already proved its worth in both the financial crisis and the government debt crisis. our integrated business model ensures that we are well positioned to be a strong partner for our clients, even in particularly difficult markets, and a stable investment for our shareholders. With our broadly diversified portfolio of investments, we aim to be well equipped for all market scenarios – even extreme ones – that could realistically arise.
risk identification is performed by means of appropriate systems and indicators (quantitative component) and a number of risk surveys, which are supplemented by expert opinions and assessments by selected, highly experienced managers (qualitative component ). our ad-hoc reporting process provides for staff to report risks to the central risk management function (irm) at any time.
We compare our internal risk model with the current status of solvency ii and take part in the Quantitative impact studies and stress tests (european insurance stress test). We explain the results of our internal risk model on page 130 ff.
risk appetite anchored in business planning constant refinement of risk measurement tools
management report // risK report munich re group annual report 2011 risk limitation is derived from the risk strategy. Based on the defined risk appetite, limits and rules and any risk-reducing measures required are decided on and implemented. We also have a comprehensive early-warning system that draws our attention to any potential shortages of capacity. if a business unit identifies attractive business that exceeds its risk limits, the risk management departments responsible and irm analyse its potential impact on the group portfolio and the risk appetite of the group as a whole. taking these results and the expected earnings from the business into consideration, we devise a solution that enables us to take the risk onto our books if appropriate.
Quantitative risk monitoring based on indicators is carried out both centrally and within units, for example at meag for investments and at ergo irm, and then collated centrally. We monitor risks that cannot be depicted in figures on a decentralised or centralised basis, depending on their significance and classification.
a central it system is used to produce the consolidated financial statements based on standard general ledgers in place throughout most of the group, with harmonised basic data, standard processes and posting rules, and a standard interface for delivery of data to the group or subgroup. authorisation procedures regulate access to accounting systems. Dual control is applied, with virtually every step subject to systembased and accounting checks. any errors are analysed and promptly corrected.
the aim of our external risk reporting is to provide clients and shareholders with a clear overview of the group’s risk situation. this includes information on our risk management methods and processes, our risk governance, and the individual risks to which munich re is exposed.
significant risks in property-casualty insurance are the premium and reserve risks. the premium risk is the risk of future claims payments relating to insured losses that have not yet occurred being higher than expected. the reserve risk is the risk of technical provisions established to cover losses that have already been incurred being insufficient.
premium risk line management has primary responsibility for controlling the premium risk. line managers grant underwriting authorities and lay down internal processes aimed at ensuring that a high level of quality is maintained; in doing so, they take account of both the specific exposures in their business and the knowledge and experience of each member of staff.
Due to the diversity and extensive ramifications of munich re’s business, it is not possible to produce a set of rules for acceptance that would fully cover relevant risks. the expertise of our underwriters on the ground is therefore of prime importance and we recognise this by providing advanced training and it systems for risk assessment and pricing, publishing internal information sheets and underwriting recommendations, and setting up working groups to create and transmit underwriting knowledge.
We calculate the reserves for losses and claims settlement costs in accordance with actuarial practice based on substantiated assumptions, methods and assessments. the assumptions are regularly reviewed and updated.
Further information on underwriting risk can be found in the notes to the consolidated financial statements under (38) risks from property-casualty insurance business.
in german primary health insurance, especially comprehensive health cover, there have been additional uncertainties since 2009 because of changes to the options available to policyholders, for example
// portability of reserves (ageing reserves) when moving to another insurer, // obligation on insurer to pay benefits for insureds who have not paid premiums, with no possibility to terminate the contract, // the right to change to a new tariff.
the changes are the result of the law reforming german healthcare (Wsg). though the new policyholder options have been taken into account in the valuation model on the basis of past experience, it is difficult to estimate how policyholder behaviour will change in the long term.
Further information on underwriting risk can be found in the notes to the consolidated financial statements under (37) risks from life and health insurance business.
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. this includes equity risk, general and specific interest-rate risk, property risk and currency risk. the general interest-rate risk relates to changes in riskfree interest-rate curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, e.g. on government bonds or on credit default swaps (cDss). We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also our underwriting liabilities, especially in life insurance. Due to the long-term interestrate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities is highly dependent on the capital markets.
We deal with market risks by means of suitable limit and early-warning systems, and through our asset-liability management, which is described on page 105. a breakdown of investments by type can be found on page 94 ff. to hedge against market risks, we also make use of derivative financial instruments, which are described in the notes to the consolidated financial statements under (9) other securities at fair value through profit or loss.
Credit risk We define credit risk as the financial loss that munich re could incur as a result of a change in the financial situation of a counterparty, such as an issuer of securities or other debtor with liabilities to our group.
We identify and mitigate these risks through our internal control system (see page 123). We take all possible steps to ensure that employees are aware of potential risks and to establish an appropriate risk culture. this includes willingness to learn from mistakes and to recognise them as opportunities for improvement.
Liquidity risk We manage liquidity risk through our holistic risk strategy, with the Board of management defining limits on which minimum liquidity requirements for our operations are based. these risk limits are reviewed annually and compliance with the minimum requirements continuously monitored.
// known and expected payment obligations through regular, detailed liquidity planning at individual-entity level, and a central cash-flow reporting system; // margin calls and collateral requirements for derivative positions; // unexpectedly high payments resulting, for example, from accumulation losses that far exceed normal loss expectations.
We also optimise the availability of liquidity in the group by means of internal funding and a cash pool fed by group companies. through stringent availability requirements, which also comply with supervisory rules, we ensure that every unit is able to meet its payment obligations.
Reputational risk reputational risk is the risk of a loss resulting from damage to the group’s public image (for example with clients, shareholders or other parties).
in 2011, ergo and munich re suffered considerable damage to their reputation as a result of media reports on an unethical incentive trip organised by hmi. a short while later, there were reports of irregularities in the sale of insurance products (including errors in the “riester” proposal form and company pension products). all cases were investigated by our internal audit function. in view of the importance and impact of the issues involved, not only were the cases thoroughly investigated at ergo, but action has also been taken to prevent recurrence: central guidelines on conduct and organisation in the ergo group have been changed and, in particular, compliance has been strengthened through the creation of a separate compliance unit reporting directly to the chairman of ergo’s Board of management.
management report // risK report munich re group annual report 2011 on page 124 ff, we provide some examples of the above-mentioned risks and how we deal with them.
internal risk model munich re manages its business on the basis of a consolidated group view, using its own integrated risk model to determine the capital needed to ensure the group’s ability to meet its commitments even after extreme loss events.
our risk model indicates the profit and loss distribution of the available financial resources over a one-year time horizon. it is based on separately modelled distributions for the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risks”. We regularly review these distribution assumptions, comparing them, for example, with loss events that have actually occurred and adjusting them if necessary.
We also show the diversification effects we achieve through both our broad spread across the different risk categories (underwriting, market and credit) and our combination of primary insurance and reinsurance business. in doing so, we recognise that the various risks are not independent of each other by taking account of tail dependencies. compared with a situation where the risks are assumed to be independent, this results in a lesser diversification effect.
a key figure calculated using the internal model is our economic risk capital (erc). By economic risk capital, we mean the amount of capital that munich re needs to have available, with a given risk appetite, to cover unexpected losses in the following year.
to determine munich re’s economic risk capital, we use the economic profit-loss distribution across all risk segments. the economic risk capital corresponds to 1.75 times the value at risk of this distribution over a one-year time horizon with a confidence level of 99.5%. the value at risk with a confidence level of 99.5% gives the economic loss for munich re which, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. it represents the future risk tolerance under solvency ii. By setting its own capital requirement at 1.75 times this risk tolerance, our group follows a conservative approach, offering its clients a high degree of security.
the distribution of economic losses between the individual legal entities in munich re may vary, but the ability of one unit to support another in the event of a loss is in some cases subject to legal constraints. in determining munich re’s capital requirements, restrictions of capital fungibility resulting from legal or regulatory requirements are therefore taken into account.
// the economic risk capital for our life and health business rose by €1.5bn, owing to portfolio growth in life reinsurance business and, in particular, lower interest rates in the usa, canada and europe which caused a significant rise in the economic risk capital for german primary insurance, as the lower risk buffers (future profit sharing) resulted in a higher risk for the insurer.
// the economic risk capital for market risks grew by €1.5bn, due in part to the lower interest rates and the higher implicit interest-rate volatility. on the one hand, the risk capital was increased by the standardised use of swap rates for discounting on the liabilities side, while on the other it was reduced by an improvement in the valuation of options and guarantees in a stressed market environment, mainly of significance in life primary insurance business.
// the economic risk capital for credit risks was up by €2.2bn. significant factors were the lower interest rates, which had the effect of increasing both the market value and the duration of the investments, and a difficult market environment that led to lower ratings for paper with higher credit spreads. in life primary insurance especially, lower risk buffers (see remarks on life and health business) meant a rise in the credit risk recognised, which was at the same time reduced by the revised calibration of the dependency structure between individual debtors.
// as last year, we used scenarios to determine the economic risk capital requirement for operational risk. the scenarios are prepared and refined annually by various expert teams in the group. in the financial year 2011, our review found that one scenario could be dropped.
// the diversification effect between the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risk” grew by around €1.7bn, due primarily to the rise of €5.4bn to €35.4bn in the sum of the economic risk requirements of the individual risk categories.
across all the risk categories, the euro equivalent of our exposures in canadian dollars, pounds sterling, Japanese yen and us dollars has increased because the euro fell further against these currencies over the course of the year.
the analysis at year-end 2011 showed that, in the aggregate, all the changes to the model reduced the group’s economic risk capital by a total of less than 10%.
Property-casualty as described, munich re actively manages its risk exposure. the underwriting risk capital for property-casualty is made up as follows from the components “basic losses” and “large and accumulation losses”: losses with a potential cost exceeding €10m at group level are classified as large losses. accumulation losses are losses affecting more than one risk (or more than one line of business). We classify all other losses as basic losses. For basic losses, we calculate the risk of subsequent reserving being required for existing risks within a year (reserve risk) and the risk of an under-rating (premium risk). to achieve this, we use analytical methods that are based on standard reserving procedures but take into account the one-year time horizon. in the case of basic losses, the annual readjustment of the models has resulted in a virtually unchanged economic risk capital requirement.
the exposures in the reinsurance segment are updated for the quarterly erc calculations, and we use the data to adjust the stochastic models for natural hazards. the current limit utilisation is determined by a bottom-up process. as ergo’s portfolio is more stable, its exposure is only updated annually.
economic risk capital (eRc) – Property­casualty 31.12.2011 Prev. year change Segment Segment Re­ Primary diversi­ Re­ Primary diversi­ €bn Group insurance insurance fication Group insurance insurance fication Group
management report // risK report munich re group annual report 2011 the rise in the economic risk capital for large and accumulation losses is mainly due to the remodelling of the “atlantic hurricane” scenario and north american earthquake. in addition, all scenarios on average are showing increased exposure.
the largest natural catastrophe exposure for munich re is the €3.5bn currently retained for the “atlantic hurricane” scenario (value at risk for a 200-year return period). our exposure to european windstorms has been quantified at €2.4bn using the scenarios we have drawn up.
in contrast to the overall development described above, the economic risk capital for the scenario “storm europe” decreased, owing to an adjustment of the stochastic modelling and reduced exposure.
as a global risk carrier, we can diversify our portfolio through the broadest possible mix and spread of individual risks, significantly reducing the volatility of total claims payments and substantially increasing the value added by all parts of our business.
Market risks market risks are determined using a scenario-based simulation calculation. the scenarios are calibrated on the basis of long historical data series.
equity risk the market value of our investments in equities, including participating interests, was €6.7bn (7.9bn) as at 31 December 2011. as at that date, on a market-value basis the ratio of equities to total investments was 3.2% (4.0%) before taking derivatives into account and 2.0% (4.4%) after derivatives. the decrease compared to the previous year is the reason for the lower risk capital for equities.
interest-rate risks in reinsurance, the interest-rate risk on fixed-interest investments in units of modified duration (interest-rate sensitivity) was 6.6, whereas the modified duration of liabilities was 5.2. the sensitivity of available financial resources (see next section) to a parallel increase in all interest-rate curves by one basis point (DV01) amounts to approximately –€3.9m. Were such a parallel shift in the interest-rate curves to occur, the available financial resources would change by that amount. the decrease in the general interestrate risk in reinsurance is mainly attributable to the reduced gap between the durations of assets and liabilities.
in primary insurance, the increase in interest-rate risks is primarily due to the fall in long-term interest rates and the simultaneous rise in implicit interest-rate volatilities.
the modified duration in primary insurance is 7.1 for fixed-interest investments and 8.7 for liabilities. this exposure to falling interest rates arises mainly out of the long-term options and guarantees in life insurance business. these risks were reduced substantially by the extensive interest-rate-risk hedging programme first implemented in 2005. the sensitivity of available financial resources (see next section) to a parallel increase in all interest-rate curves by one basis point (DV01) amounts to €21.2m.
economic risk capital (eRc) – Market 31.12.2011 Prev. year change Segment Segment Re­ Primary diversi­ Re­ Primary diversi­ €bn Group insurance insurance fication Group insurance insurance fication Group
Diversification effect –7.4 –4.7 –4.0 – –7.4 –5.8 –4.0 – –
Credit risks munich re determines credit risks using a portfolio model, which takes into account both changes in market value caused by rating migrations and debtor default. the model is calibrated over a credit cycle.
BBB and lower 1.5 1.5 no rating available 6.8 5.5 €28.3bn in available financial resources
in calculating rorac (see definition on page 61), the factor “additional available economic equity” is also relevant. it is the difference between the economic equity and the economic risk capital and amounted to –€0.8bn (4.1bn) as at 31 December 2011. this means that portions of our hybrid capital are used for risk assumption, as well as our economic equity.
Available financial resources €bn 31.12.2011 Prev. year change iFrs equity 23.3 23.0 0.3 Valuation reserves 0.9 0.9 – Value adjustments for property-casualty and life and health1 4.0 5.1 –1.1 goodwill and other intangible assets –4.2 –4.1 –0.1 tax effects and other –0.4 –0.1 –0.3 economic equity 23.6 24.8 –1.2 hybrid capital 4.7 4.8 –0.1 Available financial resources 28.3 29.6 –1.3 economic solvency ratio components 31.12.2011 Prev. year change (a) economic equity €bn 23.6 24.8 –1.2 (B) available financial resources €bn 28.3 29.6 –1.3 (c) available financial resources after dividend and share buy-back €bn 27.2 28.1 –0.9 (D) economic risk capital (erc) €bn 24.4 20.7 3.7
(B) minus (D): economic capital buffer €bn 3.9 8.9 –5.0 (c) divided by (D): economic solvency ratio % 111 136 1 change in methodology: the basis in reinsurance property-casualty is now the claims payments projected using actu arial methods (adjusted previous-year figure = €6.7bn). in addition, for property-casualty and munich health, swap rates instead of government-bond interest rates are used for discounting.
the interest rates on the borrowing of a number of eurozone sovereign issuers increased in 2011 as a result of the higher credit margins required in the markets, leading to a fall in the market values of our holdings in the government bonds of the countries concerned. this contrasted with the still generally low yields on bonds issued by eurozone countries considered safe. especially the interest rates for german federal government or “länder” issues fell further in 2011 in a volatile environment. this produced price gains on our german government bonds, but harbours major risks owing to the low return on reinvestment, which makes it more difficult for us to fulfil our future payment requirements. We monitor these risks closely and counter them with various risk management measures.
our sophisticated limit system and our well-established administration systems have served us well so far during the periods of turbulence in the financial markets. the losses incurred due to falls in the prices of euro periphery bonds were more than offset by price gains on safe investments, in particular german and us government bonds.
new and complex risks our risk early-warning system also covers “emerging risks”, i.e. those that arise as a result of legislative, socio-political, scientific or technological changes and are therefore liable to have unmeasured or unknown effects on our portfolio. the degree of uncertainty as to extent of damage and occurrence probability is by nature very high.
management report // risK report munich re group annual report 2011 interdependencies between different risks and other consequences related directly or indirectly to emerging risks. cooperation with external partners complements our internal early-warning system.
the proceedings started by the spanish antitrust authority (cnc – comisión nacional de la competencia) in 2009 against several insurers and reinsurers, including munich re’s spain and portugal branch, for alleged collusion restricting competition in spanish decennial liability business (compulsory insurance for guarantee claims in respect of contract works) continue. in December 2009, munich re’s spain and portugal branch lodged an appeal against the fine of €15.9m imposed by the cnc.
the ongoing discussions regarding the german healthcare system, notably the “citizens ’ insurance scheme”, may result in further changes in the statutory framework. if, unlike now, all citizens were to be compulsorily included in the german public health insurance system, it would spell the end of at least new business for private health insurers in comprehensive health insurance. We have been monitoring this risk for many years. similar proposals have been put forward for “citizens’ long term care insurance ”.
Summary in accordance with the prescribed processes, munich re’s Board committees explicitly defined the risk appetite for significant risk categories in the year under review and quantified it with specific figures. We determined and documented the risk appetite across the group hierarchy and communicated it throughout munich re. During the whole of 2011, risk exposures were regularly quantified and compared with the risk appetite. We assess munich re’s risk situation as manageable and under control.
Despite the difficult economic situation, there are a wide range of opportunities for us. after major losses, general risk awareness is heightened and the demand for effective risk relief via reinsurance increases. With our know-how, our ability to find the right solutions and our financial strength, we are well positioned. in primary insurance, too, we expect stable development. people’s need for care and provision is rising and increasingly has to be financed privately. in property-casualty primary insurance, we forecast that premium income will expand, mainly owing to growth in international business. For munich health, there are opportunities and risks from the international healthcare markets.
// challenges for the group owing to uncertain economic environment, but also opportunities thanks to financial strength and solution-finding ability
management report // prospects munich re group annual report 2011 capital markets in spite of the difficult growth environment, yields on german government bonds with long periods to maturity are likely to increase if the situation in the eurozone eases at least to some extent or collective liability for the debts of other euro countries is expanded. in such a case, yields on us government bonds − up to now also considered safe havens − could also increase, especially since economic growth in the usa should be higher. since we do not anticipate any increases in key interest rates, the yields on short- duration bonds are expected to remain relatively low, so that yield curves will probably become steeper overall. given the sovereign debt crisis in europe, the greater relaxation of european monetary policy and projected higher growth in the usa, the us d ollar should rise further against the euro. if the situation in the eurozone defuses at least partially, equities could benefit.
insurance industry in the european union, state supervision for primary insurers and reinsurers is set to undergo profound changes with the new rules planned under solvency ii, which are expected to generally enter into force at the earliest in mid-2013. in terms of capital, risk management and reporting, these changes will impose greater requirements on insurance companies. however, the introductory and transitional periods are likely to be long. irrespective of the fine-tuning still to be done, solvency ii will influence insurance supply and demand. new opportunities will emerge for munich re in both primary insurance and reinsurance, and these will exceed the challenges from the many different additional demands.
nevertheless, the extremely low yields on german and us government bonds present a challenge for insurers because of the significant reduction in interest earned on investments in the period between premiums being received and policy benefits being paid out. especially in long-tail business, this intensifies the need to increase prices. in property insurance business, which has a more short-term character, the heavy claims burdens arising from recent natural catastrophes have made the risk exposure clear and are driving prices up. conversely, subdued economic growth is limiting demand for insurance protection and with it the scope for higher prices.
Demand for life insurance cover to grow far more quickly than the economy
management report // prospects munich re group annual report 2011 risks the economic outlook is clouded by great uncertainty. a sharp downturn in the economy or even an extended period of stagnation with deflationary consequences cannot be ruled out in a number of industrialised countries. a sustained low-interest-rate envir onment would significantly impair the situation of life insurance companies. the high levels of debt in many countries and potential upheavals in the eurozone could further destabilise the global financial system to the detriment of the insurance industry.
Finally, ruinous competition with a downward trend in insurance prices lasting several years remains an unlikely but not impossible risk scenario. giving clear priority to profitability over growth and focusing on the efficiency of management systems continues to be critical for the insurance industry’s success.
reinsurance reinsurance continues to hold considerable promise for the future, with a wide variety of earnings opportunities, especially after the many major losses in 2011. munich re offers its cedants specialist consulting services and extensive solutions, also for tasks such as balance sheet management, risk modelling and asset-liability management. reinsurance is an efficient and flexible option for protecting primary insurers against major claims and accumulation losses, or strengthening their capital base. in addition to this, we devise innovative coverage concepts that go beyond the scope of traditional reinsurance. and we partner our clients in the often challenging task of adjusting to changes in regulatory requirements, which are being made significantly more demanding in many countries.
in 2010, we set ourselves the objective of achieving value added by new business of €450m a year by 2015 based on market consistent embedded Value (mceV) principles. given the further very good result posted in the past year, we see ourselves as well positioned to achieve this goal.
For 2012, we expect gross premiums written in property-casualty reinsurance to amount to around €16.5bn. We aim for a combined ratio of about 96% of net earned premiums over the market cycle as a whole. the uncertainties involved in the estimate partly derive from the random incidence of major individual losses.
if exchange rates remain constant, gross premiums in reinsurance should range between €25bn and €27bn overall in 2012. We envisage a consolidated result in re insurance of €1.9–2.1bn for 2012.
in life primary insurance, our total premium income is likely to be below the previous year’s level, i.e. just over €7.5bn, with gross premiums written totalling slightly under €6bn. Developments in german and international business will, however, greatly hinge on single-premium business, income from which will depend on developments in the interest-rate environment, among other things. it remains to be seen how the reduction in the guaranteed interest rate in germany as at 1 January 2012 and the introduction of unisex pricing as at 21 December 2012 will influence premium development.
in property-casualty insurance, we expect premium growth to total slightly less than €6bn, deriving from both german and especially international business. in germany, we project market-average growth of around 1–2%. the increase is likely to be stronger for international business. our combined ratio target for property-casualty business is a good level of below 95%, while in international business we anticipate a further improvement compared with 2011.
provided that profitability is appropriate, we intend to invest more strongly in renewable energy and new technologies. in 2011, we were able to expand this portfolio substantially by around €500m. to reduce the portfolio’s main risk drivers, i.e. technical and political risk, we are aiming to diversify our investments in this area regionally and technologically, investing to an increasing extent in infrastructure projects. We intend to maintain our real estate portfolio unchanged in terms of both volume and orientation in 2012.
management report // prospects munich re group annual report 2011 munich re (group)
our assumption is that the group’s gross premiums written in 2012 will be in the range of €48–50bn, provided that exchange rates remain stable compared with those at the end of 2011.
For 2012, given a general upward trend in prices in reinsurance and average loss experience, we project a considerably higher technical result than in 2011. a return on investment of around 3.5% would mean an investment result of approximately €7.2bn, i.e. slightly higher than last year, which was impacted by high write-downs on greek securities, but lower than in previous years. if actual claims experience with regard to major losses is within normal bounds and there are no severe currency or capital market developments, we expect that for 2012 we will be able to achieve a profit in the region of €2.5bn. that is equivalent to a rorac of around 10%. For 2013, we expect to be able to improve the consolidated result further.
Assets a // intangible assets 172 B // investments 173 c // investments for the benefit of life insurance policyholders who bear the investment risk 178 d // ceded share of technical provisions 178 e // Receivables 178 f // cash at banks, cheques and cash in hand 179 G // deferred acquisition costs 179 h // deferred tax assets 179 i // other assets 179
Equity and liabilities a // equity 180 B // subordinated liabilities 180 c // Gross technical provisions 180 d // Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 183 e // other accrued liabilities 183 f // liabilities 184 G // deferred tax liabilities 184
Segment reporting segment assets 188 segment equities and liabilities 188 segment income statement 190 non-current assets by country 192 investments in long-term assets per segment 192 Gross premiums written 193
Notes to the consolidated balance sheet – Assets 02 // other intangible assets 197 03 // land and buildings, including buildings on third-party land 198 04 // investments in affiliated companies and associates 199 notes to the consolidated financial statements munich Re GRoup annual RepoRt 2011
Notes to the consolidated balance sheet – Equity and liabilities 19 // subordinated liabilities 221 20 // unearned premiums 222 21 // provision for future policy benefits 224 22 // provision for outstanding claims 225 23 // other technical provisions 229 24 // Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 230 25 // other accrued liabilities 231 26 // Bonds and notes issued 235 27 // deposits retained on ceded business 235 28 // other liabilities 235
Notes to the consolidated income statement 30 // income from technical interest 239 31 // expenses for claims and benefits 240 32 // operating expenses 242 33 // investment result 243 34 // other operating result 247 35 // other non-operating result, impairment losses of goodwill and finance costs 248 36 // taxes on income 249
Disclosures on risks from insurance contracts and financial instruments 37 // Risks from life and health insurance business 252 38 // Risks from property-casualty insurance business 259 39 // credit risks from ceded reinsurance business 265 40 // market risks from financing instruments – sensitivity analysis 265 munich Re GRoup annual RepoRt 2011
Other information 42 // Related parties 268 43 // personnel expenses 268 44 // long-term incentive plan 268 45 // mid-term incentive plan 271 46 // Remuneration report 272 47 // number of staff 273 48 // auditor’s fees 273 49 // contingent liabilities, other financial commitments 273 50 // Restrictions regarding transfer of capital 274 52 // events after the balance sheet date 276 53 // earnings per share 276 54 // proposal for appropriation of profit 276
C. Investments for the benefit of life insurance policyholders who bear the investment risk 5,093 4,957 136 2.7 D. Ceded share of technical provisions (12) 5,634 5,490 144 2.6 thereof: held for sale 13 – 13 – E. Receivables
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (24) 5,373 5,210 163 3.1
F. Liabilities i. Bonds and notes issued (26) 263 290 –27 –9.3 ii. deposits retained on ceded business (27) 2,726 2,762 –36 –1.3 iii. current tax liabilities 3,388 3,253 135 4.2 iV. other liabilities (28) 13,051 13,103 –52 –0.4
2. Income from technical interest (30) 5,897 6,587 –690 –10.5 3. Expenses for claims and benefits (31) Gross 42,323 37,747 4,576 12.1 ceded share 316 431 –115 –26.7 thereof: income from associates accounted for using the equity method 100 51 49 96.1 9. Deduction of income from technical interest –5,897 –6,587 690 10.5 12. Other non-operating result (35) –707 –454 –253 –55.7 13. Impairment losses of goodwill (35) 25 109 –84 –77.1 15. Taxes on income (36) –552 692 –1,244 –
Gains (losses) recognised in equity 390 645 included in the income statement – –
change resulting from cash flow hedges Gains (losses) recognised in equity 1 –3 included in the income statement 5 –
total recognised income and expense – – change in shareholdings in subsidiaries – – change in consolidated group – – dividend – – share buy-backs – – Retirement of own shares – – Status at 31.12.2010 588 6,800 allocation to retained earnings – – consolidated result – – income and expense recognised directly in equity – –
munich Re GRoup annual RepoRt 2011 consolidated financial statements // GRoup statement of chanGes in equity
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Consolidated Retained earnings Other reserves result Retained earnings before Unrealised Reserve from Valuation result deduction of Own shares gains and currency from cash flow own shares held losses translation hedges 11,247 –580 2,717 –1,245 1 2,521 229 22,278 1,449 – – – – –1,449 – –
–52 – – – – – 2 –50 –31 – – – – – 11 –20
–20 – – – – – –10 –30 – – – – – – – – – – – – – –1,072 –4 –1,076
–137 – – – – – 2 –135 – – – – – – –3 –3
–1 – – – – – –1 –2 – – – – – – – – – – – – – –1,110 –9 –1,119
– –323 – – – – – –323 –999 999 – – – – – –
since 2002, the standards adopted by the international accounting standards Board (iasB) have been referred to as international financial Reporting standards (ifRss); the standards from previous years continue to bear the name international accounting standards (iass).
discretionary judgements and estimates are of significance for the following items in particular and are described in more detail in the respective explanatory notes: // goodwill and other intangible assets // fair values and impairments of financial instruments // deferred acquisition costs // technical provisions // pension provisions // deferred tax // contingent liabilities
Non-current assets and disposal groups held for sale non­current assets and disposal groups classified as “held for sale“ are recognised at the lower of carrying amount or fair value less sales cost and shown separately in the consolidated balance sheet.
Figures for previous years the previous­year figures have been calculated on the same basis as the figures for the financial year 2011.
the amended interpretation IFRIC 14 (rev. 11/2009), IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction, applies in the circumstances when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements. the amendment per­ mits the entity to treat the benefit of such an early payment as an asset. this change has no practical significance for munich Re.
Standards or changes in standards not yet entered into force the amendments to IFRS 7 (rev. 10/2010), Financial Instruments: Disclosures, Improving Disclosures about Financial Instruments, contain more extensive disclos­ ure requirements regarding the transfer of financial assets, with a view to making more transparent the influence of such transactions on the entity’s risk exposure and hence its financial situation. application of the new rules is mandatory for financial years beginning on or after 1 July 2011 and were adopted into european law in november 2011.
the amendments to IAS 12 (rev. 12/2010), Taxes on Income, Deferred Tax: Recovery of Underlying Assets, address the issue that the measurement of deferred tax items depends on whether the carrying amount of an asset is expected to be recovered through use or through sale. in practice, the two are often difficult to distinguish. the amendment provides a solution through the introduction of a refutable presumption that recovery of the carrying amount will normally be through sale. these amendments are mandatory for financial years beginning on or after 1 January 2012; their adoption in the eu is still outstanding.
under the amendment to IAS 1 (rev. 06/2011), Presentation of Financial Statements, Presentation of Items of Other Comprehensive Income “other comprehensive income” must now be divided into items that will be reclassified to profit or loss at a later date and items that will not. the purpose of this amendment is to improve the presentation of these items and align the approaches under ifRs and us gaap. the amendments are mandatory for financial years beginning on or after 1 July 2012 but have not yet been adopted into european law.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 the following standards are mandatory for financial years beginning on or after 1 Janu­ ary 2013. they have not yet been adopted into european law.
IFRS 11 (05/2011), Joint Arrangements, defines joint operations and joint ventures and specifies how they are to be recognised in the balance sheet. the changes compared with ias 31, interest in Joint Ventures, mainly concern the elimination of the option of proportionate consolidation for joint ventures, the amended definition of joint control, and the extended scope of application of joint operations. these may also include arrangements structured through a separate vehicle. the elimination of the option of proportionate consolidation will have no impact on munich Re, as we do not avail our­ selves of this option and already apply the equity method. the effects of the two other changes are currently being analysed.
IFRS 12 (05/2011), Disclosure of Interests in Other Entities, combines the disclosures regarding facts and circumstances governed by ifRs 10, 11 and ias 28. the objective of the standard is to provide information on the type and risk of interests in other enti­ ties and their implication for the consolidated financial statements. as a consequence, the information provided needs to be more comprehensive than hitherto. in particular, ifRs 12 requires disclosures relating to unconsolidated structured entities, non­con­ trolling interests, discretionary judgements and assumptions in evaluating the nature of interests in other entities, as well as detailed information on each significant joint arrangement. the extent to which munich Re is affected by the extended disclosure requirements is currently being examined.
IAS 27 (rev. 05/2011), Separate Financial Statements, will in future deal only with the recognition of shareholdings in entities under control, joint ventures and associates in separate single­entity financial statements in accordance with ifRs, including the relevant disclosures in the notes. the definition of control, and balance sheet recogni­ tion of entities under control in consolidated financial statements, is now regulated by ifRs 10. the standard has no effect on munich Re, as the aforementioned rules for sep­ arate single­entity financial statements in accordance with ifRs have remained unchanged.
IAS 28 (rev. 05/2011), Investments in Associates and Joint Ventures, specifically includes amendments following from the publication of ifRs 11 and ifRs 12. among other things, the standard integrates the balance sheet recognition of joint ventures and circumstances governed by sic 13, Jointly controlled entities – non­monetary contributions by Venturers. furthermore, investments in associates or joint ventures held by such entities as investment funds or unit trusts is no longer excluded from the standard’s scope of application. Rather, there is now an option to measure these at fair value according to ifRs 9, financial instruments. the amendments are not expected to have any major effects on munich Re.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 value, defining it as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. the standard includes detailed information on how to determine the fair value for different types of assets and liabilities. in addition, the standard requires further dislos­ ures in the notes – for instance, the fair value hierarchy thus far only required for finan­ cial instruments under ifRs 7 has now been extended to include all items measured at fair value. on the basis of ifRs 13, we are verifying whether munich Re’s fair value measurement is in compliance with the new provisions, and we will make any adjust­ ments necessary. the new disclosures in the notes will also need to be implemented.
a list of all our shareholdings can be found in the section “list of shareholdings as at 31 december 2011 in accordance with section 313 para. 2 of the german commercial code“.
Other Germany countries Total 1 in addition, 64 german and three non­german special funds were included in the consolidated group.
Cash flows arising from losing control €m 2011 Prev. year total consideration for losing control 534 3 non­cash consideration for losing control – – Cash consideration for losing control 534 3 cash over which control was lost –36 –11 Total 498 –8
Business combinations occurring during the reporting period on 1 January 2011, through its subsidiary munich health north america inc., Wilming­ ton, delaware, munich Re acquired 100% of the shares in the Windsor Health Group Inc. (Windsor), Brentwood, Tennessee, for a total of us$ 135.7m (€101.2m) in cash, fully financed from our own resources.
in connection with the acquisition of Windsor, other intangible assets of €46.6m and goodwill of €39.0m have been recognised. the goodwill derives in particular from syn­ ergies with the rest of munich Re’s medicare business as regards products and services offered, geographical spread and distribution channels. the goodwill includes the value assigned to Windsor’s staff and is not tax­deductible.
Windsor’s combined opening balance sheet at the time of acquisition, after elimination of its intra­group business, also includes the following ifRs fair values: investments of €9.0m, cash at banks, cheques and cash in hand of €29.5m, receivables of €26.0m, deferred tax assets of €7.5m and other assets of €13.3m, technical provisions of €29.4m, other provisions and liabilities of €22.0m, and deferred taxes of €18.3m. Wind­ sor’s equity at the time of acquisition amounted to €33.4m.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 no contingent liabilities, contingent payments or separate transactions within the meaning of ifRs 3 were identified. the income and expenses for the months of January to december 2011 have been recognised in the consolidated income statement. in this period, Windsor contributed €363 9m to group earnings and –€16.1m to the consoli­ dated result.
as Windsor was acquired with effect from 1 January 2011, the earnings and result included in the consolidated financial statements for the financial year 2011 tally with the figures since the commencement of the current financial year.
on 1 January 2011, via its subsidiary mR Rent­investment gmbh, munich, munich Re acquired 100% of the voting shares in 11 wind park com panies in a bidding process. the wind park portfolio comprises 11 wind parks already operating in various regions of germany with a total of 40 wind turbines.
through a purchase and share­transfer contract and an agreement on the change of general partner, mR Rent­investment gmbh, munich, acquired from wpd windpark asset gmbh & co. Kg, Bremen, all the limited partner shares in each of the following wind park companies: // Windpark mittelhausen gmbh & co. Kg, Bremen // Windpark sassenberg gmbh & co. Kg, Bremen // einzelanlage hohenseefeld gmbh & co. Kg, Bremen // wpd Windpark Wergzahna gmbh & co. Kg, Bremen // Windpark hillmersdorf gmbh & co. Kg, Bremen // Windpark marwitz gmbh & co. Kg, Bremen // Windpark großberndten 2 gmbh & co. Kg, Bremen // Windpark Kruge gmbh & co. Kg, Bremen // Windpark geisleden Betriebs gmbh & co. Kg, Bremen // Windpark Klein Bünzow gmbh & co. Kg, Bremen // Windpark langengrassau gmbh & co. Kg, Bremen mR Rent­management gmbh, munich, also a subsidiary of munich Re, became the new general partner in the limited partnerships.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 the provisional purchase price for the wind park portfolio was €40.5m in cash and fully financed from our own resources. the purchase price comprises various forms of con­ ditional consideration. at the reporting date, the adjustment to the purchase price due to additional or fewer downtimes was still open. there were no significant impacts on the results from adjustments to the purchase price made in the period under review.
the fair value of the acquired receivables from deliveries and services amounts to €3.6m and corresponds to the gross contract value. no defaults were expected at the time of acquisition.
goodwill of €0.9m arithmetically resulting from the transaction was written off in full after we carried out an impairment test.
earnings of €13.9m for the months of January to december 2011 have been recognised in the consolidated income statement. in this period, the wind park portfolio business contributed €1.2m to the consolidated result.
on 19 July 2011, via its subsidiary mR Rent­investment gmbh, munich, munich Re acquired 100% of the voting shares in the following two photovoltaic solar park com­ panies from fotoWatio italia s.R.l. turin, italy: // fotoWatio italia galatina s.R.l., galatina, italy // fotouno s.R.l., ginosa, italy fotoWatio italia galatina s.R.l. operates a photovoltaics park outside the town of galatina (near lecce, in the apulia region of italy). fotouno s.R.l. operates three photovoltaic parks (cantore plant, stornara plant, marinella plant) on the outskirts of the town of ginosa.
the purchase price for the solar park companies is €150.9m. the amount comprises a cash payment of €17.3m to the seller and €133.6m for the settlement of liabilities of the acquired companies. at the reporting date, the contingent adjustment to the purchase price due to deviations between the actual and estimated net debt of the acquired com­ panies at the time of acquisition (including the results for July) had been concluded, with no significant impacts on the results.
the ifRs fair values of the assets and liabilities of adelfa and the photovoltaic plant at the time of acquisition are as follows: intangible assets of €15.5m, investments of €15.3m, receivables of €1.1m, other assets of €4.9m, liabilities of €2.5m towards mR Rent­investment gmbh, and other liabilities of €4.6m.
the goodwill of €0.1m arithmetically resulting from the transaction was written off in full after we carried out an impairment test.
Associates pursuant to ias 28, associates are generally all entities which are not subsidiaries but on whose financial and operating policies the investors can exercise a significant influ­ ence. in the case of shareholdings amounting to between 20% and 50% of the voting power, the entities in question are deemed to be associates unless it can be clearly demonstrated that there is no significant influence.
information on the measurement of investments in associates can be found in the notes on assets, under B – investments.
Other Germany countries Total 31 dec. previous year 45 16 61 additions – 1 1 Reductions 2 6 8 31 dec. financial year 43 11 54
Goodwill resulting from the first­time consolidation of subsidiaries is tested for impair­ ment at least annually, in accordance with ias 36. We additionally carry out ad­hoc impairment tests if there are indications of impairment. for impairment testing, the goodwill is allocated to the cash­generating units or groups of cash­generating units expected to derive benefit from the synergies of the business combination. to ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cash­generating unit or a group of cash­generating units is compared with that unit‘s or group’s recoverable amount. the recoverable amount is the greater of the fair value less costs to sell and the value in use (present value of future cash flows expected to be derived from a cash­generating unit or a group of cash­generating units). if this re ­ coverable amount is lower than the carrying amount, a write­down is made on the goodwill. if the amount of the impairment of a cash­generating unit or group of cash­ generating units is greater than the carrying amount of the goodwill allocated, the difference is generally allocated pro rata between the other relevant assets of the unit or group of units on the basis of their carrying amounts. however, the carrying amount may not be reduced below the highest of fair value less costs to sell, the value in use, and zero.
the other intangible assets mainly comprise acquired insurance portfolios, self­ developed and other software, and acquired sales networks, client bases and brand names.
acquired insurance portfolios are recognised at their present value on acquisition (pVfp – present value of future profits). this is determined as the present value of expected profits from the portfolio acquired, without consideration of new business and tax effects. the acquired insurance portfolios are amortised in accordance with the realisation of the profits from the insurance portfolios underlying the pVfp calculation. they are regularly tested for impairment in accordance with ifRs 4 (liability adequacy test); cf. notes on liabilities item c. Write­downs are recognised under operating expenses.
self­developed and other software, acquired sales networks, client bases and brand names are carried at cost. self­developed and other software is amortised on a straight­line basis at a rate of 20–33% over its useful life – three to five years – or in exceptional circumstances at a rate of at least 10% over a period of up to ten years. the useful lives and depreciation rates of the acquired sales networks and client bases are 2–17 years and 6–50%, and those of the brand names 1–30 years and 3–100%; the items in question are amortised consistently in accordance with the straight­line method. in addition, the assets are tested for impairment at each balance sheet date and write­ downs or write­ups made if required. Write­downs and write­ups are distributed in the consolidated income statement between investment expenses, expenses for claims and benefits and operating expenses. if it is not possible to allocate the write­downs and write­ups to the functional areas, they are shown under other non­operating expenses and income.
Investments in affiliated companies that we do not consolidate because they are not material are generally carried at their fair values. if the investments are quoted on a stock exchange, we use the share prices at the balance sheet date; for unquoted invest­ ments, the fair value is measured using the discounted earnings or net asset value method. changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
Investments in associates are valued by the equity method at the group‘s proportion­ ate share of their net assets. the associate’s earnings attributable to the group are included in the investment result. as a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate are used; in the case of the annual financial statements of significant associates, appropriate adjust­ ments are made to conform them to munich Re‘s accounting policies, in accordance with ias 28.27; exceptional transactions of material importance for a true and fair picture of the associate‘s financial position are recognised in the same financial year. investments in associates that are not material for assessing the group‘s financial pos­ ition are generally accounted for at fair value. to determine the fair value, we use the share prices at the balance sheet date if the investments are quoted on a stock exchange; for unquoted investments, the fair value is measured using the discounted earnings or net asset value method. changes in the fair value are recognised in “other reserves“ under unrealised gains and losses.
Loans are non­derivative financial assets with fixed or determinable payments that are not quoted in an active market. they are measured at amortised cost in accordance with the effective interest method. Write­downs for impairments are made in cases where the repayment of a loan can no longer be expected.
Fixed-interest securities held to maturity are measured at amortised cost in accord­ ance with the effective interest method.
Fixed-interest or non-fixed-interest securities available for sale that are not desig­ nated as at fair value through profit or loss or recognised under loans are accounted for at fair value. if no quoted prices in an active market are available, fair values are based on recognised valuation methods in line with the present value principle. unrealised gains or losses are calculated taking into account interest accrued and, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation (provision for deferred premium refunds), are recognised directly in equity under “other reserves“.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 all unrealised gains or losses from such valuation are included in the investment result.
Derivatives Pricing method Parameters Pricing model Equity and index risks stock options traded on the stock exchange Quoted price – – otc stock options theoretical price listing of underlying shares Black­scholes (european) effective volatilities cox, Ross and money­market interest rate Rubinstein (american) dividend yield monte carlo simulation equity forwards theoretical price money­market interest rate present­value method share price dividend yield equity/index futures Quoted price – – total return swaps theoretical price market values of the funds present­value method (hedge fund certificates) interest­rate curve Interest-rate risks interest­rate swaps theoretical price swap curve money­market interest­rate curve present­value method swaptions/interest­rate guarantee theoretical price at­the­money volatility matrix and skew Black­76 swap curve money­market interest­rate curve interest­rate currency swaps theoretical price swap curve present­value method money­market interest­rate curve currency spot rates interest­rate futures Quoted price – – inflation swaps theoretical price Zero coupon inflation swap rates present­value method interest­rate curve Bond futures Quoted price – – Quoted options on bond futures Quoted price – – Currency risks currency options theoretical price Volatility garman­Kohlhagen currency spot rates money­market interest­rate curve currency forwards theoretical price currency spot rates present­value method money­market interest­rate curve Other transactions insurance derivatives theoretical price market values of the cat bonds present­value method (excluding variable annuities) interest­rate curve insurance derivates theoretical price Biometric and lapse rates present­value method (variable annuities) Volatilities interest­rate curve currency spot rates credit default swaps theoretical price credit spreads present­value method Recovery rates isda cds standard model interest­rate curve total return swaps on commodities theoretical price listing of underlying index present­value method commodity options theoretical price listing of underlying shares Black­scholes (european) effective volatilities cox, Ross and money­market interest rate Rubinstein (american)
securities that we lend by way of securities lending continue to be recognised in our balance sheet, as the main risks and rewards remain with munich Re; securities that we have borrowed are accounted for by the lender. interest income from these transactions is recognised in the investment result.
Recognition of financial instruments financial assets in our direct portfolio are generally accounted for at the settlement date. investments held in special funds are accounted for at the trade date.
all financial instruments recognised at fair value are allocated to one of the valuation hierarchy levels of ifRs 7. this valuation hierarchy provides for three levels. the initial basis for the allocation is the economic investment class. only if this does not result in an appropriate allocation do we deviate from such an approach in individual cases.
in the case of level 1, valuation is based on unadjusted quoted prices in active markets for identical financial assets which munich Re can refer to at the balance sheet date. a market is deemed active if transactions take place with sufficient frequency and in suf­ ficient quantity for price information to be available on an ongoing basis. since a quoted price in an active market is the most reliable indicator of fair value, this should always be used if available. the financial instruments we have allocated to this level mainly comprise equities, investment funds (except property funds) and fixed­interest securities (bearer bonds) for which either a stock market price is available or prices are provided by a price quoter on the basis of actual market transactions. We have also allocated derivatives traded on the stock market to level 1.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 assets allocated to level 2 are valued using models based on observable market data. for this, we use inputs directly or indirectly observable in the market, other than quoted prices. if the financial instrument concerned has a fixed contract period, the inputs used for valuation must be observable for the whole of this period. the financial instru­ ments we have allocated to this level mainly comprise borrowers’ note loans, pfand­ briefs, subordinated securities and derivatives not traded on the stock market.
for assets allocated to level 3, we use valuation techniques not based on inputs observable in the market. this is only permissible insofar as no observable market data are available. the inputs used reflect munich Re’s assumptions regarding the factors which market players would consider in their pricing. We use the best available infor­ mation for this, including internal company data. the financial instruments allocated to this level of the fair value hierarchy largely comprise investments in private equity, renewable energy and new technologies (Rent), certain credit structures, and invest­ ments in affiliated companies and associates measured at fair value. We also allocate insurance derivatives and derivative components that are separated from the host insurance contract to level 3.
Net investment result the net investment result comprises regular income, income from write­ups, gains and losses on the disposal of investments, other income, write­downs of investments, man­ agement expenses, interest charges and other expenses. Regular income and expenses from investments not measured at fair value through profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are deducted from or added to the acquisition costs, with impact on profit or loss, until maturity.
We determine acquisition cost on the basis of the average purchase price. in the case of an impairment, a write­down is made to the fair value at the balance sheet date, i.e. generally the publicly quoted market price. if there is a further fall in the fair value of equity investments that have already been written down once, a further write­down recognised in the income statement is made again immediately. such impairments recognised in profit or loss may not be reversed through profit or loss. if, in a sub­ sequent period, the reasons for the impairment of fixed­interest securities or loans cease to apply, the impairment is reversed, with impact on the income statement. the resultant carrying amount may not exceed the original amortised cost.
c // investments for the benefit of life insurance policyholders who bear the investment risk these are investments for policyholders under unit­linked life insurances. they are measured at fair value. unrealised gains or losses from changes in fair value are included in the investment result. these are matched by corresponding changes in the technical provisions (equity and liabilities item d), which are included in the technical result. the change in technical provisions also includes changes from additional pre­ mium components. Recognising these investments at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different meas­ urement of the corresponding provisions.
Current tax receivables and other receivables are accounted for at nominal value. adjustments of value are made if there is objective evidence of impairment, cf. assets item B – impairment. in impairment tests of our receivables, we generally first assess whether objective evidence of impairment exists for items that are individually signifi­ cant. if this is not the case, and also in the case of individually insignificant items, the impairment test is carried out collectively on the basis of groups of similar receivables. Receivables that are individually assessed for impairment are not included in the col­ lective assessment. the amount of the probable loss is measured as the difference between the amortised cost and the present value of estimated future cash flows. the impairment thus determined is recognised as an expense. We generally deduct impair­ ments directly from the items concerned on the assets side, without using a value adjustment account. if, in a subsequent period, the reasons for the impairment cease to apply, the impairment is reversed, with impact on the income statement. the resultant carrying amount may not exceed the original amortised cost.
g // deferred acquisition costs deferred acquisition costs comprise commissions and other variable costs directly con­ nected with acquisition or renewal of insurance contracts. in life business and long­ term health primary insurance, acquisition costs are capitalised and amortised over the duration of the contracts. this is done either proportionally to the premium income (fas 60) or proportionally to the respective contracts‘ expected gross profit margins calculated for the relevant year of the contract term (fas 97, 120). the allocation of individual contracts to the fass concerned is shown in the notes on equity and liabil­ ities item c. in determining the amount of amortisation, we take into account an actu­ arial interest rate and changes resulting from the disposal or withdrawal of contracts from the portfolio. in property­casualty business, short­term health primary insurance and health reinsurance, the deferred acquisition costs are amortised on a straight­line basis over the average term of the policies, from one to five years. deferred acquisition costs are regularly tested for impairment using a liability adequacy test as per ifRs 4; cf. notes on equity and liabilities item c.
i // other assets other assets are generally carried at amortised cost. the owner­occupied property rec­ ognised under other assets is accounted for as outlined under the notes on asset item B – land and buildings. plant and equipment is amortised mainly on a straight­line basis, the underlying useful lives ranging between one and 50 years. impairment losses, and impairment losses reversed, in the group’s owner­occupied property and plant and equipment are distributed between the underwriting functional areas.
Equity and liabilities a // equity the item issued capital and capital reserve contains the amounts that the equity holders of munich Reinsurance company have paid in on shares. the capital reserve is reduced by the externally generated costs directly connected with equity capital meas­ ures, after taking into account tax effects.
own shares held by munich Re at the balance sheet date have been deducted directly from retained earnings.
Other reserves contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and from investments in non­consoli­ dated affiliated companies and in associates that we do not value at equity. these reserves also include unrealised gains and losses from the valuation of associates at equity, differences resulting from the currency translation of foreign subsidiaries’ fig­ ures, and the valuation result from the hedging of cash flows. Write­ups of equity investments available for sale are also recognised in this equity item.
Unearned premiums are accrued premiums already written for future risk periods. for primary insurance, these premiums are calculated separately for each insurance policy pro rata temporis; for reinsurance, nominal percentages are used in some cases where the data for a calculation pro rata temporis is not available. the posting of unearned premiums is restricted to short­term underwriting business, i.e. property­casualty busi­ ness (except long­term accident cover) and parts of health business.
in reinsurance, measurement is carried out partly individually for each risk and partly collectively for reinsured portfolios, using biometric actuarial assumptions based on the tables of the national actuarial associations. these are adjusted for the respective reinsured portfolio, in line with the probabilities observed for the occurrence of an insured event. discount rates are chosen that reflect the best estimate of expected investment income, less a safety margin. for the major part of the portfolio, these assumptions are fixed at the beginning of the contract and not changed over its duration.
the measurement of the provisions for future policy benefits depends on the type of contract, being based either on fas 60 (life primary insurance without performance­ related participation in surplus, health primary insurance and the bulk of reinsurance treaties), on fas 97 (life primary insurance on the universal life model, unit­linked life insurance and life reinsurance for assumed policies based on fas 97) or on fas 120 (life primary insurance with performance­related participation in surplus).
for contracts in accordance with fas 60, the provision for future policy benefits is cal­ culated from the present value of estimated future policy benefits (including claims adjustment expenses) less the present value of future net level premiums. net level pre­ mium is that part of the gross premium that is needed to finance future policy benefits. life primary insurance contracts with limited premium payment are generally valued in accordance with fas 97.
for all other contracts as per fas 97, an account is kept to which net level premiums and interest earnings are credited and from which risk premiums and administration expenses are debited, not all credits and debits being contractually fixed at the time the contracts are concluded. the provision for future policy benefits for life primary insur­ ance where policyholders bear the investment risk themselves (unit­linked life insur­ ance) is shown separately under equity and liabilities item d.
d // gross technical provisions for life insurance policies where the investment risk is borne by the policyholders this item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit­linked life insurance). the value of the provision for future policy benefits essentially corresponds to the mar­ ket value of the relevant investments shown under assets item c. Besides this, as with the provision for future policy benefits in accordance with fas 97, they may include additional premium components; cf. the notes on assets item c. changes in this pro­ vision are fully recognised in the technical result. insofar as these changes derive from unrealised gains and losses from alterations in the fair values of the related invest­ ments, they are matched by opposite changes of the same amount in the investment result. Recognising these provisions at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding investments.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 tractual trust agreement in the form of a two­way trust) – assets that may only be used to cover the pension commitments given and are not accessible to creditors – the pen­ sion obligations are shown less the amount of these plan assets. if the fair value of the assets exceeds the related outsourced pension commitments, this reimbursement right is recognised under “other receivables“.
Foreign currency translation munich Re’s presentation currency is the euro (€). the balance sheets of foreign sub­ sidiaries whose national currency is not the euro are translated in accordance with the functional currency principle using the year­end exchange rates, and their income statements using quarterly average exchange rates. any exchange differences arising in the process are recognised in equity (reserve for currency translation adjustments).
in contrast to this, currency translation differences are largely recognised in profit or loss in our subsidiaries’ individual financial statements. this involves the translation of foreign currency items into the respective functional currency in accordance with ias 21. an excess of assets over liabilities in a particular foreign currency results on bal­ ance in a gain if that currency appreciates, and in a loss if it falls in value. the reverse applies if cover is insufficient.
the following table shows the exchange rates of the most important currencies for our business: Currency translation rates
Reinsurance Life Property-casualty Life 31.12. 31.12. 31.12. €m 2011 Prev. year 2011 Prev. year 2011 Prev. year A. Subordinated liabilities 1,350 1,344 3,043 2,885 108 105 B. Gross technical provisions held for sale – – 24 – – – ii. provision for future policy benefits 14,638 11,605 – 317 69,387 69,606 iii. provision for outstanding claims 5,116 4,509 41,230 37,161 1,581 1,510 thereof: held for sale – – 16 – – – iV. other technical provisions 505 498 65 138 2,457 2,167 20,304 16,664 47,439 43,285 73,433 73,284 C. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholder – – – – 5,372 5,206 D. Other accrued liabilities 167 174 677 623 616 565 E. Other segment liabilities 5,995 5,904 11,486 11,296 8,801 9,300 Total segment liabilities 27,816 24,086 62,645 58,089 88,330 88,460
Reinsurance Life Property-casualty Life 31.12. 31.12. 31.12. €m 2011 Prev. year 2011 Prev. year 2011 Prev. year A. Intangible assets 169 168 2,007 1,969 1,103 1,162 B. Investments i. land and buildings, including buildings on third-party land 257 267 1,187 1,178 1,445 1,760 thereof: held for sale – – – – 13 – ii. investments in affiliated companies and associates 1,359 1,274 6,000 5,418 350 406 thereof: associates accounted for using the equity method 78 58 403 295 100 179 iii. loans 230 339 1,065 1,436 35,863 32,708 iV. other securities 1. held to maturity – – – – 13 42 2. available for sale 14,489 12,879 51,355 50,529 34,352 37,695 thereof: held for sale – – 52 – – – 3. at fair value through profit or loss 549 331 909 603 990 617 15,038 13,210 52,264 51,132 35,355 38,354 V. deposits retained on assumed reinsurance 8,694 6,121 1,198 1,500 166 137 Vi. other investments 245 457 1,176 1,333 934 624 25,823 21,668 62,890 61,997 74,113 73,989 C. Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 5,092 4,953 D. Ceded share of technical provisions 930 987 2,518 2,396 2,837 2,936 thereof: held for sale – – 13 – – – E. Other segment assets 6,271 5,631 11,499 10,183 8,613 9,085 Total segment assets 33,193 28,454 78,914 76,545 91,758 92,125
– – – – – – – – – – 16 –
– – – – – – – – – – 13 –
– – – – – – – – – – 52 –
Primary insurance Munich Health Asset management Consolidation Total Health Property-casualty 2011 Prev. year 2011 Prev. year 2011 Prev. year 2011 Prev. year 2011 Prev. year 2011 Prev. year
Investments in long-term assets per segment1, 2 €m 31.12.2011 Prev. year Reinsurance life 89 72 Reinsurance property-casualty 330 248 primary insurance life 69 110 primary insurance health 26 80 primary insurance property-casualty 182 235 munich health 115 26 asset management 7 33 1 the non-current assets mainly comprise intangible assets (especially goodwill) and our owner-occupied and investment property, as well as investments in renewable energy (Rent).
Reinsurance Primary insurance Munich Health Total €m 2011 Prev. year 2011 Prev. year 2011 Prev. year 2011 Prev. year europe north america asia and australasia africa, near and middle east 1 after elimination of intra-group reinsurance across segments. the premiums are generally allocated according to the location of the risks insured. the presentation in the management report differs from this; cf. note on page 73.
goodwill allocated across other multiple cash-generating units or groups of cash-generating units is not significant in comparison with the total carrying amount of goodwill in any instance. in cases where the recoverable amounts of these cash-generating units or groups of cash-generating units are based on the same key assumptions, the aggregate carrying amount of the goodwill allocated is not significant in comparison with the total carrying amount of goodwill either. We regard as “significant” within the meaning of ias 36.134 and ias 36.135 amounts of 10% or more of total group goodwill.
Assumptions for determining the recoverable amount in impairment testing impairment tests for cash-generating units allocated a significant portion of the goodwill were carried out on the basis of the following assumptions: the calculation of these values in use is based on cash flow forecasts derived from the current market environment and the latest corporate planning approved by management. prepared in an interactive process involving the operational units, the controlling units responsible and the Board of management, the corporate plans are reviewed and updated at least every quarter. after the detailed planning phase, we estimate the growth achievable long term by extrapolating the adjusted cash flows of the last plan year.
Amount of impairment losses recognised in profit or loss during the period in the financial year 2011, our impairment testing of goodwill identified an impairment of €25m. this has been recognised in the item “impairment losses of goodwill” in the income statement and is mainly attributable to the following: given the difficult market environment in south Korean motor insurance business, increasingly evident regulation and the less favourable mid-term opportunity and risk profile, we subjected the goodwill of eRgo daum direct general insurance co. ltd., seoul, south Korea, to an impairment test in the first quarter of 2011. the goodwill of €20m has consequently been completely written off. this is recognised in the property -casualty primary insurance segment.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 2 // other intangible assets the impairment losses are distributed between the different group segments as follows: in reinsurance, – (€19m) is apportionable to life and – (€28m) to property-casualty; in primary insurance, €19m (5m) is apportionable to property-casualty and €1m (–) to life; – (€8m) is apportionable to munich health.
Acquired licences/ patents Miscellaneous 2011 Prev. year Self- €m developed Other gross carrying amount at 31 dec. previous year 41 5 70 3,866 3,696 accumulated depreciation and accumulated impairment losses at 31 dec. previous year 8 3 20 2,233 1,978 carrying amount at 31 dec. previous year 33 2 50 1,633 1,718 currency translation differences 1 – – 7 47 additions disposals loss of control – – – 6 –
impairment losses reversed – – – – – depreciation and impairment losses carrying amount at 31 dec. financial year 110 – 53 1,581 1,633 accumulated amortisation and accumulated impairment losses at 31 dec. financial year 12 5 29 2,173 2,233 gross carrying amount at 31 dec. financial year 122 5 82 3,754 3,866
the impairment losses were largely triggered by reduced earnings and higher return requirements in the market.
the aggregated assets of all associates amount to €8,429m (9,519m), liabilities to €5,585m (6,444m), results for the year to €122m (47m), and revenue to €1,603m (1,520m). for associates not accounted for using the equity method, assets amount to €160m (411m), liabilities to €85m (355m), results for the year to – (–€6m), and revenue to €120m (177m).
the other loans mainly comprise pfandbriefs, government bonds, and borrowers’ note loans of banks.
Breakdown of investments in affiliated companies and associates €m 31.12.2011 Prev. year affiliated companies accounted for at fair value 214 203 associates accounted for using the equity method 924 870 accounted for at fair value 16 18
Rating of “other loans“ according to carrying amounts €m 31.12.2011 Prev. year
Carrying amounts fair values €m 31.12.2011 Prev. year 31.12.2011 Prev. year government bonds – – – – debt securities of banks 13 42 13 43
consolidated financial statements // notes munich Re gRoup annual RepoRt 2011 the rating categories are based on those of the leading international rating agencies. in deviation from the purely economic view, the carrying amount of the securities represents the maximum exposure to credit risk at the balance sheet date, in accordance with ifRs 7.
7 // hierarchy for the fair value measurement of investments at 31 december 2011, around 81% of the investments measured at fair value are allocated to level 1 of the fair value hierarchy, 17% to level 2 and 2% to level 3.