1 Previous years’ fi gures adjusted owing to recognition of Munich Health as a separate segment (see “Recognition and measurement”). 2 Including amounts attributable to minority interests and policyholders. 3 Before elimination of intra-Group transactions across segments.
Large and very large losses (net) €m 2,228 1,157 1,507 1,126 585
Munich Re’s market capitalisation at 31 December5 €bn 21.4 21.5 22.9 29.0 29.9
The diagram provides a general overview of our Group and makes no claim to completeness. For further details, please see the list of shareholdings on p. 269.
“We are one of the bold”“We are one of the bold” 1414
What opportunities await us in space // A discussion between Ernst Steilen and Thomas Reiterand Thomas Reiterand
Articles and interviews in this magazine are available on the internet as audiofi les: www.munichre.com/en/audio
In this magazine, we present eight children born in 2010 to Munich Re employees – in Germany, India, Senegal, Poland, the USA and China. What may their lives be like in the near and distant future? You can fi nd out in the following articles and on the internet at
Last year, around 140 million children were born worldwide. how will they live in the future? What challenges will they have to face? What risks will they be exposed to? What opportunities will they have? And what will the earth look like in decades to come?
After all, there is no doubt that for us, the future begins today. And with our integrated business model of primary insurance and reinsurance, we are well prepared for it. Around 130 years’ experience in risk evaluation and management help us devise sustainable insurance solutions for the major challenges of tomorrow. client-focused, innovative, with strong growth and long-term profi tability. These attributes make us one of the world’s leading reinsurers and insurers.
With its new brand presence, Munich Re’s primary insurance subsidiary is reinventing not only itself but also the relationship between insurer and customer. //
These questions were looked at intensively by the ergO insurance group last year – and rigorously answered in a manner virtually unprecedented among insurers. To start with, interviewers from the respected nuremburg market research institute icon, commissioned by eRGO, polled a representative sample of more than 6,000 Germans about their experience with insurance – and came back with rather sobering results. Just over half the respondents, for example, believed that their insurer did its best for them. More than a third complained that their insurer failed to keep promises and did not offer good value for money. “insurance products are not clear“, was another typical statement. “insurance providers don’t tell you about what’s in the small print“, said others. Further complaints concerned the impersonal nature of the service, products’ lack of transparency, and the vagueness of value propositions.
“The financial crisis has led to people examining things more critically and asking more questions“, says Dr. Torsten Oletzky, ceO of the eRGO insurance Group. “it has become more important for them to understand exactly what they are signing. And they quite rightly expect to be informed fairly and clearly.“
This being so, eRGO not only realigned its strategy last year but also geared it consistently to the needs and wants of its clients. under the eRGO brand, which was largely unknown in Germany before, Munich Re’s primary insurer amalgamated the hamburg-Mannheimer and Victoria brands and established a new kind of insurer. eRGO’s direct insurer KarstadtQuelle Versicherungen became eRGO Direkt. “in positioning the eRGO brand, we had a great opportunity to change things that bothered people about insurers“, says Thomas Bischof, head of eRGO Group Development.
A special kind of insurer further information: www.ergo.com ergO is one of the major insurance groups in Germany and europe, with premium income amounting to over €20bn. The group is represented in over 30 countries worldwide, focusing mainly on europe and Asia. One of the market leaders in its domestic market of Germany, eRGO offers an extensive range of insurances, private provision and services.
After going live, the online platform www.millionengruende. de received several hundred postings a day from clients for a time. This was the fi rst website to give users the opportunity to directly express what they expect from the service and cover provided by an insurer – and the feedback shows that such an option was long overdue.
To ensure that consumers were informed promptly and extensively about the new kind of insurer, eRGO launched a 360° advertising campaign in virtually all important media. Whoever clicked on one of the main German news portals last autumn, switched on the television, opened one of the German dailies, looked at publications like “Spiegel“, “Zeit“ or “Stern“, or simply walked through a major German city with their eyes open inevitably encountered the new eRGO. The ergO at a glance More than 50,000 people work for the insurance group as employees or full-time self-employed agents. Over 40 million clients place their trust in the competence, security and assistance that eRGO and its specialists provide in its various fi elds of business. eRGO’s investments, amounting to over €116bn, are mainly managed by MeAG, the asset and unit-trust manager that also belongs to Munich Re, one of the world’s leading reinsurers and risk carriers.
At www.millionen-gruende.de, ergO clients had the possibility for the fi rst time to post their thoughts on what they expect of an insurer. Did they actually do this? Yes – in fact to a much greater extent than we anticipated. in just the fi rst three months, over 1,000 visitors to the website posted a huge number of suggestions and promising ideas, which we are currently evaluating. The large number of people who took the time to let us know their opinion was a major success in itself. The response shows us that insurance customers have really been waiting for someone to fi nally listen to them. //
Can you give an example? We are currently reviewing everything – policy wordings, letters to customers, claims settlements – for comprehensibility, relevance and clarity. We want to ensure that all the information we give our clients in future is clear and understandable. it will naturally take some time for us to revise all of our innumerable communications, but we are measuring our progress. We are seeking ongoing feedback from our clients and will also review self-critically how far we have advanced towards our goals.
Clients want an insurer that communicates with them on the same level, understands the reality of their lives, and listens to them. Thomas Bischof, Head of ERGO Group Development, talks about the new ERGO’s claim and strategy. //
After school, i went to study at the Loyola college in chennai. After initially working for a few years in Kolkata, hyderabad and new Delhi, i worked for a time in Britain and new Zealand. The india i returned to was quite a different one. As far as healthcare is concerned, india today is like a nation in high-speed mode. if i go into hospital in new Delhi or one of the other 65 megacities in india, i know that i will be in the care of excellently trained doctors and nurses, with the most modern technology and equipment. nowadays, no indian need leave the country to obtain first-rate healthcare. That is the good news.
Both sides of the coin – medical care that is out standing but available at a rising cost – show that we are acting at exactly the right time in the right place. Global experience teaches us that private health insurance is one of the best ways to finance the cost of healthcare needs. With 320 million people earning a good or high income, there are a huge number of indians who can and will do precisely that. People referring to india today talk about a “waking elephant”, given the annual growth of 7% in GnP and 14% in average income. india’s middle class is now four to five times the total population of Germany, and this is reflected in the growth rates heALTh inSuRAnce // APOLLO Munich heALTh
Apollo Munich health insurance is a joint venture between the indian enterprise Apollo hospitals Group and Munich health. With over 1,000 employees and around one million insureds, the company will earn premium income of uS$ 46.6m in the financial year 2010/2011, thus doubling its previous year’s figure. For the coming five years, Apollo Munich health insurance is targeting growth in premium volume of 25% per annum.
But when i travel through india’s cities, i see signs of change everywhere. The rapid urbanisation is leading to the emergence of urban conglomerates with the necessary critical mass for the fi nancing and running of top-class medical centres. At the same time, this development will make our hospitals more interesting for indian doctors and nurses, too many of whom are still leaving the country to take up better-paying posts abroad. it is quite possible that in the near future indian doctors will return to work in clinics and hos pitals in their own country.
So far, this has been an urban story. The picture for rural areas and for the approximately 400 million indians still living below the poverty level is quite diff erent. it is for these people that the indian government recently launched a low-budget insurance scheme. By making a contribution of less than uS$ 1 a year, a family of fi ve can purchase basic health insurance cover. The programme is fi nanced largely by the federal and state governments, and run by private providers like us, in a shining example of public-private partnership.
for us, insurance of the poorest is a business that has to fi nance itself like any other. But it is something that we are very proud of, because it will help to change our country.
With the opportunities that we have, and the benefi ts to society that our industry provides, i can say that today, at this time and in this place, i undoubtedly have one of the best jobs in the world. //
A country nearly as big as the european union, but with more than twice as many inhabitants. Six climate zones, 21 off icial languages, 1.2 billion people. Still a developing country, where the average annual income is €708 and the pace of traff ic on the roads is dictated by the rhythm of ox carts and rickshaws. But at the same time the world’s largest democracy and one of its most dynamic and rapidly growing economies. india is all that in one.
Amina comes from a continent where ambitious plans are in the making. For in the coming decades, the Dii industry initiative, launched with the help of Munich Re, aims to create the basis for a network of solar and wind power plants in Africa to supply carbon-neutral power for the region and for europe. Given that the Dii initiative will generate economic growth, education opportunities and jobs as well as carbon-neutral energy, the project opens up chances of genuine sustainable development for the continent. And who knows? Perhaps Amina, too, will make a contribution as an electrical engineer at a solar power plant.
Both projects – the oil spill cover and the power-from-the-desert initiative – are examples of the insurance industry’s “pacemaker function”. Our products make it possible for risks to be taken and for innovations to be ventured. These innovations are necessary to overcome the major challenges of our time. We monitor climatic, social and technological changes and analyse the need for risk protection and the related business potential. in this way, for example, we also devise insurance models for very diff erent risks connected with generating and utilising renewable energies.
All these activities can be summed up in one word that has unfortunately often been overused in recent years. And yet “sustainability” describes very well what guides us. After all, insurance is a promise for the future; our business model is built on fulfi lling obligations from insurance contracts on a durable basis. i am fi rmly convinced that it is in our own interest to practise sustainable management. A forward-looking and responsible approach – corporate responsibility in action – has been an integral part of Munich Re’s Group strategy for many years. A business strategy that is sustainable in this sense is not only more successful in itself but also makes a company more attractive for its employees, customers and investors. //
When Patryk and Jakub were born, their native country had just completed an astonishing year. Whereas Poland’s neighbours were only gradually recovering from the economic and fi nancial crisis, the Polish economy, which had recorded growth of 1.7% in the critical year 2009, continued to boom. At the same time, 307,000 start-ups were registered in Poland, more than in the ten previous years. Poland is increasingly becoming a nation of dynamic young entrepreneurs, and it is very possible that Patryk and Jakub will one day number among them.
is that really more than empty words? Yes, definitely. We as an insurance company benefit directly from values like integrity, honesty and community spirit among our clients. Their influence was evident, for example, in the three major natural catastrophes that occurred last year. After the two terrible floods and the hardest winter for 20 years, many Poles helped their neighbours and did what they could for their country, instead of just waiting for the state to provide assistance.
lower share than with hungary or Slovenia, which are pretty much dependent on foreign trade. Thirdly, our government was prudent enough not to launch any exaggerated economic pro grammes in the crisis.
You yourself have two children of student age. What’s your impression of their generation? Very ambitious and extremely mobile. Young Poles are hungry for education, change and progress. Another feature is a great yearning for what may be termed overriding social values.
Congratulations, Mr. Sliwicki: Poland seems to have escaped the economic crisis of the last couple of years almost unscathed. The Polish economy was the only european economy to grow during the crisis year 2009, and by as much as 1.7%. What has made Poland a special case economically? Piotr Sliwicki: You have to con sider a series of factors. Firstly, as a member of the european union, we benefit from european sub sidies but still have our own currency. unlike the Baltic states, whose currencies are pegged to the euro, we were able to significantly devalue the zloty during the crisis and thus increase the price advantage enjoyed by our exports. Secondly, exports make up only around 40% of our gross national product, a considerably eRGO heSTiA // PRiMARY inSuRAnce
We will continue to profi t from a rise in living standards and the strength of the economy.
At the time Addison Camille and Alexandra grace were born (3 november 2010 in houston), seven tourists had already been into space and returned to earth. The estimated cost of their tickets: uS$ 10–20m. currently, several private companies are preparing commercial fl ights into space and even the installation of a space hotel, scheduled to open in 2015. By Addison camille’s and Alexandra Grace’s 50th birthday, ticket prices will have fallen dramatically and trips into space will have become commonplace. nevertheless, space fl ight remains a highly complex and risky undertaking.
ernst Steilen: good morning, Mr. reiter. interesting vehicle behind you there. Thomas Reiter: Oh yes, that’s a model of the Rosetta landing craft “Philae“, which is on a comet mission. The data you can see on the control panels describe its precalculated route. The landing is scheduled for 2014.
i continue to find it astonishing what major discoveries still await us in space more than 40 years after the first moon landing. As you know, a nASA mission recently discovered a quantity of water at the moon’s south pole estimated to be roughly equivalent to Lake Constance. That is indeed a highly interesting discovery, given that water can be used for producing not only food but also oxygen and as fuel for the return flight. And at the end of the day it is certainly conceivable that in the distant future we will be able to get valuable raw materials from the moon. You know the popular subject helium 3 …
energy is one thing, safety another: Another important precondition for commercial flights would be spacecraft whose safety is comparable with that of today’s aircraft. After all, not many people are as courageous as you, who dared to board a Space Shuttle shortly after the explosion of Columbia.
SPAce inSuRAnce are approximately 150 satellites already in orbit that are also insured with us. how can such big risks be insured?
As with all large and complex risks, a combination of knowledge, experience and financial strength is the key. We have been insuring space risks since the 1970s, which means that we have experienced all the ups and downs of the industry. Today, our engineers are able not only to assess in detail the technical risks and failure probabilities of spacecraft but also to translate the findings into viable coverage concepts. nevertheless, there are still risks of course, and nowhere are they as wide-ranging or as fatal as in space. That’s right. in space, a malfunction cannot be remedied just like that. A marginal problem often results in a total loss.
What do you think the chances are of reducing transportation costs in the foreseeable future? if we really knew that, we would be a great step further. up to now, all propulsion systems have been based on the combustion of chemical fuels, whose energy content is naturally limited. One way forward will be to develop completely new launcher systems. But their development is extremely expensive.
how great are the strains on the body during the launch phase? Are they tolerable for space tourists? i have no doubts on that score. Launch acceleration is around 3.5 G, which is more or less equivalent to the forces you are familiar with from a rollercoaster ride. But it goes without saying that a thorough medical examination is necessary before such a flight.
Your practical tip for space travellers? Firstly, get ready for a really unbelievable experience. Being able to savour the three dimensions in space without wings or other aids is simply breathtaking. i have never met anyone who was not euphoric about this experience. Secondly, get used to weightless ness gradually. Only move cautiously in the first few hours – otherwise you may get similar symptoms to travel sickness. Apart from that, i always find it astonishing how the human body, made for life with gravity, accustoms itself almost effortlessly to weightlessness. //
it is forty years since the chinese government launched its policy of modernisation coupled with strict birth policies. how fundamentally this would accelerate change within the country was probably not envisaged even by the originators. While china advanced from a reclusive third world country to the “world’s workbench“ and the average income of workers increased sixfold, the birth rate fell from an average of 5.8 in 1970 to around 1.6 children per chinese woman. And china is still a young country: only 14% of its inhabitants are older than 60 today.
for Steve Zhang, Managing Director Life of Munich re Beijing, this process of change is already tangible. Together with his colleagues from the Munich Re offices in Beijing, Shanghai, and hong Kong, Zhang advises chinese primary insurers on designing insurance solutions for people in china to cover the risks of old age. “Munich Re’s worldwide expertise is of enormous benefit here“, says Zhang. “We can utilise underwriting know-how from numerous markets around the world and combine this with our local market knowledge. That is a huge advantage in a young insurance market like china.“
The way in which Munich re’s global expertise pays off is demonstrated by the development of a comprehensive long term care insurance product for chinese clients. Steve Zhang and his colleagues were able to draw on data from more than 23,000 claims from a portfolio of 767,000 policies, which Munich Re experts analysed in depth and evaluated with a view to deriving long term care incidence rates for particular regions or product types. Practical knowledge was supplied by experts from LifePlans, a Munich Re specialist service provider based in Waltham, Massachusetts. “Munich Re’s global expertise in long term care insurance can be an important reference for us in tackling the issue of an ageing population in china”, says Mr. Feng Xiangying, Vice President of chinese primary insurer Picc health.
After all, demand is enormous. Thanks to healthier diets and improvements in hygiene and healthcare, life expectancy has increased from 41 to 71 years since the foundation of the People’s Republic. But it is not only the proportion of senior citizens that will grow but also the percentage of “old elders“, and with them the number of people in need of long term eXPeRTiSe // Munich Re
But the biggest change is faced by China. in a country in which only a fraction of the population can count on a dependable state pension and the institution of homes for the elderly is more or less unknown, the majority of seniors currently live with their children or are otherwise supported. however, this informal pension system is coming under increasing pressure because of shrinking family size. What is more, many children nowadays no longer live with their parents but far away in the booming metropolises. “We call it the 4-2-1 problem,” says Zhang, “because in many families today one child has to support two parents and four grandparents. And of course most people are aware that this cannot work.”
How will we live in the future? Just like today? Or quite differently? You can find answers in the enclosed supplement and on the internet at www.report2010.munichre.com
Our integrated business model of insurance and reinsurance enables us to devise and successfully market customised solutions for our clients.
TO OuR shaRehOldeRs // cOnTenTs notable events in 2010 003 letter to shareholders 004 The Board of Management 006 Munich Re shares 008 strategy 013
Munich Re and ldK solar co. ltd. sign an insurance contract covering the possible risk of performance deterioration in photovoltaic modules.
The Munich Re climate summit presents innovative insurance products and new coverage concepts at the World exhibition in shanghai.
at 30 June 2010, MeaG’s assets under management total €204bn, thus exceeding the €200bn mark for the first time. in the first half of 2010 alone, assets under management increase by €11.6bn.
Munich Re develops an insurance solution covering oil companies against liability risks from oil disasters during offshore drilling operations.
Munich Re concludes an agreement to acquire Windsor health Group, inc. (Windsor), the aim of the planned purchase being to strengthen Munich health’s position in the us market. Windsor health plan, inc. operates governmentsponsored health plans and specialty managed healthcare programmes for the senior segment.
Just five years after its establishment, daman national health insurance in abu dhabi welcomes its two-millionth client in the united arab emirates.
the Group’s performance enables us to raise the dividend again by 50 cents compared with last year to €6.25 per share. subject to the annual General Meeting approving this proposal on the appropriation of profits, Munich Re will have paid out more than €3bn in dividends for the crisis years 2008–2010. this puts us at the head of the field among daX 30 stocks in terms of dividend yield.
this financial strength, combined with our sophisticated, hands-on risk management, our prudent investment policy and our efficient capital management, have made us resilient in the crisis. consequently, we have been able to concentrate on developing our three fields of business: primary insurance, reinsurance and Munich health. We have not needed to engage in “crisis management” at any time.
outside eRGo’s home market, we aim to be present in the emerging markets of asia and eastern europe. to this end, eRGo agreed on a joint venture for life insurance with a local partner in china at the start of this year and has entered into a strategic cooperation with a Vietnamese property-casualty insurer, underpinned by a minority shareholding. the key virtue in developing and expanding international business is patience. Value can only be created if well-considered steps are taken at the right time.
our third and youngest field of business, Munich health, will this year conclude the consolidation process begun in 2010. With strong premium growth and constant earnings development, Munich health is increasingly contributing to the Group’s performance. the acquisition of the Windsor health Group, completed at the beginning of 2011, has considerably strengthened our position in the us Medicare market. this supports us in achieving sustainable added value – a hallmark of Munich health’s strategy and business as well.
ladies and gentlemen, on behalf of my colleagues on the Board of Management and all employees in the Group, i thank you for the confidence you have shown in us. the stage is set for sustained profitability. as a Group, we will continue to develop steadily and consistently, keeping to our course and remaining dependable. after all, you want to know – and we want you to know – what to expect from your investment.
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
Jörg Schneider Group Reporting/Group controlling/corporate Finance Mergers & acquisitions/ integrated Risk Management/Group legal, compliance/Group Taxation/ investor and Rating agency Relations
TO OuR shaRehOldeRs // Munich Re shaRes during much of 2010, the european capital markets were dominated by the debt crisis afflicting several eurozone countries and stoking fears of possible defaults. Financial stocks, with their investments in bonds issued by these countries, were particularly affected. in the first few months of the year, Munich Re’s share price benefited from our dependable capital strength and earnings potential, despite huge losses from natural catastrophes.
More than 40 banks and brokerage houses regularly evaluate Munich Re shares. at the end of december 2010, some 28% of the analysts gave our shares a positive assessment, 52% a neutral one, and 20% a negative rating.
Munich Re shares daX 30 dJ euRO sTOXX insurance source: datastream
Jan. Feb. Mar. apr. May Jun. Jul. aug. sep. Oct. nov. dec.
Year-end closing price € 113.45 108.67 annual performance (excluding dividend) % 4.4 –2.1 Beta relative to daX (daily, raw) % 0.7 0.8 Market capitalisation at 31 december1 €bn 21.4 21.5 Market value/equity at 31 december2 0.9 1.0 average trading volume ’000 1,069 1,191 earnings per share € 13.06 12.95 dividend per share € 6.25 5.75 dividend yield at 31 december % 5.5 5.3 dividend payout (status at 25 Feb. 2011) €m 1,118 1,072 1 This includes own shares earmarked for retirement. 2 including minority interests.
Our largest shareholder at the end of 2010 was Warren e. Buffett, who 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.). in second place is asset manager BlackRock with 6.2%. Warren e. Buffett and the aforementioned companies in his group informed us in October 2010 that their investment is geared to generating trading profits, not to implementing strategic objectives. The intention is to acquire further shares within the next 12 months. They do not seek to exert an influence on the composition of Munich Re’s management or supervisory boards or to significantly change the company’s capital structure.
Our corporate strategy geared to sustained increase in value is accompanied by on going and open communication with all capital market participants.
The main task of investor relations at Munich Re is to specifically address investors, cultivating contact with existing shareholders and winning over new ones. at the same time, we ensure that due account is taken of our investors’ opinions and preferences in internal discussion and decision-making processes. We have again done well in insurance -sector rankings for the quality of companies’ investor relations, achieving recognition for 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 we are glad to send these to interested shareholders on request. Many of our events are transmitted live via webstreaming. 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 facilities.
Our 123rd annual General Meeting was held at the icM – international congress center Munich on 28 april 2010. Munich Reinsurance company became the first daX 30 company to offer online participation and a postal vote at its aGM. This en abled our shareholders to take advantage of these options recently introduced by German legislation when casting their votes on the various agenda items.
Our business model is supported by Group-wide risk management, an investment policy geared to the structure of our liabilities, and active capital management. Our risk management considers much more than just the risks from our insurance business. it includes investments, for example, and models interactions between the different risks. it is firmly embedded and actively practised Group-wide. Our selection of investments takes into account the due dates and currencies of our underwriting liabilities, thus reducing reinvestment and currency risks. With our active capital management, we ensure that Munich Re’s capitalisation is always appropriate. Our economic equity, calculated on a market-consistent basis, covers the capital requirement resulting from our internal risk model and takes into account the stipulations of regulators and rating agencies. capital that is not required is returned to our shareholders in the form of dividends and share buy-backs. Our most important performance indicator is return on risk-adjusted capital (RORac), which relates the profit earned to the required risk capital, allowing the management of all activities in the Group to be geared to economic value added.
in primary insurance, with eRGO, we are aiming to achieve an established place among the successful international insurance groups. eRGO aspires to be best in class in terms of both profitability and client satisfaction. “To insure is to understand” – this is the claim with which eRGO launched its new brand strategy to become the insurer with a particularly keen understanding of its clients’ needs. eRGO is systematically working on clear communication with clients, actively asking them for feedback and suggestions. as from this year, a customer advocate will ensure that the client perspective is firmly established in all corporate activities. By realising this strategy, eRGO intends to stand out from the competition and constantly improve its service to clients.
This applies to all markets in which eRGO operates, be it Germany or the numerous markets abroad. eRGO currently earns around a quarter of its total premium income outside its home market – in the case of new business, the figure is already one half. Outside Germany, eRGO aims to be present above all in the emerging markets of asia and eastern europe.
in reinsurance, we last year enhanced the focus of our value proposition to clients. Given the significant changes in insurance business, our clients’ need for professional answers to ever more complex questions is growing. With this firmly in mind, we are working intensively on innovative solutions that often expand the boundaries of insurability. an increasingly networked world and newly emerging risks are resulting in scenarios for which traditional reinsurance products do not offer solutions. in dialogue with clients and outside experts, our staff are responding to this new insurance demand. By pooling their knowledge of risks and markets, they can devise solutions. a good example is the coverage concept for offshore oil drilling which we presented after the explosion of deepwater horizon. such events, with huge damage from oil pollution, could not be sufficiently insured against up to now. Our initiative met with a positive reception not only from insurers and brokers but also from the public at large.
Other examples of innovative products we have developed are guarantee insurances in the field of renewable energies. a coverage model devised by Munich Re for the manufacturers of photovoltaic modules has already established itself as the market standard. Only recently, we launched the first comparable cover for wind farms. With both insurances, Munich Re assumes the financial risk arising from the guarantees given by the manufacturers of such equipment to investors and operators. This gives the manufacturers greater financial scope and enhances investment security for the purchaser. With such solutions, Munich Re develops attractive new business and, through risk transfer, facilitates the economic use of renewable energies.
in 2011, we will further consolidate our activities in international healthcare business and, above all, drive forward the initiatives that are already proving successful. With the acquisition of the Windsor health Group, we have strengthened Munich health’s position in Medicare business in the usa, the world’s largest healthcare market. We have successfully helped to establish a health insurance company in the united arab emirates and now intend to transfer this business model to neighbouring regions.
2010 was a very turbulent year for many. For our Group it was a successful one. Far from being in “crisis mode”, we were able to take our opportunities and profitably expand our business. We will continue to resolutely pursue our strategy in the current year.
the chairman of the Supervisory Board and the chairman of the Board of Management maintained an ongoing dialogue, particularly in connection with key issues of strategy, corporate risk management and current business performance. Where necessary, the chairman of the Board of Management informed me promptly of significant events and developments in the group. prof. Dr. henning Kagermann, chairman of the audit committee, also remained in close contact with Dr. Jörg Schneider, member of the Board of Management responsible for group reporting.
Munich Re gRoup annual RepoRt 2010 particular the realignment of its brand and new set-up of the life segment, and on issues of compliance and anti-fraud management. and finally, we appointed the external auditors for the 2010 financial year.
in april, we decided for the first time in full session on the extent to which the Board of Management had achieved its objectives and on the amount of bonus payments for the members of the Board of Management from the 2009 annual bonus. 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.
in october, we mainly discussed issues of corporate governance. in response to the new recommendations of the german corporate governance code, we probed the subject of diversity, in particular the promotion of equal opportunities in the group. We decided on amendments to the Board members’ contracts, necessitated by the german pension Rights adjustment act and the new regulation on remuneration schemes in the insurance sector. Moreover, we obtained detailed reports on the performance of Munich health and on earnings and growth in eRgo’s commercial and industrial insurance.
at its last meeting in December, the Supervisory Board dealt with the Board of Management ’s remuneration from 2011 onwards and decided on the weightings of the individual target categories and measurement bases for the financial objectives in connection with the variable remuneration for 2011. We adjusted the plan conditions of all ongoing long-term incentive plans (lips) of the Board of Management in order to treat retiring Board members and heirs equitably with regard to lips and the variable remuneration component restructured in 2010. and we concerned ourselves with the group planning for 2011 and 2012 presented by the Board of Management. We debated the group’s risk strategy with the chief Risk officer and thoroughly analysed the group’s risk situation and profitability in the currently still difficult capital market environment. We satisfied ourselves that risk management is well organised and practised, i.e. that it is effective in all parts of the group.
the committee reviewed and monitored the auditor’s independence. in this context, the audit committee took delivery of reports from the auditor on its auditing and nonaudit -related services. likewise, the audit committee prepared for the full Supervisory Board the appointment of the external auditor for the financial year 2010, determined the main points of the audits and set the auditor’s fees. Following a resolution by the full Supervisory Board, the chairman of the audit committee commissioned the audit for the financial year 2010. Furthermore, it commissioned the external auditor with a review of the half-year financial report 2010. in addition, the audit committee considered the 2010 quarterly reports and the 2010 half-year financial report, which it discussed in the presence of the auditor. Besides this, it assured itself of the comprehensiveness of Munich Re’s internal control system on the basis of a presentation by the external auditor.
Munich Re gRoup annual RepoRt 2010 committee discussed risk management and risk strategy developments with the chief Risk officer. in accordance with the agreed guidelines, the chief Risk officer also informed the audit committee directly of individual risk-relevant decisions, and the Board of Management promptly informed the committee whenever limits were exceeded.
in three meetings in 2010, the nomination committee conferred about a successor to Dr. thomas Wellauer, who left the Supervisory Board as at 30 September 2010. at the same time, it adjusted the set of criteria for selecting suitable Supervisory Board members to incorporate the new recommendations by the german corporate governance code and the objectives decided on by the full Supervisory Board regarding future appointments to the Supervisory Board. this set of criteria served as a basis for selecting suitable candidates. at the committee’s suggestion and with the consent of the shareholder representatives, the Supervisory Board proposes that annika Falkengren, president and ceo of Skandinaviska enskilda Banken (SeB) be elected by the 2011 annual general Meeting for the Supervisory Board’s remaining term of office.
Corporate governance and declaration of conformity the Supervisory Board concerned itself intensively with the amendments to the german corporate governance code, in particular the subject of diversity. it formulated objectives for the future composition of the Supervisory Board, further details of which are available in the corporate governance report on page 26. Furthermore, it agreed that all Supervisory Board members would be offered annual internal briefing sessions similar to those conducted for new Supervisory Board members in 2009.
the Standing committee analysed the efficiency of the Supervisory Board’s work in the year under review using an extensive questionnaire. the outcome of the survey and proposals for implementing improvements were presented to the full Supervisory Board.
Changes on the Supervisory Board as at 12 February 2010, Dr. Benita Ferrero-Waldner was appointed by the Registration court to the Supervisory Board to replace the late prof. Karel van Miert, who died on 23 June 2009. the annual general Meeting on 28 april 2010 elected her for the Supervisory Board’s remaining term of office.
Dr. thomas Wellauer, who had been a member of Munich Re’s Supervisory Board since 22 april 2009, resigned from office for professional reasons as at 30 September 2010. We thank him for his valuable – unfortunately only brief – contribution to the work of the Supervisory Board.
Company and Group financial statements KpMg Bayerische treuhandgesellschaft aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft duly audited the following documents and gave them an unqualified auditor’s opinion: the company and group management reports and financial statements as at 31 December 2010. the respective reports and the Board of Management’s proposal for appropriation of the net retained profits were submitted directly to the members of the Supervisory Board. at its meeting on
Munich Re gRoup annual RepoRt 2010 2 February 2011, the audit committee had the opportunity to confer in detail about the preliminary year-end fi gures as at 31 December 2010. on 8 March 2011, they prepared the Super visory Board’s resolution on the adoption of the company fi nancial statements and the approval of the group fi nancial statements. to this end, the audit committee examined the company and group fi nancial statements, the management reports and the Board of Management’s proposal for appropriation of the net retained profi ts. it discussed these at length with the auditor present at the meeting and also 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 9 March 2011.
the Supervisory Board also checked the company and group fi nancial statements and management reports and the proposal of the Board of Management for appropriation of the net retained profi ts. after conducting its own concluding examination and having heard the auditor’s report, the Supervisory Board had no objections and agreed to the outcome of the external audit. it approved the company and group fi nancial statements on 9 March 2011. the fi nancial statements were thus adopted. having carefully weighed all the relevant aspects, the Supervisory Board also agreed with the Board of Management’s proposal for appropriation of the net retained profi ts.
Beyond this, we have our own Munich Re code of conduct specifying high-level ethical and legal requirements that must be met by employees. this document is also published on our website.
Munich Re gRoup annual RepoRt 2010 in our code of conduct we clearly state our views on corporate integrity, i.e. legally impeccable behaviour based on ethical principles. at the same time, the code is an expression of our understanding of value management. the code of conduct contains regulations that are binding for all Munich Re employees, including management, particularly for dealing with conflicts of interest, maintaining confidentiality, preventing money laundering and fraud, complying with antitrust law and insider trading law, and adhering to specified practices for donations and sponsoring. Furthermore, the code of conduct outlines a procedure for reporting legal infringements or contraventions which allows the company to respond promptly, even to the suspicion of irregularities, or to prevent any form of financial crime.
Munich Re gRoup annual RepoRt 2010 by german listed companies. in addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. every year, Munich Reinsurance company’s Board of Management and Supervisory Board publish a declaration stating how far the code’s recommendations have been and will be complied with. the current declaration of conformity can be found on page 22.
Munich Reinsurance company is a joint-stock 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 co-determination agreement and the articles of association, which are published on our website.
the principle of parity co-determination on the Supervisory Board has been maintained in the co-determination agreement, and strengthened by taking into account staff employed in the rest of europe.
pursuant to article 16 of the articles of association, the Board of Management must comprise a minimum of two persons; beyond this, the number of members is determined by the Supervisory Board. Munich Reinsurance company’s Board of Management had nine members in the 2010 financial year. an overview of its composition and distribution of responsibilities can be found on page 60. additional information on individual members of the Board of Management is available on our website. the Board of Management has two committees – one for group matters and one for reinsurance – in order to enhance the efficiency of its work. Rules of procedure issued by the Supervisory Board regulate the work of the Board of Management, in particular the allocation of responsibilities between the individual Board members, matters reserved for the full Board of Management, and the required majority for Board of Management resolutions. the full Board of Management decides on all matters for which the law or the articles of association 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, for tasks which constitute fundamental management functions or are of exceptionally great importance, and finally for significant personnel issues at top management level.
the Reinsurance Committee comprises those members of the Board of Management that do not sit on the group committee, i.e. torsten Jeworrek, ludger arnoldussen, thomas Blunck, georg Daschner, peter Röder, Wolfgang Strassl and Joachim Wenning. a further member is the chief Financial officer for Reinsurance, hermann pohlchristoph. the chairman of the committee is appointed by the Supervisory Board. this office is held by torsten Jeworrek. the Reinsurance committee decides on all fundamental matters relating to the business field of reinsurance except where the full Board of Management is mandatorily responsible.
Both the group committee and the Reinsurance committee have set up subcommittees, whose members include other senior executives from Munich Reinsurance company and the group. they comprise the group investment committee, the group Risk committee and the global underwriting and Risk committee. only Board members of Munich Reinsurance company have voting rights on these committees, each of which has its own written rules of procedure. the group investment committee deals with all significant issues affecting the investments of the group and the individual fields of business. Both the group Risk committee and the global underwriting and Risk committee deal with the risk management process, albeit in different contexts.
in compliance with the articles of association, the Supervisory Board has 20 members. half are representatives of the shareholders, elected by the annual general Meeting, and half are elected representatives of the employees. under the co-determination agreement, employees of group companies in the european union (eu) and european economic area (eea) may also participate in the election of employee representatives.
an overview of the members of the Supervisory Board can be found on page 60 f. additional information on the current members of the Supervisory Board is available on our website.
the Supervisory Board has established its own rules of procedure, specifying responsibilities, work processes and required majorities. it has also adopted separate rules of procedure for the audit committee. as provided for in the german co-Determination
Munich Re gRoup annual RepoRt 2010 act and included in the provisions of article 12 of the articles of association, the chairman of the Supervisory Board and his first deputy must be elected by a majority of two-thirds of its constituent members. if a second vote is needed, the shareholder representatives elect the chairman of the Supervisory Board, and the employee representatives his first deputy, by a simple majority of the votes cast in each case.
in addition, the Supervisory Board’s rules of procedure provide for a recommended age limit of 70 for candidates.
Munich Reinsurance company’s Supervisory Board has set up five committees: the Standing committee, the personnel committee, the audit committee, the nomination committee, and the conference committee. the full Supervisory Board is regularly informed about the work of the committees by their respective chairmen. the committees ’ main responsibilities are as follows: the Standing Committee prepares Supervisory Board meetings and decides on matters of company business requiring the Supervisory Board’s approval insofar as the full Supervisory Board or another committee is not responsible. it makes amendments to the articles of association that only affect the wording, and decides on the attendance of guests at Supervisory Board meetings. Besides this, it prepares the annual declaration of conformity with the german corporate governance code, in accordance with Section 161 of the german Stock companies act, and the Supervisory Board’s report about the company’s corporate governance in the annual report. every year, it reviews the efficiency of the Supervisory Board’s work and submits appropriate proposals to the full Supervisory Board where necessary. it also approves loan transactions of the company with managers and Supervisory Board members or parties related to them, as well as company contracts with members of the Supervisory Board. if the chairman of the Supervisory Board is unable to attend, it determines the chair of the annual general Meeting.
Members of the Standing committee are Dr. hans-Jürgen Schinzler (chairman), herbert Bach, hans peter claußen, Wolfgang Mayrhuber and Dr. Bernd pischetsrieder.
Members of the audit committee are prof. Dr. henning Kagermann (chairman), christian Fuhrmann, Marco nörenberg, anton van Rossum and Dr. hans-Jürgen Schinzler.
Members of the nomination committee are Dr. hans-Jürgen Schinzler (chairman), prof. Dr. henning Kagermann and Dr. Bernd pischetsrieder.
the Conference Committee makes personnel proposals to the Supervisory Board if the requisite two-thirds majority is not achieved in the first vote when it comes to appointing or dismissing members of the Board of Management. its responsibilities have remained the same after application of the co-determination agreement and are now laid down in the articles of association and the Supervisory Board’s rules of procedure.
More details of the work of the Supervisory Board committees in the financial year ended can be found in the report of the Supervisory Board to the annual general Meeting, which is printed on page 17 ff.
Munich Re gRoup annual RepoRt 2010 annual general Meeting the regular responsibilities of the annual general Meeting include reaching a resolution on the appropriation of profits and approving the actions of the Board of Management and Supervisory Board.
in accordance with item 4 of the german corporate governance code, the remuneration system for the Board of Management was determined by the full Supervisory Board. the necessary preparations for the resolution were made by the personnel committee of the Supervisory Board, comprising the chairman of the Supervisory Board, one shareholder representative and one employee representative.
– pensionable basic remuneration (= 25% of target overall direct remuneration) number of years on the Board
1 For the variable remuneration, the share shown presupposes 100% achievement of the objectives.
Munich Re gRoup annual RepoRt 2010 variable remuneration the variable remuneration component is geared to the overall performance of the group and defined organisational units and to the personal performance of the individual members of the Board of Management. its amount depends on the degree to which annually set objectives for annual and multi-year performance are met. achievement of objectives is measured at the end of the performance terms, there being no adjustment of the targets during these periods. payouts are made at the end of the one- and threeyear periods under consideration. With a view to promoting a management approach that takes due account of the company’s long-term interests, the members of the Board of Management are obliged to invest 50% and 25% of the paid-out variable remuneration in Munich Reinsurance company shares.
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 (property-casualty) and Munich Re (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 risk-adjusted 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 58. the performance measures embodied in value-based management are used for the company result and the divisional results. the objectives are weighted individually according to the responsibilities of the individual members of the Board of Management.
variable remuneration based on multi-year performance For the multi-year performance remuneration component, three-year 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 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 individual members of the Board of Management.
the variable remuneration for the multi-year performance is reviewed and decided on by the full Supervisory Board and then paid out in the year after the three-year 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 two-year period.
Full and pro-rata calculation of the variable remuneration for annual and multi-year performance the basis for the full and pro-rata calculation of the variable remuneration is the first year. only the full “eligible” months in this year are taken into account (pro rata tempor is). in the case of retirement, occupational disability, death or premature depart ure from the company for other reasons, the rules for the full and pro-rata calculation apply.
Share-based remuneration agreements in force during the reporting period Mid-Term Incentive Plan 2009–2011 this plan is based on performance over a three-year period. it promotes the medium- and long-term increase in Munich Re’s value in terms of internal value creation (valuebased 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.
Long-Term Incentive Plan this remuneration component, with a long-term perspective, is linked to the sustained appreciation of Munich Re’s share price. the long-term incentive plan, launched every year since 1999, was set up for the members of the Board of Management for the last time in 2009. the participants were granted a certain number of stock appreciation rights. these can only be exercised if, after a two-year vesting period, Munich Re’s share price has risen by at least 20% since inception of the plan and the shares have outperformed the euRo StoXX 50 index at least twice over a three-month period during the term of the plan.
all in all, the remuneration system for members of the Board of Management was in conformity with the recommendations of the german corporate governance code for 2010. in particular, it also complies with the german regulation of 6 october 2010 on the supervisory law requirements for remuneration schemes in the insurance sector (versvergv), which in its material points largely corresponds to the german Federal Financial Supervisory authority’s circular 23/2009 of 21 December 2009. in the circular in question, which was superseded by the versvergv, the Supervisory authority had specified in more detail for the german insurance industry the Financial Stability Board principles whose implementation the g20 states had agreed on at their summit meeting in pittsburgh in September 2009.
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.
Munich Re gRoup annual RepoRt 2010 as of 2009, newly appointed members of the Board thus become members of a defined contribution plan. For this plan, the company provides the Board members with a pension contribution, which in 2009 was related to basic remuneration, for each calendar year (contribution year) during the term of their contract. the pension contribution is paid over to an external pension insurer. this insurer’s guaranteed interest rate is 2.25%. the insurance benefits that result from the contribution payments to the external insurer constitute the company’s pension commitment to the Board member. For Board members newly appointed as from 1 January 2009, a uniform pension contribution rate has been set; the annual basic remuneration is multiplied by this rate to arrive at the pension contribution payable.
Board members who had already reached the age of 55 at the conversion date were not transferred to the defined contribution system and remain members of the previous system’s defined benefit plan.
owing to the increase from 25% to 30% in the share of basic remuneration in overall remuneration as at 1 January 2010, there has been a change in the assessment basis for the Board members’ pensions. an unintended rise in the pensions would otherwise have been the consequence. From 1 January 2010 onwards, the defined benefits are fixed on the basis of “pensionable basic remuneration”, which corresponds to 25% of the target overall direct remuneration (= basic remuneration + variable remuneration on the basis of 100% achievement of objectives). in the case of the defined contribution plan, the rate is fixed on the basis of the target overall direct remuneration.
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
// For Board members transferred from the old system to the new: entitlement of between 30% and 60% of pensionable remuneration, reduced by 2% for each year or part thereof short of the Board member’s 65th birthday; the company assumes payment of the difference between the monthly occupational pension and the monthly incremental pension from the external insurance. the policy reserve available at the date the pension benefit is claimed can be paid out as an annuity or as a lump sum.
vested benefits under the german employers’ Retirement Benefits act // Board members have vested benefits under the german employers’ Retirement Benefits act if they leave the company before reaching the age of 60 and the pension commitment has existed for at least five years before.
// For members of the Board of Management transferred from the old system to the new: the entitlement under the vested pension is a proportion of the vested pension based on the ratio of actual service with the company to the period the Board member would have worked for the company altogether up to the fixed retirement age (Section 2 para. 1 of the german employers’ Retirement Benefits act). the entitlement from the incremental pension comprises the pension benefits fully financed under the insurance contract up to the occurrence of the insured event based on the pension contributions made up to the date of leaving the company (Section 2 para. 5a of the german employers’ Retirement Benefits act). this entitlement is paid out as an annuity or a lump sum.
the improved vested benefits do not apply to Board members appointed as from 2009. For Board members transferred from the old system to the new, the improved vested benefits apply only to that part of their pension resulting from the vested pension under the defined benefit plan.
Benefit amount: // For a period of six months after leaving the Board, previous monthly basic remuneration (only for Board members appointed prior to 2006) // For the share from the defined benefit plan: Defined benefit of between 30% and 60% of the pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 60th birthday
Provision for surviving dependants in the event of the death of a Board member during active service, the surviving dependants receive the previous monthly basic remuneration for a period of six months if the deceased was appointed to the Board of Management before 2006. in the case of Board members appointed as from 2006, the previous monthly basic remuneration is paid to the beneficiaries for a period of three months. if the Board member’s death occurs after retirement, the surviving dependants receive the previous monthly occupational pension for a period of three months, provided the marriage/registration of the civil partnership took place and/or the child was born before the Board member started drawing the occupational pension. if the Board member’s occupational pension was reduced owing to early retirement, pensions for surviving dependants are based on the reduced occupational pension.
Subsequently, surviving dependants of a Board member who dies during active service or after retirement receive the following benefits: // Widow(er)’s pension or pension for registered civil partner amounting to 60% of the defined benefit or insured occupational pension. if the spouse or registered civil partner is more than ten years younger than the Board member, the surviving
Munich Re gRoup annual RepoRt 2010 dependant’s pension will be reduced by 2% for each year or part thereof of age difference, but by not more than 50%.
// Surviving dependants’ pensions together may not exceed the occupational pension of the Board member. if necessary, the orphans’ pensions will be reduced proportionally.
the benefits for surviving dependants for widow(er)s or registered civil partners if the marriage or registered civil partnership was not contracted until a point in time when the Board Member was already drawing the occupational pension, and for orphans if they were not born until after such a point in time. the entitlement for orphans ceases on their reaching the age of 18 (or 20 for orphans of Board members transferred from the old system to the new). For orphans who are in full-time education or vocational training, doing military or civilian service, or unable to support themselves owing to a physical or mental disability, the entitlement is extended until they reach the age of 25 (or 27 for orphans of Board members transferred from the old system to the new). the entitlement to a surviving dependant’s pension under the defined contribution plan ceases if the Board member draws the pension in the form of a lump sum. pensions for surviving dependants cease upon their death.
Pension adjustment in the case of Board members appointed before 2009, occupational pensions and pensions for surviving dependants are reviewed for adjustment if salaries payable under pay-scale agreements in the insurance industry have increased by more than 12% (based on the average final salary of all pay-scale categories) since the pensions were last fixed or more than three years have passed since that date. the adjustment made will at least be in line with the increase in the cost of living in the meantime according to the consumer price index for germany. this arrangement also applies to Board members newly appointed as from 2009 and receiving a pension commitment from the company for the first time before 1 January 1999. For Board members appointed as from 2009 who did not receive a pension commitment from the company before 1 Janu ary 1999, occupational pension and benefits for surviving dependants are adjusted by 1% annually from the date when the pension or benefit in accordance with Section 16 para. 3 item 1 of the german employers’ Retirement Benefits act starts being drawn. vested benefits are not adjusted.
total remuneration of the Board of Management the basis for reporting the remuneration of Board members is german accounting Standard no. 17 (DRS 17, revised 2010), according to which the amount shown as remuneration for annual performance is the provision established for that remuneration, since the performance on which the remuneration is based has been completed by the balance sheet date and the requisite Board resolution is already foreseeable. under the above-mentioned standard, remuneration for multi-year performance is not recognised until the year of payment. the members of Munich Reinsurance company’s Board of Management received remuneration totalling €11.7m (17.8m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. total remuneration thus shows a reduction of €6.1m compared with the previous year. the main reasons for this are that, firstly, no performance share units or stock appreciation rights were granted in 2010 and, secondly, provisions for multi-year performance 20102012 may not be recognised in remuneration in the year under review, since the underlying performance has not yet been completed.
Munich Re gRoup annual RepoRt 2010 the Mid-term incentive plan 2009–2011 and the long-term incentive plan 2009 are accounted for at fair value at the granting date. Details of the fair value are provided in the notes to the financial statements under (45) Mid-term incentive plan and (44) long-term incentive plan. Whether these variable component amounts will actually be paid out to the Board members and, if so, how high the sums will be, is not yet certain and will depend on the degree to which individual objectives are achieved, on share-price development and on the fulfilment of the exercise conditions of the longterm incentive plans. Future obligations arising from the long-term incentive plans are safeguarded in such a way that the expenses resulting from a growth in value of the stock appreciation rights are neutralised as far as possible by an increase in the value of the share portfolio.
1 at the time of preparation of this report, no Board resolution had yet been passed on the amounts to be paid for 2010. the amount shown for annual performance remuneration is based on estimates and the relevant provisions posted. For the 2009 annual bonus, a total of €271,830 more was paid out than had been reserved. the amounts for the 2010 annual performance have been increased accordingly.
2 performance share units were granted for the first and last time for the financial year under the Mid-term incentive plan 2009–2011. 3 the total expenditure recognised in 2010 (expenses for reserves due to the development in value of the performance share units from the 2009–2011 plan) for the
Mid-term incentive plan 2009–2011 breaks down as follows: von Bomhard €116,266, arnoldussen €130,399, Blunck €140,856, Daschner €154,685, Jeworrek €195,400, Röder €114,001, Schneider €83,182, Strassl –€8,495, Wenning €97,589.
4 the total expenditure recognised in 2010 (expenses for/release of reserves due to the development in value of the stock appreciation rights from the 2003–2009 plans) for the long-term incentive plans breaks down as follows: von Bomhard €133,025.60, arnoldussen €15,205.80, Blunck –€10,595.78, Daschner €48,892.63, Jeworrek €86,380.56, Röder €19,092.36, Schneider €77,035.80, Strassl –€37,320.55, Wenning –€3,799.37.
Munich Re gRoup annual RepoRt 2010 the following table shows the amounts payable for the variable remuneration under the newly structured remuneration system as at 1 January 2010.
Total amounts Name Annual performance1, 3 Multi-year performance2, 3 payable Set for € Set for € €
1 at the time of preparation of this report, no Board resolution had yet been passed on the amounts to be paid for 2010. the amount shown for annual performance remuneration is based on estimates and the relevant provisions posted in the table on page 37.
Munich Re gRoup annual RepoRt 2010 pension entitlements personnel expenses of €4.1m (4.0m) were incurred in the financial year 2010 to finance the pension entitlements for active members of the Board of Management. of these, €1.0m was apportionable to defined benefit plans and €3.1m 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 long-term pension-specific risks. the following defined benefits, present values, contribution rates and personnel expenses result for the individual members of the Board of Management: Pension entitlements
Defined benefit plan Present value Personnel of defined expenses Financial Defined benefit as at for Name year benefit1 31 December provisions2
Dr. Joachim Wenning4, 8 2010 – – 11,411 2009 – – –
6 no transfer to defined contribution system, as Board member had already reached 55 at the conversion date. entitled to an occupational pension in the event of premature or regular termination of employment.
7 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 with the meaning of iaS 19, employee Benefits, so no present value shown.
Remuneration structure for senior executives in accordance with the german regulation on the supervisory law requirements for remuneration schemes in the insurance sector, Munich Re is currently reviewing its system of remuneration for senior executives and making necessary adjustments.
the individual variable components are granted at all management levels, but with different weighting. the weighting of the aggregate variable remuneration components for the first management level below the Board of Management is more than 50% of total remuneration. proceeding down the management hierarchy, this percentage decreases successively, making up around one-third of total remuneration at the lowest management level. there is a well-balanced combination of short-, medium- and long-term components. the proportion of medium- and long-term remuneration is over 50% in the variable remuneration for the top management level, so that a longer-term incentive system is provided for. no guaranteed variable remuneration components are granted.
Total remuneration of the Supervisory Board the rules in place since the financial year 2009 provide for a fixed remuneration component of €50,000 for each member of the Supervisory Board, plus a variable resultrelated component and a component based on long-term corporate performance. the chairman of the Supervisory Board receives twice, and the Deputy chairman one-anda -half times, the fixed remuneration and the variable remuneration.
the variable result-related remuneration is based on the undiluted earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with international Financial Reporting Standards (iFRSs): each Supervisory Board member receives €4,000 for each full euro by which earnings per share exceed €12, but a maximum of €40,000. Based on earnings per share of €13.06, vari able result-related remuneration is thus payable for the financial year 2010. the performance-related remuneration component with long-term 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 2010.
Prof. Dr. Peter Gruss 2010 50,000.00 – 4,000.00 54,000.00 1 plus turnover tax in each case, in accordance with article 15 para. 6 of the articles of association. 2 in the case of members of the audit committee and/or nomination committee, the amount includes attendance fees in accordance with article 15 para. 4 of the articles of association.
Share trading and shares held by members of the Board of Management and the Supervisory Board the company has to be notified promptly of the acquisition or sale of company shares (or financial investments 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.
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.
management report // Contents munich re 048 Business environment 064 Business performance 070 Financial position 100 other success factors 108 risk report 116 prospects 138
Munich Re 48 structure 48 Important tools of corporate management 54 governing bodies of munich re 60
Business performance 70 overview and key figures 70 reinsurance 75 primary insurance 87 munich Health 92 Investment performance 94
Risk report 116 risk governance and risk management system 116 economic risk capital 126 available financial resources 132 selected risk complexes 134 outlook 137 summary 137
Prospects 138 overview 138 economic parameters 138 munich re’s development 140 management report
In order to make the global spectrum of their business model clearer, all our reinsurance units throughout the world appear under the uniform brand of munich re. our primary insurance activities are combined in the ergo Insurance group (ergo). our international health reinsurance business and health primary insurance outside germany are organised separately under the munich Health brand.
// new ergo brand: Value proposition sets ergo apart from its competitors munich re
global Clients and north america handles our accounts with major international insurance groups (hence “global Clients”) and globally operating lloyd’s syndicates as well as Bermuda companies. It also pools our know-how in the north american market. It is responsible for our subsidiaries there, including munich reinsurance america, munich reinsurance Company of Canada, american modern Insurance group (amIg) and the Hartford steam Boiler group (HsB group) and for international special lines business such as workers’ compensation and marine. the division additionally oversees the Watkins syndicate.
Europe and Latin America Bell & Clements (london) ltd., london münchener rück do Brasil resseguradora s.a., são paulo3 münchener rückversicherungs-gesellschaft a.g. sucursal españa y portugal, madrid3 münchener rückversicherungs-gesellschaft ag in münchen rappresentanza generale per l’Italia, milan3 munich re France Branch, paris munich reinsurance Company uK general Branch, london
North America american Family Home Insurance Company, Jacksonville, Florida american modern Home Insurance Company, amelia, ohio american modern Insurance Company of Florida, Inc., Jacksonville, Florida american modern Insurance group, Inc., amelia, ohio american modern select Insurance Company, amelia, ohio american modern surplus lines Insurance Company, amelia, ohio american southern Home Insurance Company, Jacksonville, Florida american Western Home Insurance Company, oklahoma City, oklahoma Beaufort underwriting agency ltd., london First marine Insurance Company, amelia, ohio global standards, llC, Wilmington, Delaware groves, John & Westrup limited, london HsB engineering Insurance limited, london HsB group, Inc., Hartford, Connecticut HsB solomon associates llC, Wilmington, Delaware HsB professional loss Control, Inc., tennessee msp underwriting ltd., london munich re Capital limited, london munich re Holding Company (uK) ltd., london munich reinsurance america, Inc., Wilmington, Delaware3 munich reinsurance Company of Canada, toronto n.m.u. group limited, london
primary insurance munich re’s second pillar is primary insurance business, which is concentrated in ergo. In primary insurance, we offer products from all the main classes of insurance (with the exception of credit insurance). In 2009, munich re had increased its almost 95% stake in ergo by nearly 5%, offering the other shareholders cash compensation for their shares (“squeeze-out”). this offer, which amounted to €97.72 per share, was accepted at the ergo annual general meeting on 12 may 2010. this measure further simplifies the group’s shareholding structures, saves costs and is a logical step in munich re’s integrated insurance group strategy.
management report // munICH re munICH re group annual report 2010 ergo’s many different sales channels include not only the companies’ own strong sales organisations but also a wide variety of broker relationships, extensive marketing cooperations and 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 in 2008 combined its health reinsurance worldwide and health primary insurance outside germany, pooling it under the brand of munich Health in 2009. munich Health covers large stretches of the healthcare-sector value chain and is being shown as a separate segment from 2010.
Property-casualty D.a.s. Deutscher automobil schutz allgemeine rechtsschutzVersicherungs -aktiengesellschaft, munich D.a.s. Österreichische allgemeine rechtsschutz-Versicherungsaktiengesellschaft, Vienna D.a.s. société anonyme belge d’assurances de protection Juridique, Brussels Das legal expenses Insurance Company limited, Bristol Das nederlandse rechtsbijstand Verzekeringmaatschappij n.V., amsterdam ergo assicurazioni s.p.a., milan ergo Daum Direct general Insurance Co. ltd., seoul ergo Direkt Versicherung ag, Fürth ergo russ Versicherung ag, st. petersburg ergo sIgorta a.s., Istanbul ergo Versicherung ag, Düsseldorf mtu moje towarzystwo ubezpieczeniowe s. a., sopot sopockie towarzystwo ubezpieczen ergo Hestia spolka akcyjna, sopot VICtorIa general Insurance Company s.a., athens VICtorIa-seguros s.a., lisbon 1 a complete list of shareholdings can be found on p. 269 ff. in the notes to the consolidated financial statements. 2 only group companies with equity capital generally exceeding €50m are listed.
management report // munICH re munICH re group annual report 2010 asset management meag combines the investment activities of munich re. It also offers its comprehensive know-how to external institutional investors and private clients.
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) ltd., london münchener rück 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
Important tools of corporate management munich re’s value-based management philosophy munich re’s objective is to analyse risks from every conceivable angle and to assess and diversify them, thereby creating lasting value for shareholders, clients, and staff. a guiding principle of our entrepreneurial thinking and activity is to increase munich re’s share price on a sustained basis. this is also the aim of our active capital management, on which we report on page 102 f. the main features of our shareholder value approach in practice are the consistent application within the group of value-based management systems, which we constantly refine.
the framework for any business activity is our risk strategy (see page 117 ff.), from which we derive a detailed network of limitations. Besides value-based parameters, we observe a range of important additional conditions in managing our business. these conditions may be reflected in supplementary targets or may even determine a unit’s short-term orientation in a particular situation. they include rules of local accounting systems, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements.
// With value-based performance indicators we ensure the economic view and the ne cessary comparability of alternative initiatives and prioritise these.
management report // munICH re munICH re group annual report 2010 the adjusted result consists of the technical result (derived from the income statement ), the investment result, and the remaining non-technical result. In each case, value-based adjustments are made, including the smoothing of expenditure for major losses, the normalisation of investment income, and the recognition of future claims expenses at present value.
the products of life primary insurance and the bulk of our health primary insurance business are characterised by their long-term nature and the distribution of results over the duration of the policies. For valuing such long-term portfolios, whose performance cannot be reasonably measured on the basis of a single year, we follow the principles of market Consistent embedded Value (mCeV)©1, the current version of which was published by the european Insurance CFo Forum in october 2009.
embedded value as a performance indicator 1 © stichting CFo Forum Foundation 2008.
management report // munICH re munICH re group annual report 2010 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.
our steering of munich re’s investments is strongly geared to the structure of the liabilities on our balance sheet. as part of our asset-liability management, we determine the economic neutral position. this synthetic investment portfolio best reflects the characteristics of our liabilities towards clients, taking into consideration significant additional parameters in the investment of capital.
In an optimisation process, a benchmark portfolio is developed that reflects our own risk-bearing capacity and other investor preferences on the basis of long-term expect ations of capital market yields. our asset manager meag is responsible for implementing this strategic benchmark portfolio into concrete investments, from which it deviates only within a carefully defined framework and taking into account its own market view for the respective financial year. 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.
In 2010, paid claims and the change in claims provisions in the property-casualty primary insurance segment totalled €3,130m (2,856m) and net operating expenses €1,621m (1,502m), compared with net earned premiums of €4,813m (4,568m). at 96.8%, the combined ratio in primary insurance was higher than for 2009 (93.2%), but was still good.
management report // munICH re munICH re group annual report 2010 therefore, while we aim to keep our combined ratio as low as possible, it is not our only target.
We are adhering to our long-term objective of 15% roraC after tax across the cycle of insurance and interest-rate markets, although it will be difficult to achieve with the currently low interest rates. as soon as the requirements of solvency II and the new IFrss for insurance contracts and financial instruments have been finalised, we will gear our target performance measures to the key indicators from this new framework with its strong economic focus. We are aiming for a consolidated result of around €2.4bn for 2011. Considering the major-loss burden in the first two months of the year, however, this target can only be achieved if random major losses remain below expect ations in the further course of the year.
In life primary insurance and in german health primary insurance, mCeV is one of the foundations of our value-based management.
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of management) (Chairman of the group Committee) group Development group Investments group Communications group audit group executive affairs
Dr. rer. pol. Thomas Blunck special and Financial risks reinsurance Investments Central procurement
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
Hans Peter Claußen (Deputy Chairman) member since 22 april 2009 employee of D.a.s. allgemeine rechtsschutz -Versicherungs-ag
Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann member since 22 July 1999, last re-elected on 22 april 2009 president of acatech – german academy of science and engineering
management report // munICH re munICH re group annual report 2010
Peter Löscher member since 22 april 2009 Chairman of the Board of management of siemens ag
Reinhard Pasch member since 22 april 2009 employee of ergo Versicherungsgruppe ag
Anton van Rossum member since 22 april 2009 Former Chief executive officer and former member of the Board of Fortis
Conference Committee Dr. jur. Hans-Jürgen Schinzler (Chairman) Herbert Bach Hans Peter Claußen Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder a report on the remuneration of the Board of management and the supervisory Board is provided on page 28 ff.
management report // munICH re munICH re group annual report 2010 2 own group company within the meaning of section 18 of the german stock Companies act.
Dr. rer. pol. thomas Blunck münchener & magdeburger agrarversicherung ag global aerospace underwriting managers ltd. (gaum), london new reinsurance Company ltd., Zurich (Chairman)
Dr. oec. publ. Wolfgang strassl – apollo munich Health Insurance Company ltd., Hyderabad, India storebrand Helseforsikring as, oslo
management report // munICH re munICH re group annual report 2010 1 status: 31 December 2010 (in the case of members who have left the Board of management, the information shows the status at the date of their departure).
Heico Corporation, miami silvia müller ergo Versicherungsgruppe ag2 – marco nörenberg ergo Versicherungsgruppe ag2 – reinhard pasch – – Dr. e.h. Dipl.-Ing. Bernd pischetsrieder metro ag tetra-laval International s. a. group, pully anton van rossum – Credit suisse groupe ag, Zurich rodamco europe nV, amsterdam royal Vopak nV, rotterdam (Chairman) solvay s.a., Brussels andrés ruiz Feger – – richard sommer ergo Versicherungsgruppe ag2 – Dr. phil. ron sommer – JsFC sistema, russia mts oJsC, russia sistema shyam teleservices ltd., India tata Consultancy services ltd., India
General parameters our business environment is one of increasing complexity, with an upward trend in major insurance-relevant events. We are seeing a disproportionate rise in insured losses in relation to economic activity, for which we believe climate change is partly responsible, in addition to an increase in values in exposed regions. as a result, new risk potentials and accumulation hazards are emerging. Demographic shifts are also leading to fundamental changes in many parts of the world, confronting social security systems with enormous challenges. It is therefore imperative to carry on refining risk models and to translate new findings into actuarial practice. a group like munich re, among the leaders in integrated risk management, can take long-term advantage of the resulting opportunities in both insurance and reinsurance. Conversely, our prospects for generating short-term profits during booms are restricted by our fundamentally conservative business policy in certain areas, governed by our pronounced risk awareness.
Economic parameters the year 2010 was marked by a global economic recovery. nevertheless, great uncertainty persisted on the capital markets: fear of defaults on government bonds issued by countries on the periphery of the eurozone produced huge fluctuations in the euro exchange rate and a flight to the perceived safe havens of german and us government bonds. Interest rates remained low.
// global economic recovery continues // market conditions for insurance and reinsurance remain challenging // new solvency II insurance supervisory regime about to enter crucial implementation phase
the economic upswing in the USA lost momentum in the course of the year. although the unemployment rate declined in comparison with year-end 2009, it was still high in the fourth quarter at a seasonally adjusted 9.6%.
Jan. Feb. mar. apr. may Jun. Jul. aug. sep. oct. nov. Dec.
management report // BusIness enVIronment munICH re group annual report 2010 the combination of great uncertainty on the financial markets, low inflationary pressure and high unemployment in many industrialised countries caused the major central banks to adhere to their low-interest-rate policies. Key interest rates of the eCB and the Bank of england remained at 1% and 0.5% respectively, while the Japanese central bank lowered its rate from 0.1% to 0–0.1%. the us Federal reserve left its key interest rate unchanged at 0–0.25% and, in autumn 2010, also decided on a further round of unconventional monetary policy measures to keep long-term interest rates low. as a result, our expectation of a moderate rise in the yields of long-term government bonds was not fulfilled. Yields at year-end were just below their start-of the-year level, although a distinct increase was evident in the last quarter.
price volatility on the stock markets remained within reasonable bounds in 2010 compared with the two previous years, but at times reflected the remaining uncertainty about economic development and the stability of the financial system. over the year as a whole, the markets moved differently, with the DaX in particular outperforming important comparative indices. the oil price at the end of December was 10% higher than at the beginning of the year.
Jan. Feb. mar. apr. may Jun. Jul. aug. sep. oct. nov. Dec.1,0 germany usa
management report // BusIness enVIronment munICH re group annual report 2010
While vibrant economic development in many countries had a positive effect on the demand for insurance, price stagnation curbed premium growth in many segments of property-casualty insurance. Business in life and health insurance, on the other hand, increasingly recovered. altogether, therefore, global premium volume grew moderately in the year under review, with demand for insurance cover in many emerging countries again rising very dynamically.
the capital base of insurers and reinsurers, which had already recovered from the consequences of the international financial crisis in the course of 2009, continued to strengthen and even surpassed its pre-crisis level in 2010.
In the first half of the year, high investment profits recorded by reinsurers contrasted with heavy losses from natural catastrophes. the market conditions for reinsurers did not improve. prices moved sideways with a slight downward trend in the renewals at the turn of the year and at 1 april and 1 July. In the renewals at 1 January 2011, they showed a further fall on average.
according to preliminary estimates, the primary insurance sector in germany increased its premium income by 4.7% in 2010, compared with growth of 4.2% in the previous year. life insurance benefited considerably from single-premium business and posted a significant improvement of 6.8% in premium volume. property-casualty business saw only marginal growth, with premium increasing by 0.7%. premium income in private health insurance rose by 6.0%.
With a view to avoiding a new financial crisis, further changes were made to regulatory requirements for financial markets and institutions.
In the usa, the Dodd-Frank Wall Street Reform and Consumer Protection Act has strengthened regulation of the whole financial sector. Besides operating as the us central bank, the Federal reserve may in future supervise insurers as well. In addition, there will be a Federal Insurance office, which is to represent the usa internationally and be responsible for treaties with other states regarding the supervision of insurance com panies.
In germany, following the lead of international agreements, a law on the supervisory requirements for remuneration systems of financial institutions and insurance companies was passed. this regulation specifies that remuneration must always be appropriate, transparent and geared to a company’s sustainable development. In addition, the german Federal Financial supervisory authority, BaFin, may prohibit or restrict the payment of variable remuneration components if the company in question does not fulfil minimum capitalisation requirements.
Munich Re gRoup annual RepoRt 2010 the increase in gross premium was attributable to currency translation effects and organic growth. owing to the high claims costs, the combined ratio in both reinsurance and primary insurance considerably exceeded the previous year’s level. the fact that we still managed to post a similarly good consolidated result to that of the previous year was due to the very satisfying investment result and a lower tax rate.
for the reporting on individual fields of business, the following principle applies: volumes and results that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-group reinsurance cessions from primary insurers to reinsurers) are included.
not all the investments we hold to cover our technical provisions and other liabilities are managed separately by field of business. this means that for our reinsurance companies which conduct life, health and property-casualty reinsurance, we have to divide up investment results and investment portfolios that cannot be directly allocated to a particular segment. in those cases where, as reinsurers, we post technical provisions with our clients to collateralise our obligations, the original amounts of the resulting deposits retained and associated interest income are naturally allocated precisely to the respective segment. the same applies to the portfolios and investment income from reinsurance covers for unit-linked annuity insurance with variable guarantees (“gMxB”). for all other portfolios and investment income, we undertake what is inevitably an
1 the term overcoverage denotes a situation in which the assets in a foreign currency exceed the liabilities in that currency.
Beyond this, the impact of changes in exchange rates is reflected in period-to-period comparisons of all items in the income statement. thus, for example, gross premiums translated into euros for the consolidated financial statements show a rise if their original currency has appreciated against the euro compared with the prior period. falling exchange rates have a converse effect.
With effect from 1 January 2011, we acquired 100% of the shares in us Medicare provider Windsor health group (Windsor). the purchase price amounted to us$ 131m (€98m). More details can be found in the notes to the consolidated financial statements under (53) events after the balance sheet date.
under the share buy-back programme decided on by Munich Reinsurance company’s Board of Management on 7 May 2010, we repurchased a further 1.7 million Munich Re shares with a volume of €195m after the balance sheet date up to 25 february 2011.
// Rise in premium income of 8.4% to €23.6bn, primarily owing to large-volume transactions
Consolidated result life and health €m 705 714 561 1 excluding health business conducted like life insurance. 2 2006–2007 adjusted owing to change in methodology. 3 not available for the financial years 2006–2007, since ifRs 8 was applied for the first time in the financial year 2009.
premium at €23.6bn (21.8bn), our premium volume in 2010 showed an increase of 8.4%. if exchange rates had remained the same, premium would have risen by 1.5%. approximately €19bn or 81% of premium was written in foreign currency, of which 37% was in us dollars and 12% in canadian dollars. 19% of our premium volume was transacted in euros.
We continued to adhere strictly to our underwriting policy of risk-based prices, terms and conditions. the high market capacity, which for economic reasons was not matched by a corresponding increase in demand, caused prices on reinsurance markets unaffected by claims burdens to generally come under moderate pressure. thanks to our active cycle management, the prices in our portfolios were maintained at a stable level in 2010. in addition, we achieved a rise in premium volume owing to largevolume transactions in life reinsurance.
the MceV of total life reinsurance business increased to €8,284m (6,773m) in the past financial year. the total earnings of €1,018m (1,616m) were accounted for in almost equal measure by in-force business and new business written in 2010. the value added by new business of €475m (562m) comprises both sustainable new business in a variety of markets and several major blocks of business. a presentation regarding MceV is avail able on Munich Re’s website.
the situation in important individual markets is as follows: an integral part of our life reinsurance business in Germany is occupational disability risk coverage. in this segment, the implications of the financial crisis had to be monitored especially carefully. our market and product expertise enabled us to support our clients, particularly in developing future-oriented product concepts. claims experience was not subject to any exceptional burdens, thanks to the consultancy we provided to our clients in the area of claims management and the now noticeable economic recovery. nonetheless, the elimination of intra-group reinsurance in 2009 led to a decline in premium income of around €0.3bn in the reinsurance segment in 2010.
Munich Re gRoup annual RepoRt 2010 in the USA our subsidiary Munich american Reassurance company posted higher gross premiums of €1.7bn (1.5bn), thus maintaining its position among the leading life reinsurers. Despite intense competition, we see good opportunities for profitable growth arising in the area of pure mortality covers from the provision of reinsurance capacity tailored to our clients’ requirements. the technical result was below our expectations. While claims experience in our core business – mortality risks coverage – was favourable, we anticipate that claims in long term care insurance will rise. for reserve-strengthening and write-downs of deferred acquisition costs for this business, we therefore incurred expenses of around €315m.
in Canada, Munich Re, toronto (life) again achieved growth in premium income and its result in 2010, thus assuming a leading market position in all lines in which it conducts business: life, disability, health, critical illness and long term care. premium income grew to €2.2bn (1.6bn), mainly owing to the conclusion in 2009 of large-volume transactions for which the full annual premium is shown for the first time in 2010. the favourable claims experience in individual life business made a particularly large contribution to the outstanding result. thanks to its market position, our canadian branch is excellently placed to maintain the momentum in its business development and result in 2011.
competition in the British life insurance market remains intense. an oversupply of reinsurance capacity is exerting persistent pressure on the price of pure mortality covers. We are prepared to sacrifice market share where our expectations regarding risk-based pricing cannot be met. in group reinsurance business, we expanded our range of products, above all in the area of automated business processes. the business prospects in this area continue to be good for 2011. to optimise the diversification of our portfolio, we are therefore looking into attractively priced options for the assumption of longevity risks for the British market in particular. in the united Kingdom, Munich Re, london (life) posted gross premium income totalling €0.8bn (0.8bn).
for the coming years, we see growth potential resulting from the introduction of sol - v ency ii, particularly in europe but also in some asian markets. as solvency requirements increase, so should the demand for reinsurance solutions. We are already engaging in intensive dialogue with our clients and have launched the necessary measures to prepare for this development.
Result in 2010, we posted an operating result of €2,509m (3,381m) and a satisfactory consolidated result of €1,806m (2,111m). over the market cycle as a whole, Munich Re’s target is a combined ratio of around 97% of net earned premiums. at 100.5% (95.3%), the combined ratio in 2010 clearly exceeded this figure, owing to the high major-loss expenditure.
aggregate losses from natural catastrophes came to €1,564m (196m), representing 11.0 (1.4) percentage points of net earned premiums and thus well above the projected 6.5%. the earthquake in chile was the largest individual loss in 2010 at €748m. in terms of Munich Re’s loss burden, the earthquake was the third-largest loss in our history, after the attack on the World trade center (2001) and hurricane Katrina (2005). Besides this, there were other major natural catastrophes, the most notable being the earthquake in new Zealand in september (€339m), the floods in australia in December (€267m), two hailstorms in australia in March (€171m), Winter storm Xynthia in europe at the end of february (€47m), and the damage from heavy snowfalls on the us east coast in february (€30m). By contrast, the hurricane season in the north atlantic was relatively benign. Major tropical cyclones did form, but fortunately they seldom made landfall in densely populated coastal regions.
at €664m (962m), man-made major losses were lower in 2010 than in the previous year, which had been burdened by default losses in credit and surety insurance due to the financial crisis. the loss that stood out was the explosion of the Deepwater horizon oil rig in april, for which Munich Re has reserved a low three-digit million euro amount.
on the African continent, we also recorded profitable growth. our subsidiary Munich Reinsurance company of africa ltd. raised its premium income by 45.7% to €153m. there are still good opportunities for above-average and profitable growth in the african markets, especially south africa.
as in the previous year, around one-third of our treaty business was written at differential terms, i.e. at better terms and conditions than those obtained by other reinsurers, or in the form of exclusive treaties where we were the sole reinsurer.
Combined ratio by property-casualty division germany, asia pacific and africa 102.5 100.1 106.5 106.0 94.2 global clients and north america 99.6 88.8 101.4 95.8 91.9
trends and growth in selected markets and at our subsidiaries in Germany, premium income fell to €1,303m (1,416m), partly due to continuing erosion of primary insurers’ original rates and increases in cedant retentions, and partly because we withdrew from business where we could not obtain risk-commensurate prices, terms and conditions.
in Greater China, premium volume rose to €735m (423m). We diversified and optimised our portfolio by forgoing business that did not meet our profitability requirements, writing new large-volume and profitable treaties in china, and expanding our client base. We also participated in strong original growth.
Gross premiums written in property-casualty germany, asia pacific and africa 3,268 2,836 3,152 2,917 2,881 global clients and north america 6,140 6,058 5,086 5,751 6,097
Regulatory developments in India continue to give cause for hope that the market will be opened to international reinsurers. given the medium- and long-term growth potential – also in the reinsurance sector – Munich Re is continuing to keep all its strategic options open.
in Spain, our premium income decreased to €403m (448m), owing partly to the continuing economic crisis and partly to our systematic withdrawal from non-profitable business. We nevertheless succeeded in maintaining our leading market position.
Most of the losses from the earthquake in chile involved the latin american market and our branches in Madrid and london. We immediately set up a local claims management task force which enabled us to give our clients direct support for efficient claims settlement and to swiftly make advance claims payments. thanks to this high degree of flexibility and service, we have been able to expand our market share at considerably higher prices.
Munich Re gRoup annual RepoRt 2010 in the Global Clients and North America Division, we registered a slight overall increase in premium owing to the full consolidation of the hsB group. We took advantage of attractive growth opportunities in selected products and existing client accounts, but consistently shed business that was unprofitable due to pressure on reinsurance rates, including large-volume treaties. We increased our stake in lloyd’s Msp syndicate from 73.2% to 84.7%.
Munich Reinsurance Canada Non-Life Group – Munich Reinsurance company of canada and temple insurance company – again made a very positive contribution to the result, despite several weather-related events. the expansion of our specialty insurance activities via temple insurance company is also progressing well.
New Reinsurance Company Ltd.1 2010 Prev. year Change % gross premiums written sfr m 1,289 1,518 –15.1 thereof property-casualty sfr m 702 941 –25.4 net earned premiums sfr m 1,162 1,465 –20.7 thereof property-casualty sfr m 590 887 –33.5 loss ratio property-casualty % 57.2 67.8 expense ratio property-casualty % 26.9 21.6 combined ratio property-casualty % 84.1 89.4 Result for the year sfr m 136.3 205.8 –33.8 investments sfr m 3,858 4,387 –12.1 1 financial statements in accordance with national accounting law.
Munich Re gRoup annual RepoRt 2010 business exposed to natural hazards and major losses, we were able to achieve improvements in prices, terms and conditions in 2010. for 2011, we must reckon with a further fall in premium income as a result of our rigorous profit-oriented underwriting policy in a difficult market environment. however, we are proceeding on the assumption that in the offshore energy sector, rates in the insurance and reinsurance markets will rise owing to the known exposures to natural catastrophes and the Deepwater horizon loss. We will take advantage of our market position to generate profitable business from this development. our initiative to provide cover for offshore oil drilling is a step in the same direction.
We continued to extend our leading position in agricultural reinsurance, where the business we wrote mainly comprised state-supported crop insurance programmes, with a large portion stemming from the usa. in close consultation with selected cedants, we are applying our vast experience and expertise in this business to other regions with a high potential for earnings and growth.
in our financial risks segment, credit and bonding reinsurance is the most important class of business. here we reinsure financial risks 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. together with our clients, we took specific measures in the crisis years 2008 and 2009 to control risks in the reinsurance portfolios and implemented improvements in prices, terms and conditions on the primary insurance side. these activities, along with the swift recovery of the economy, had a positive effect in the financial year 2010, enabling us to lower our combined ratio in credit and bonding to 82.4% (173.4%). premium income developed as expected, totalling €744m (632m). for 2011, with the improvement in the macroeconomic situation continuing, we expect credit and bonding results to stabilise at a good level in primary insurance; the same applies to our results in reinsurance.
Marketing eRgo offers the appropriate sales channel for every client. there are over 20,000 fulltime self-employed agents, direct sales staff, brokers and strong cooperation partners servicing clients in germany and abroad. eRgo has a broad-based distribution partnership agreement in germany, central and eastern europe with the major european bank unicredit group. through its travel insurer eRV, eRgo works with more than 17,000 partners in the tourist industry in germany, its main sales partners being travel agents and tour operators.
Key figures gross premiums written life €m 6,484 6,294 6,053 health €m 5,499 5,171 5,840 life and health €m 11,647 11,606 operating result2 consolidated result life €m 172 27 –12 health €m 165 83 16 life and health €m 358 319 1 primary insurance premium income comprises the following: in the life primary segment, it 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. in the health and property-casualty primary insurance segments, it comprises the gross premiums written.
2 not available for the financial years 2006–2007, since ifRs 8 was applied for the first time in the financial year 2009.
the operating performance was also satisfactory: in 2010, we posted a result increase of 39.8% to €1,269m (908m). the technical result amounted to €648m (814m), not only because of the difficult conditions in important markets such as turkey, poland and south Korea but also owing to natural hazard events like the long, harsh winter and floods on the odra and Vistula. these events had a greater impact on property-casualty insurance than in the previous year, especially in our international business.
Munich Re gRoup annual RepoRt 2010 premium in the financial year 2010 overall, premium volume across all lines of business totalled €19.2bn (18.2bn), representing an increase of 5.4%. expansion was particularly prominent in international business, reflecting organic growth and favourable trends in exchange rates in important markets. although our premium volume in primary insurance largely stems from the eurozone, our income was still positively influenced by changes in exchange rates, above all the polish zloty. at €14.5bn (14.0bn), overall premium income from germany was up 3.6% on the previous year. gross premiums written in 2010 totalled €17.5bn (16.6bn). unlike overall premium income, gross premiums written do not include the savings premiums of €1.7bn (1.6bn) from unit-linked life insurance and capitalisation products. eRgo’s premium growth is especially pleasing in view of the brand changeover in germany, where our sales forces have done an excellent job.
Life the consolidated result in life insurance for the past financial year amounted to €172m (27m), benefiting from write-ups of hedging instruments.
Munich Re gRoup annual RepoRt 2010 overall premium income in life insurance was up by 3.6% in 2010. in international business, premium showed significant growth of 5.3%, reaching a total of €2.1bn. the rise is due not least to the satisfying development in poland and Belgium, where we posted growth of 131.7% and 30.3% respectively. the substantial increase in poland is mainly attributable to our bank cooperation agreements. in germany, we recorded premium income of €6.0bn (5.9bn) over the year as a whole, representing expansion of 3.0%. gross premiums written in and outside germany rose by 3.0%.
Health in the health insurance segment, the consolidated result for 2010 rose to €165m (83m). the MceV amounted to €1,733m (1,971m) at the end of the financial year. since only short-term interest-rate guarantees are provided in this business, the interest-rate en vironment did not have such a strong impact as in life insurance. total MceV earnings nevertheless fell to –€122m (168m), while the value added by new business decreased to €28m (36m).
New business in life insurance 2010 Prev. year Change €m €m % Germany
Regular premiums 331 340 –2.6 annual premium equivalent1 492 466 5.6
in the past financial year, premium volume increased, the growth of 7.2% largely deriving from international business. in greece, we grew our premium income by 46.0% thanks to our exclusive partnership with piraeus Bank. there was also significant premium expansion in poland (+19.6%) and south Korea (+36.8%), reflecting favourable trends in exchange rates. in international business, we posted a total premium volume of €2.3bn (2.0bn) for 2010, a rise of 18.0% against the previous year. in german business, premium income totalled €3.17bn (3.16bn), an increase of 0.4%. this development was largely driven by commercial and industrial insurance, where we achieved 2.8% growth in premium to €773m (752m). in the highly competitive class of motor insurance, our premium volume showed a modest increase to €601m (593m) against 2009. in a still difficult legal protection market, premium income for direct business fell by 2.0%. our business with personal accident policies was down by a marginal 1.5%, while other personal lines business remained essentially stable.
// Marked increase in premium income of 29.3% to €5.1bn // combined ratio of 99.7% from January to December // investment result of €142m // consolidated result for the year of €63m in recent years, the global health market has become one of the fastest-growing sectors of the economy in terms of both insurance and care provision. this trend will become even more pronounced in the future due to advances in medicine, improved life expectancy and the development of healthcare markets in emerging countries. in order to maximise the opportunities this presents, Munich Re has pooled its specialists for international health primary insurance (outside germany) and reinsurance business in a separate organisation under the new brand Munich health.
in 2010, the consolidated result totalled €63m (27m). there was a slight reduction of 6.0% in the investment result to €142m (151m), and our operating result also decreased moderately by 1.5% to €131m (133m).
Key figures 2010 Prev. year Change % gross premiums written €bn 5.1 4.0 29.3 operating result €m 131 133 –1.5
Munich Re gRoup annual RepoRt 2010 international health primary insurance business showed an increase of 9.1% to €1,925m (1,764m), with premium growth particularly pronounced in the united Kingdom, spain and Belgium. at sterling, premium volume for the whole of 2010 was down, given the more stringent us regulatory framework for the senior segment on which it focuses: premium income came under pressure from sales restrictions. in the fourth quarter, Munich Re announced the acquisition of Windsor. the transaction was completed on 1 January 2011. the cooperation between sterling and Windsor enables us – thanks to Windsor’s provider network of physicians and hospitals – to use and expand our overarching managed-care competence, in keeping with the new legal requirements. We have thus laid the foundations for profitable growth in the usa, the world’s largest health insurance market.
in reinsurance the growth in premium income by 45.5% to €3,215m (2,210m) is essentially due to new, large-volume treaties providing capital relief to our clients in north america and asia.
Gross premiums by market region 53% (52 %) north america (na)
// fixed-interest securities and loans continue to dominate the portfolio with share of 84%
Reinsurance Primary insurance Munich Health Asset management Total Life Property-casualty Life Health Property-casualty €m 31.12.2010 Prev. year 31.12.2010 Prev. year 31.12.2010 Prev. year 31.12.2010 Prev. year 31.12.2010 Prev. year 31.12.2010 Prev. year 31.12.2010 Prev. year 31.12.2010 Prev. year land and buildings, including buildings on third-party land 267 211 1,178 1,095 1,760 1,775 623 635 340 309 16 15 63 46 4,247 4,086 other securities held to maturity – – – – 42 83 – – – 1 – – – – 42 84 other securities available for sale other securities at fair value through profit or loss held for trading
Deposits retained on assumed reinsurance 5,069 5,171 1,499 1,347 136 118 1 1 3 3 194 158 – – 6,902 6,798 investments for the benefit of life insurance policyholders who bear the investment risk – – – – 4,953 4,024 3 1 – – 1 1 – – 4,957 4,026
Munich Re gRoup annual RepoRt 2010 investment principles our investment strategy considers supervisory requirements aimed at ensuring optimum security and profitability, with sufficient liquidity at all times, and an appropriate mix and spread. We also comply with all other legal requirements. We only make investments in assets from which we expect an appropriate return, our asset managers paying strict attention to the risk tolerance of each company and the principle of sustainability. as far as possible, we reduce currency risks by matching our expected liabilities with assets in correlated currencies. We also take care that the maturities of our fixed-interest securities are aligned with those of our liabilities. the methods we use to control investment risks are described in detail in the risk report on page 116 ff.; our approach to asset-liability management is explained on page 102.
significant developments in the financial year 2010 the performances of the most important share price indices varied over the course of the year: the DaX, for example, recorded an increase of around 16% since January, whereas the euRo stoXX 50 lost around 6% in the same period. there were similar discrepancies in the bond markets. While yields on german government bonds fell further, risk spreads on government bonds of peripheral eurozone countries rose strongly. through restructurings in our portfolio, we benefited from falling interest rates and realised gains on disposals that contributed significantly to the improvement in our result from €7.9bn to €8.6bn. We were thus able to achieve a gratifying return on investment of 4.5% (4.3%), which was appreciably higher than our previous year’s projection.
the carrying amount of our investments rose in 2010. apart from new investments, this was due in particular to the fall in the euro against the us dollar over the year as a whole (despite a marked recovery in the second half-year). this significantly increased the market values of our investments held in foreign currencies when translated into euros.
Fixed-interest securities and loans, including short-term items, on a market-value basis1 1 presentation based on economic view and not fully comparable with ifRs figures. the economic view includes cash positions.
investing in real assets such as equities and real estate also diversifies our portfolio and increases the level of protection against the inflation risk. in the period under review, we carefully increased our equity portfolio (including investments in affiliated com panies and associates at market value) to €7.9bn (5.2bn). at the reporting date, our economic equity exposure after allowing for derivative financial instruments was 4.4% (2.8%).
Regular investment income rose, due to our larger portfolio of fixed-interest se curities and loans and to our cautious resumption of investments in credit-exposed securities. in addition, there was an increase in income from associates.
Investment result by type of investment 2010 Prev. year Change €m €m %
Deposits retained on assumed reinsurance and other investments 114 150 –24.0 investments for the benefit of life insurance policyholders who bear the investment risk 271 441 –38.5 expenses for the management of investments and other expenses 464 467 –0.6
management report // Financial position munich re group annual report 2010 munich re’s financial strength continues to be assigned the second-highest rating category by each of the leading rating agencies.
Development of Group equity issued capital and capital reserve 7,388 7,388 7,388 consolidated result attributable to equity holders of munich reinsurance company 2,422 2,521 1,555 non-controlling interests 245 229 285
management report // Financial position munich re group annual report 2010 the increase in equity was attributable not only to the consolidated result but also to a rise in the reserve for currency translation adjustments and to marginally higher net unrealised gains, which derived mainly from our non-fixed-interest securities available for sale. the dividend payment and share buy-back programme, on which we report on page 102 f., had a lowering effect on equity. our valuation reserves not recognised in the balance sheet and totalling €3.6bn (3.2bn) are dealt with on page 97.
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 and is essentially designed to optimise the cost of capital and ensure that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we quantify our debt leverage, which is defined as the ratio of strategic debt to the sum of group equity and strategic debt expressed as a percentage. 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.
strategic debt includes subordinated liabilities amounting to €4,847m. these are described in the notes to the consolidated financial statements under (19) subordinated liabilities.
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 €1,738m and the debt leverage amounts to only 7.0%.
management report // Financial position munich re group annual report 2010 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 ex ample, require foreign reinsurers to establish premium and reserve deposits with primary insurers or set up trust accounts with certain financial institutions. at the reporting date, this involved investments with a volume of €10.4bn (12.7bn).
in addition, there were contingent liabilities, which are described in the notes to the consolidated financial statements under (50) contingent liabilities, other financial commitments.
to configure our asset management as effectively as possible, we also use derivative financial instruments, which are described in the notes to the financial statements under (9) other securities at fair value through profit or loss.
at the balance sheet date on 31 December 2010, our revenue reserves under german commercial law accounting amounted to €1,667m. in 2010, we acquired 11.8 million shares worth €1,300m – 5.7 million shares or a volume of €650m under the 2009/2010
in addition, subject to the approval of the annual general meeting, we intend to pay our shareholders a dividend of €6.25 per share for the financial year 2010 from munich reinsurance company’s net retained profits.
Information in accordance with Section 315 para. 4 of the German Commercial Code and explanatory report of the Board of Management composition of the issued capital as at 31 December 2010, munich reinsurance company’s share capital of €587,725,396.48 was divided into 188,468,471 registered, no-par-value, fully paid shares. these shares constitute a single category of stock. the rights and obligations deriving from them follow from the pertinent statutory requirements and articles of association. the shares are endowed with full voting and dividend rights, with the exception of the 8,089,888 registered, no-par-value, fully paid shares held by munich re itself at 31 December 2010 (section 71b of the german stock companies act). each voting share carries one vote at the annual general meeting. With respect to the company, the only parties deemed shareholders in accordance with the german stock companies act (section 67) are those entered in the company’s register of shareholders.
Warren e. Buffett and companies in his group informed us in accordance with section 21 of the german securities trading act (Wphg) that they hold a total share of 10.244% of munich reinsurance company’s voting rights. they notified us, as at 12 october 2010, of the following direct or indirect shareholdings exceeding 10% of the voting rights:
management report // Financial position munich re group annual report 2010
statutory regulations and provisions of the articles of association regarding appointment and dismissal of members of the Board of management and concerning amendments to the articles of association the legal parameters for the appointment and dismissal of members of the Board of management are specified in the company’s co-determination agreement, articles 13 and 16 of the articles of association, sections 84 and 85 of the german stock companies act, and sections 121a paras. 1 and 7a of the german insurance control act. munich re’s co-determination agreement and articles of association have taken over the legal tenets of the german co-Determination act. the supervisory Board appoints the members of the Board of management and may dismiss them at any time for good cause. on initial appointment, members of the Board of management are usually given contracts for a term of between three and five years. extensions of up to five years are possible and – in exceptional cases – members of the Board of management may also be appointed by a court of law.
Direct Indirect % holding holding Warren e. Buffett, usa 0.053 10.191 Berkshire hathaway inc., omaha, usa 10.191 oBh llc, omaha, usa 10.191 national indemnity company, omaha, usa 10.191
// 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 18 april 2011 by an amount of up to €5m by issuing new shares against cash contribution (authorised capital increase 2006). 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 conditions 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.
overall in the year under review, cash – which encompasses cash with banks, cheques and cash in hand – decreased by €182m (including currency effects) to €2,900m.
Consolidated cash flow statement 2010 Prev. year1 Change €m €m % cash flows from operating activities 8,836 8,654 2.1 cash flows from investing activities –7,696 –5,263 –46.2 cash flows from financing activities –1,384 –2,680 48.4 Cash flows for the financial year –244 711 –
management report // other success Factors munich re group annual report 2010
reinsurance as reinsurers, we deploy our extensive risk knowledge to develop individual solutions for our clients to meet their diverse needs. We therefore provide our cedants with the full range of underwriting products. We regularly assume a pioneering role in the development of new coverage concepts, for instance for offshore oil drilling operations. We also offer our clients consulting and other risk-related services. our client management is geared to providing premium solutions and intensifying cooperation with our clients.
since the summer of 2010, the ergo insurance group has been selling life and property -casualty covers under a single ergo brand in its home market of germany. ergo has made a clear promise to clients: “to insure is to understand” expresses our aim of focusing directly on our clients’ requirements. this encompasses needs-oriented consultancy, clear and comprehensible communication, innovative services, and rapid support in the event of a loss.
clients benefit from financial strength and risk knowledge ergo focuses consistently on clients’ needs
Research and development an in-depth understanding of risks is the basis of our business. that is why we analyse known risks on an ongoing basis to determine whether there have been any changes in their structure or occurrence probability. We focus on identifying new risks at an early stage and offering solutions for known risks that have hitherto been uninsurable.
munich re has developed an insurance solution covering oil companies against liability risks from oil disasters during offshore drilling operations. climate change and the necessary development of renewable energy technologies also allow scope for innovation. For instance, we have devised an insurance solution that covers the performance guarantees provided by solar module manufacturers – an important milestone for the funding of photovoltaic projects.
in cooperation with universities, ergo’s health insurer DKV is examining the link between health behaviour and risks. in 2010, a representative DKV study on the state of health in germany, which was prepared in collaboration with cologne’s sports university, conducted a first thorough analysis of the situation in germany.
Staff by region 50.0% (50.5%) north america 60.9% (60.7%) rest of europe 1.2% (1.2%) latin america and middle east 0.1% (0.0%) north america 0.7% (0.6%) asia and australasia 4.9% (4.6%) asia and australasia 2.3% (2.1%) asia and australasia 5.4% (5.5%) africa, near and middle east 33.1% (32.3%) rest of europe 30.1% (30.6%) north america 9.2% (9.7%) rest of europe over 90% of the 759 (788) staff in asset management work in germany.
Munich Reinsurance Company ERGO MEAG % 2010 Prev. year 2010 Prev. year 2010 Prev. year over one year and up to five years 20.6 17.2 9.7 9.6 36.5 38.1 over five years and up to ten years 28.7 29.5 17.0 20.3 30.8 38.2 over ten years and up to 20 years 29.1 27.1 41.3 41.0 23.3 15.0 group
management report // other success Factors munich re group annual report 2010 reduced investment in further training at ergo is attributable to the fact that, under the “new ergo” project, events with a large number of participants and other measures were organised without external support, i.e. at low cost.
reinsurance our overall remuneration system comprises a well-balanced package of components reflecting and underlining our corporate culture that recognises and rewards performance. in view of the successful 2009 financial year, munich reinsurance company paid out the company result bonus for the first time in munich in 2010, a new variable salary component that allows all employees to share in the company’s good results. the distribution of this bonus payment is based on individual performance and demonstrates to staff that it pays to work hard.
our business success is rooted in our excellent knowledge and its market-oriented implementation. initiatives that promote staff training and professional development were therefore a focal point of attention in 2010. our international graduate trainee programme was expanded by a further ten positions in 2010 to a total of 30 – an investment in young talent. munich re’s career path for experts was further strengthened: outstanding experts in specialist areas relevant to business can now advance up to senior-executive level. they have a set of suitable talent management measures to support them. this represents another step in putting expert and management career paths on an equal footing.
primary insurance the “new ergo” project to implement our brand strategy was supported with a comprehensive change management programme in which staff were actively involved. in so doing, we achieved a high level of acceptance. From the corporate guiding principles developed in the project, we derived a “staff promise” which will be an important platform for our hr policies over the next few years.
management report // other success Factors munich re group annual report 2010 munich health the qualitative measures of our human resources management also apply to munich health staff. at the same time, management is continuing to work on integrating all the experts and business models within munich health and expanding our professional expertise in the international healthcare market.
Corporate responsibility munich re’s business environment is constantly in flux, presenting ever new opportunities and risks. Defining factors, such as climate change, technological progress, the globalised financial markets and demographic trends, constitute major challenges. a forward-looking and responsible approach throughout the company is an integral part of our business model. this approach is specified in more detail in our corporate responsibility strategy, and was reinforced when munich re joined the united nations global compact in 2007.
in primary insurance and reinsurance, we develop new solutions such as special cover concepts for renewable energy or rates for climate-friendly vehicles, and provide advice on holistic healthcare programmes. as a global risk carrier, we also offer microinsurance geared to the financial situation and living conditions of disadvantaged population groups. internationally, we are actively involved in the united nations environment programme (unep Fi) and work together with a group of major international financial enterprises on principles for sustainable insurance (psi). another example is the industry initiative of Dii gmbh, which munich re established in 2009 in conjunction with the Desertec Foundation and other international enterprises. the declared aim is to develop a suitable technical, economic, and political framework for carbon-free power generation in the deserts of north africa and the middle east.
With our own office buildings, we focus our activities on reducing greenhouse gas emissions // by reducing travel, energy and heat consumption, and waste; // by using water and paper sparingly; // by increasingly replacing conventional sources of energy with renewable ones.
management report // other success Factors munich re group annual report 2010 a fifth of our staff in the group works in buildings certified to the international environmental management standard iso 14001. in 2009, our munich site became climateneutral, our declared aim being to achieve carbon-neutrality in the whole reinsurance group by 2012.
our understanding of corporate responsibility also involves assuming responsibility for the community in which we live and work. in addition to systematically promoting education and science, munich re supports selected cultural and social projects. health is another cornerstone of our activities, as exemplified by a range of prevention projects in which ergo is engaged. munich re’s commitment is backed by the various foundations we have set up, which contribute significantly to sustainable development.
our shares have featured in the most respected sustainability indices, e.g. the Dow Jones sustainability index (DJsi) and the Ftse4good index. Both listings were successfully reaffirmed in autumn 2010. corporate responsibility issues are gaining in importance in our communication with shareholders.
Remit and objectives risk management is a key part of our corporate governance. it underpins our financial strength, enabling us to meet our obligations to clients and creates sustained value for our shareholders. in addition, it protects munich re’s reputation. We achieve these objectives through worldwide risk management encompassing all of our operations.
Organisational structure to ensure that our risk management operates efficiently and effectively, we have established specific risk management functions and bodies. our integrated risk management (irm) Division supervises risk management group-wide, building on decentralised structures in all units of the group. it is headed by the chief risk officer (cro), who, like the local cros at other companies in the group, is supported by interdisciplinary teams of highly qualified staff. our extensive documentation, guidelines and instructions ensure that staff in our risk management structure and the group as a whole are kept informed of our risk strategy, organisation and processes.
Risk governance munich re’s risk governance fosters the development and maintenance of an appropriate risk and control culture, which encompasses all significant risk categories. it is supported by committees at group and business-segment level: // munich re’s risk situation in 2010 manageable and under control // solvency ratio still comfortable // uniform worldwide system for managing risks risk report
management report // risK report munich re group annual report 2010 group level the cro is a permanent member of the Group Committee, the central committee responsible for group-wide issues, the development and management of strategy, financial control, and risk management and investment matters.
additionally, there is a Reputational Risk Committee (see page 125 for details).
risk management for primary insurance is primarily decentralised to ergo irm and supported by risk management structures in all areas of ergo. the ergo Board of management has established the ERGO Risk Committee as a decision-making body.
With effect from the 2010 financial year, munich re is reporting on munich health as a separate segment managed by the munich health Board. the Munich Health Risk Committee was also set up in april 2010 to deal with risk matters.
Determining the risk strategy munich re operates worldwide, turning risk into value. the assumption of risks is therefore an essential part of our business strategy. our risk strategy defines the extent of the risks we are prepared to incur for our clients and shareholders. the development of the risk strategy is embedded in the annual planning cycle, and hence in our business strategy. it is approved by the Board of management and discussed regularly with the supervisory Board.
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
management report // risK report munich re group annual report 2010 the risk limits are: // overall portfolio limits: based on munich re’s overall portfolio and designed to protect our capital and limit the likelihood of an economic loss for the year; // supplementary limits: 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 survival were they to materialise; // other limits: designed to preserve munich re’s reputation and thus protect its future business potential. they encompass limits for individual risks that, though they would not necessarily threaten the company’s existence, could cause lasting damage to the confidence of clients, shareholders and staff.
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 subsequent government debt crisis.
our implementation of risk management at operational level embraces the identification, measurement, analysis and assessment of risks, and the resultant risk reporting, limitation (reduction to a level we have defined as appropriate) and monitoring, which enables us to follow all significant risks closely.
using a holistic risk management approach, we have made the identification, analysis, assessment and documentation of significant operational risks and key controls more efficient and effective. moreover, the optimisation of risk and control accountability through clear assignment of responsibilities and the definition of risk management measures has created transparency.
For each of munich re’s business segments, the ics delivers a risk map, i.e. the significant risks and processes are systematically linked. the map shows all relevant risk control points. even risks and controls that cut across different divisions can be clearly identified. By making our risk situation transparent, we can react rapidly and efficiently to changes in internal and external requirements. this means that we are able to identify risks at an early stage, address control shortcomings immediately and take effective remedial action.
the ics is a “learning system”, which reviews the risks, risk assessments and controls at least once a year and makes adjustments where necessary. internal audit also reviews the effectiveness of the ics as part of its audit plan at least annually and assesses the need to adapt it to take account of changes in parameters.
munich re applies carefully defined materiality thresholds to ensure that internal controls are appropriate. significance, risk experience and compliance are taken into account in determining the thresholds. all risks significant from a group perspective for financial reporting are integrated into the ics in accordance with uniform criteria.
By means of an accounting manual and regular circulation of information on changes required, munich re ensures that uniform rules are applied throughout the group for the treatment, valuation and disclosure of all items in the balance sheet and income statement. any amendments are subject to a stringent procedure as regards timing, responsibilities and circulation of information. a standardised process is used to ensure that the companies included implement and comply with the accounting regulations.
the consolidated financial statements are prepared using a fast-close procedure in a central system, where subgroup accounts are produced as a component of the consolidated financial statements for the group as a whole. clearly documented instructions and controls are in place for the closing process (consolidation and reporting).
Dual control is applied throughout the process of preparing individual company and consolidated financial statements. system and accounting checks are in place at every stage of the closing process. any errors are analysed, followed up and corrected.
risk reporting internal risk reporting provides all Board members with regular information on the risk situation, both as regards the individual risk categories (ongoing) and the entire group (quarterly). the audit committee of the supervisory Board and BaFin also receive the quarterly internal risk report.
early-warning mechanisms thus ensure that negative trends are identified in sufficient time for countermeasures to be taken.
significant risks in property-casualty insurance are the premium and reserve risks. 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 primary responsibility for controlling the premium risk lies with operational management. managers of operations grant underwriting authorities and lay down internal processes with the intention of 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.
For the natural hazard and terrorism scenarios, budget capacities compatible with the risk strategy are allocated to each underwriting unit. Before business is accepted, risk data must be recorded and the potential loss quantified in accordance with mandatory rules, and the business may only be written if sufficient budget capacity is available.
management report // risK report munich re group annual report 2010 reserve risk the estimation of reserves is fraught with uncertainty. this is due to the fact that the settlement of claims that have arisen before the balance sheet date is dependent on future events and developments. unforeseen loss trends resulting from court rulings, changes in the law, differences in loss adjustment practice, medical and long term care, and economic factors such as inflation can have a considerable impact on loss experience.
it may also be necessary to adjust the actuarial assumptions we use for biometrics and surrender behaviour, which constitute long-term risks for the portfolio. in life insurance, it is mortality, longevity and disability risks that are especially relevant; in health insurance, it is morbidity risks, although if there is a lasting change in the actuarial assumptions applied in primary insurance, long-term contracts generally provide for premium adjustments.
the remarks on underwriting guidelines and limits (see “property-casualty” section) also apply to life and health reinsurance business. in primary insurance, regular reviews of the actuarial assumptions by actuaries and the requisite amendment of rating rules ensure that risks and processes are properly controlled.
Further information on underwriting risk can be found in the notes to the consolidated financial statements under (37) risks in life and health insurance business.
management report // risK report munich re group annual report 2010
Market risk We define market risk as the risk of economic losses resulting from changes in values in the capital markets. this includes equity risk, the general and specific interest-rate risk, property risk and currency risk. the general interest-rate risk describes all changes in the risk-free interest-rate curve, whereas the specific interest-rate risk takes account of changes in credit risk spreads. We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also our underwriting liabilities, especially in life insurance. Due to the long-term interest-rate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities is highly dependent on the capital markets.
applying stress tests, sensitivity and duration analyses, we simulate market fluctuations and devise strategies for counteracting them where necessary.
the investments we make in our operations must comply with group-wide minimum standards as defined in our general investment guidelines. Besides this, we take account of restrictions on investments resulting from our risk strategy.
a detailed presentation of the economic risk capital for market risks can be found on page 130 f. sensitivity analyses of the market-price risks associated with financial instruments can be found in the notes to the consolidated financial statements under (40).
Credit risk We define credit risk as the financial loss that munich re could incur as a result of a change in the financial position of a counterparty, such as an issuer of securities or other debtor with liabilities to our group.
We use a cross-balance-sheet counterparty limit system valid throughout the group to monitor and control our group-wide credit risks. the limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data and the risk appetite defined by the Board of management. the group-wide limit for a counterparty is broken down for the reinsurance and primary insurance segments, and for the underwriting and investment sides. the basis for the exposure figure is the estimated financial loss in the event of default by the counterparty after realisation of collateral (credit equivalent exposure – cee). the cee factors are estimated on the basis of historical analyses and expert opinions.
management report // risK report munich re group annual report 2010 in order to take account of other country risks besides the credit risk of government bonds, our group Development function also prepares a specific country scoring in addition to the pure default rating. it covers the main political and economic risks and those relating to internal security in a country, thus enabling us to assess comprehensively additional country risks of varying importance for different business segments. it has to be considered in underwriting and investment decisions and serves as an indicator for decisions on individual limits. We also monitor our accumulations in certain sectors and regions and limit them where appropriate.
Operational risk munich re defines operational risks as potential losses resulting from inadequate processes, technical failure, human error or external events. these include criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations and disagreements with business partners.
// frequent simulation of the impact of particular strains on our liquidity.
Strategic risk munich re defines strategic risk as the risk of making wrong business decisions, implementing decisions poorly, or being unable to adapt to changes in its operating environment. the existing and new potential for success in the group and the segments in which it operates creates strategic risks, which generally arise early on and can lead to a significant long-term reduction in corporate value.
We counter this risk by discussing significant strategic issues and decisions in our strategy committee and regularly monitoring their implementation. the strategy committee comprises the members of the group committee, and hence the cro, plus the chief executive officers (ceos) of the business segments and the head of group Development. as a result, strategic decision-making processes are intermeshed with risk management. irm is additionally involved in the operational business planning and in the processes for mergers and acquisitions.
on page 121 ff., we provide several examples of the above-mentioned risks and how we deal with them.
every risk category is depicted in both reinsurance and primary insurance. in the munich health segment, the life and health risk category and operational risks are shown, but not market and credit risk, which are covered in the reinsurance and insurance segments through our internal risk control.
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.
munich re’s risk situation in 2010 manageable and under control managing business using our own integrated risk model
// the economic risk capital for market risks grew by €3.1bn, drivers being the increased equity-backing ratio (after allowing for derivatives) and the higher interest -rate risk in primary insurance, mainly due to the lower interest rates.
// the economic risk capital for credit risks was up by €1.4bn, mainly due to the higher market-induced assessment of credit risks, as reflected in lower ratings. in life primary insurance, lower risk buffers (future profit sharing) means an increased assumption of risk by insurers and thus a rise in the credit risk recognised.
// as last year, we used scenarios to determine the economic risk capital requirement for operational risk. the scenarios were prepared by various expert teams in the group and are reviewed and refined annually as part of the ics review (see page 119 f.).
Property-casualty as described, munich re actively manages its risk exposure. this includes restricting our exposure through limits and budgets for natural catastrophe risks, where our experts consider scenarios for possible natural events, the scientific factors, occurrence probabilities and potential loss amounts. on the basis of these models, the impact of various events on munich re’s portfolio is calculated and represented in mathematical terms in the form of a stochastic model. these models form the basis for the erc calculation for the “large and accumulation losses” category, which apart from natural hazard scenarios includes man-made losses, and for the limits and budgets for accumulation losses.
the exposures of 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 – also referred to as budget consumption – is determined by a bottom-up process. as ergo’s portfolio is more stable, its exposure is only updated annually.
the largest natural catastrophe exposure for munich re is the €3.3bn 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 €2.9bn using the scenarios we have drawn up.
the underwriting risk capital for property-casualty is made up as follows from the two 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.
the significant rise in the economic risk capital for large and accumulation losses is mainly due to the above-mentioned increase in the peak scenarios “storm europe” and “atlantic hurricane”. We have also changed the placement of our external retrocessions. in the case of basic losses, the annual readjustment of the models has resulted in a virtually unchanged requirement for economic risk capital.
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. the risk arising out of large and accumulation losses is depicted using the above-mentioned models, the models for large losses being calibrated on the basis of historical claims experience.
Diversification effect –3.6 –3.4 –0.2 – –3.5 –3.4 –0.2 – –0.1
Market risks market risks are established using a scenario-based simulation calculation. the scenarios are calibrated on the basis of long statistical series. this risk category can be broken down further into the subcategories “equity risk”, “general interest-rate risk”, “specific interest-rate risk”, “property risk” and “currency risk”. the general interest-rate risk includes implicit volatility risks and inflation risks.
Economic risk capital (ERC) – Market 31.12.2010 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 2010 equity risk the market value of our investments in equities, including participating interests, was €7.9bn (5.2bn) at 31 December 2010. at this date, on a market-value basis, the ratio of equities to total investments amounted to 4.0% (2.8%) before taking derivatives into account and to 4.4% (2.8%) after allowing for derivatives. this increase compared with the previous year is the main reason for the higher risk capital for equities.
in reinsurance, the interest-rate risk on fixed-interest investments in units of modified duration (interest-rate sensitivity) is 5.9, whereas the modified duration of liabilities is 3.4. 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 –€15m. Were such a parallel shift in the interest-rate curves to occur, the available financial resources would change by the given amount. the increase in the interestrate risk in reinsurance is mainly attributable to the greater gap between the duration of assets and liabilities.
in primary insurance, the modified duration is 6.6 for fixed-interest investments and 8.3 for liabilities. this exposure to falling interest rates derives mainly from 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 €19m. the different exposures in reinsurance and primary insurance thus partially cancel each other out at group level.
currency risk our foreign subsidiaries are obliged to hold equity capital in local currency for regulatory reasons. a currency risk in relation to the euro is no longer included at group level for the non-fungible portion of this equity capital, thus reducing the currency risk.
management report // risK report munich re group annual report 2010 our sophisticated limit system and our well-established administration systems have served us well – even during times of turbulence in the financial markets – and enable us to manage our investments efficiently and successfully.
We compare the economic risk capital, which equates to munich re’s capital requirement, with the available financial resources which can be used to cover losses that exceed expectations. the available financial resources are calculated as the sum of the economic equity and the available hybrid capital. the economic equity is based essentially on munich re’s iFrs equity, modified by various economically appropriate adjustments.
Economic solvency ratio components 31.12.2010 Prev. year Change (a) economic equity €bn 24.8 23.6 1.2 (B) available financial resources €bn 29.6 28.4 1.2 (c) available financial resources after dividend and share buy-back €bn 28.1 26.7 1.4 (D) economic risk capital (erc) €bn 20.7 17.4 3.3
Effects of the financial crisis an example of overarching accumulations is the impact of the worldwide financial crisis.
on the insurance side, current indications are that munich re is potentially exposed mainly via the liability classes directors’ and officers’ liability (D&o) and professional indemnity (pi). specifically, there is the prospect of liability arising out of alleged misconduct in the form of inadequate advice, mismanagement or negligence on the part of sales organisations, banks or other financial intermediaries. even if courts ultimately do not award damages, any defence costs covered under insurance policies could be considerable. since such lawsuits are typically very prolonged, it will be several years before there is final clarity regarding the extent of the losses. at the turn of the year 2010/2011 (as at 31 December 2010), we had received isolated provisional notifications from our liability reinsurance clients. We have taken these into account through appropriate precautionary allocations to iBnr reserves.
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, technological and similar changes and are 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.
in november 2009, the spanish antitrust authority (cnc – comisión nacional de la competencia) imposed fines on several insurers and reinsurers, including munich re’s spain and portugal branch (münchener rückversicherungsgesellschaft, surcursal españa y portugal), for alleged collusion restricting competition in spanish decennial liability business (compulsory insurance for guarantee claims in respect of contract works). in December 2009, munich re’s spain and portugal branch lodged an appeal against the cnc’s decision in the expectation that the next higher instance will arrive at a different assessment of the facts.
Outlook the future regulatory requirements for risk management have become clearer as a result of the progress made in the european union’s solvency ii project, notably the production of the draft implementing measures by the solvency ii expert group (seg). nevertheless, there is still considerable uncertainty regarding the future calibration of the standard formula and the requirements from the second and third pillar of solvency ii.
munich re group annual report 2010 management report // prospects predictions about the forthcoming development of our company are based primarily on planning figures, forecasts and expectations. consequently, the following assessment of munich re’s development merely reflects our imperfect assumptions and subject ive views. it follows that we cannot accept any responsibility or liability in the event that they are not realised in part or in full.
// Despite uncertain economic environment, opportunities thanks to financial strength and solution-finding competence
capital markets continued growth should lead to a marginal rise in interest rates for german and us government bonds in 2011. since we anticipate that increases in key interest rates will be only small, the yield curves are likely to remain relatively steep. currency developments will continue to be volatile, given the debate surrounding public debt. the easy monetary policy pursued in a number of industrial countries paired with moderate positive growth and limited inflation provide an environment favourable to shares.
insurance industry in the european union, state supervision for primary insurers and reinsurers is set to undergo profound changes with the rules planned under solvency ii, which are scheduled to enter into force at the beginning of 2013. in terms of capital, risk management and reporting, these changes will impose enhanced requirements on insurance companies. in its preliminary studies, the european commission has been examining the impact of solvency ii’s quantitative risk capital requirements on the companies concerned. 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.
Far-reaching changes are also on the horizon for the accounting of insurance contracts and financial instruments in our consolidated financial statements. in July 2010, the international accounting standards Board (iasB) – the london body responsible for international Financial reporting standards – published an exposure draft for a standard relating to insurance contracts, intended to achieve a consistent international approach in this area. even if some of the details of the planned changes are questionable, they would be a major step in the right direction. the new standard for financial instruments (iFrs 9) awaits adoption by the european commission – possibly in a modified form – before we can apply it.
the solid capitalisation of providers and buyers is having a significant effect on prices, terms and conditions in the international reinsurance markets. a further fall in prices in property-casualty reinsurance was therefore observable in the renewals at the beginning of the year, except in lines and regions where companies had suffered high losses. For the further course of 2011, we anticipate a sideways trend, not least owing to the unbroken series of natural catastrophes.
By nature, the insurance industry is also particularly exposed to the consequences of economic and social policy decisions, an example being healthcare policy, with its substantial implications for private health insurance. moreover, the planned tightening of supervisory regulations in the financial services industry also harbours risks for the insurance sector: especially after the financial crisis, there are concerns that the changes – mainly geared to banking – could be transferred indiscriminately to the insurance industry. conceivable in this context are exaggerated capital requirements, excessive reporting obligations, and restrictions for individual types of business.
Munich Re’s development limits to forecasting results it is not only the obvious fluctuations in the incidence of major losses that make an accurate forecast of iFrs results impossible. our investment result is difficult to predict as well. We gear the selection of our investments, based on economic criteria, to the characteristics of our technical provisions and liabilities, also using derivative financial instruments to hedge against fluctuations on the interest-rate, equity and currency markets and to fine-tune exposures. the high volatilities in these markets result in substantial changes in the values of derivatives, which under iFrs accounting we generally recognise in profit or loss, i.e. as income or expense in our income statement. however, such recognition in the income statement is not always provided for with regard to the related underlying transactions themselves. Despite our economically well-balanced underwriting and investment portfolio, this inconsistency gives rise to considerable fluctuations in our investment and consolidated result, making a reliable forecast more difficult. here we can give only rough indications of the possible impact. Firstly, a rising interest-rate level will tend to lead to lower results, and a falling interest rate to higher results, than those forecast in this section. Fluctuations in exchange rates can also have an influence on our result. a stronger euro, for instance, will produce gains, while a weaker euro will burden the result. Furthermore, major share price losses could necessitate write-downs of equities in our expanded share portfolio.
management report // prospects munich re group annual report 2010 reinsurance reinsurance continues to hold considerable promise for the future, with a wide variety of earnings opportunities in the long term. in 2009, we responded to a shift in demand trends by repositioning ourselves. even more so than in the past, munich re will offer 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 strengthening an insurer’s capital base. additionally, we devise innovative coverage concepts that go beyond traditional reinsurance.
Life reinsurance offers good growth potential. We are experiencing continuing demand for large-volume capital substitute solutions. opportunities will also emerge from the privatisation trends in provision for old age, long term care and disability, from the need for asset protection, and from the dynamic expansion of the asian life insurance markets. For 2011, we anticipate gross premiums written totalling around €9bn. in the case of our underwriting result, we project a figure of around €0.4bn from 2011 onwards.
at 1 January 2011, treaty business with a volume of around €7.9bn was up for renewal. the renewal negotiations again took place in a competitive environment. as a result of primary insurers’ good capitalisation, demand for reinsurance cover remained largely unchanged. With reinsurers providing more than enough capacity, prices generally fell further. only in British motor insurance business and in lines of business and regions that experienced losses, e.g. in offshore energy and in australia, were we able to obtain price increases. us natural catastrophe business remains profitable, although it continued to experience price reductions in view of the sufficient capacity available and relatively benign hurricane season in terms of losses. in europe, premium rates fell despite high claims costs.
owing to persistent pressure on prices, we declined various business opportunities, in line with our strict cycle management. of the total business up for renewal, around 16% (€1.3bn) was not renewed because it did not meet our profitability requirements, a substantial portion of this in europe. We were able to compensate for part of the reduction in premium through the expansion of existing profitable client relations. in addition, we generated substantial new business volume totalling approximately €1.2bn, particularly in strongly growing markets. on balance, the renewals resulted in a slight increase in premium of some €330m (+4.1%). at +0.1%, the rate level for our portfolio remained at around the same level as in the previous year. thanks to our strong global presence and ability to offer complex reinsurance solutions swiftly and tailored to our clients’ needs, we were able to buck the trend of falling prices. in this market environment, munich re’s stability and financial strength have paid off. We are therefore very satisfied with the renewals.
For the forthcoming renewals at 1 april 2011 (Japan and Korea) and 1 July 2011 (parts of the us market, australia and latin america), a premium volume of around €2.8bn will be up for renewal. We expect that prices here will stabilise, also given the series of natural catastrophes that have occurred.
For 2011, we project gross premiums written of just over €15bn in property-casualty reinsurance. We envisage a combined ratio of around 97% of net earned premiums over the market cycle as a whole. this estimate is based on an average major-loss burden of 6.5% from natural catastrophes. since we were affected by major loss events at the end of February 2011, i.e. the floods in Brisbane and cyclone Yasi (also in australia) and the earthquake in new Zealand, we will only be able to achieve our target if random major losses remain below our expectations in the further course of the year.
if exchange rates remain constant, gross premiums in reinsurance (excluding munich health) should range between €24–25bn in 2011.
primary insurance in primary insurance, we expect that premium development in the individual segments will continue to be varied in 2011, with a positive trend overall.
in life insurance, our total premium income should be somewhat below the previous year’s level, i.e. just under €8bn, while gross premiums written should total around €6bn. in this context, it should be noted that the developments in german and international business will greatly depend on whether the demand for single-premium business remains as strong as in 2010 and whether we can write this business profitably in the respective market environment.
in property-casualty insurance, we expect premium growth to total slightly less than €6bn. in germany, we project growth of around 1%, i.e. above the market average. the increase is likely to be stronger for international business. the combined ratio for property-casualty business should be at a good level of under 95%.
Total premium income in primary insurance (excluding health primary business written outside germany by munich health) should be in the range of €19–20bn in 2011. We anticipate that gross premiums written will range between €17bn and €18bn.
to guarantee optimum management of the interest rate risk, the structure of our bond portfolio will be geared to the periods of our liabilities in 2011 as well. in 2010, we bene­ fited from an extended duration position we had taken as a form of protection against a possible crisis scenario. given the current interest­rate level and our expectations for a moderate rise, we have slightly reduced the duration in the first quarter of 2011. We are likely to keep our portfolio of investments in inflation­indexed bonds constant in 2011. nonetheless, we will continue to look at investments in commodities to hedge against inflation.
We are at present adhering to our long-term objective of a 15% return on our risk-based capital (rorac) after tax across the cycle of the insurance and interest-rate markets. however, this target will be difficult to achieve with the currently low level of interest rates. as soon as the requirements of solvency ii and the new iFrss for insurance contracts and financial instruments have been finalised, we will gear our target performance measures to the key indicators from this new framework with its strong economic focus.
For 2011, given the essentially stable prices expected in reinsurance and average loss experience, we expect the underwriting result to be slightly higher. however, we do not anticipate any significant rise in capital market interest rates, so regular income from fixed-interest securities and loans should be somewhat lower. With our significantly increased but historically low equity-backing ratio, write-downs are likely to be correspondingly moderate, but so are the opportunities to realise gains on disposal. From today’s standpoint, we are therefore proceeding on the assumption that investment results will be appreciably lower than in 2010, with a total return of under 4% on the portfolio. all in all, then, if other parameters remain unchanged, we aim for a consolidated result of around €2.4bn for 2011, i.e. approximately the same level as in 2010. considering the major-loss burden in the first two months of the year, however, this target can only be achieved if random major losses remain below expect ations in the further course of the year. For 2012, we are aiming for a consolidated result of similar magnitude.
our shareholders can look forward to the dividend for 2010, which – subject to approval by the annual general meeting – will rise by 50 cents to €6.25 per share.
Cell structure // While the cell membrane surrounds and protects the cell and regulates the passage of various substances into and out of the cell, the cytoskeleton stabilises the external and internal structure. although its name suggests otherwise, the cytoskeleton is actually a very dynamic protein structure. amongst other things, it is responsible for intracellular movement and transport. the cell nucleus found within the cell contains the chromosomal dna and hence the genes.
€23.0bn equity €193.1bn investments €4.0bn operating result €2.4bn consolidated result €45.5bn Gross premiums written
munich Re GRouP annual RePoRt 2010 consolidated financial statements // contents consolidated balance sheet 150 consolidated income statement 152 statement of recognised income and expense 153 changes in Group equity 154 consolidated cash flow statement 156 notes to the consolidated financial statements 157
munich Re GRouP annual RePoRt 2010 consolidated financial statements // contents application of international financial Reporting standards (ifRss) 157 declaration of conformity with the German corporate Governance code in accordance with section 161 of the German stock companies act 157 figures for previous years 157 consolidation 158 Recognition and measurement 160
Assets a // intangible assets 164 B // investments 164 c // investments for the benefit of life insurance policyholders who bear the investment risk 169 d // ceded share of technical provisions 169 e // Receivables 169 f // cash at banks, cheques and cash in hand 170 G // deferred acquisition costs 170 h // deferred tax assets 170 i // other assets 170
Equity and liabilities a // equity 171 B // subordinated liabilities 171 c // Gross technical provisions 171 d // Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 174 e // other accrued liabilities 175 f // liabilities 176 G // deferred tax liabilities 176
Segment reporting segment assets 178 segment equities and liabilities 180 segment income statement 182 non-current assets by country 184 Gross premiums written 184
munich Re GRouP annual RePoRt 2010 consolidated financial statements // contents 06 // other securities held to maturity 190 07 // hierarchy for the fair value measurement of investments 191 08 // other securities available for sale 194 09 // other securities at fair value through profit or loss 196 10 // deposits retained on assumed reinsurance 199 11 // other investments 199 12 // ceded share of technical provisions 200 13 // other receivables 201 14 // deferred acquisition costs 202 15 // deferred tax 204 16 // other assets 206 17 // non-current assets and disposal groups held for sale 207
Disclosures on risks from insurance contracts and financial instruments 37 // Risks from life and health insurance business 241 38 // Risks from property-casualty insurance business 248 39 // credit risks from ceded reinsurance business 254 40 // market risks from financing instruments – sensitivity analysis 254 munich Re GRouP annual RePoRt 2010
munich Re GRouP annual RePoRt 2010 consolidated financial statements // contents
Other information 42 // Related parties 257 43 // Personnel expenses 257 44 // long-term incentive Plan 257 45 // mid-term incentive Plan 261 46 // Remuneration report 262 47 // employee share-ownership programmes 263 48 // number of staff 263 49 // auditor’s fees 263 50 // contingent liabilities, other financial commitments 264 51 // Restrictions regarding transfer of capital 264 53 // events after the balance sheet date 266 54 // earnings per share 268 55 // Proposal for appropriation of profit 268
Notes 31.12.2010 Prev. year Change €m €m €m €m €m % A. Intangible assets ii. other intangible assets (2) 1,633 1,718 –85 –4.9
F. Cash at banks, cheques and cash in hand 2,900 3,082 –182 –5.9 G. Deferred acquisition costs (14) Gross 9,165 8,604 561 6.5 ceded share 72 76 –4 –5.3 thereof: owner-occupied property held for sale – 13 –13 –100.0
Notes 31.12.2010 Prev. year Change €m €m €m €m % A. Equity (18) i. issued capital and capital reserve 7,388 7,388 – –
iV. consolidated result attributable to munich Reinsurance company equity holders 2,422 2,521 –99 –3.9
B. Subordinated liabilities (19) 4,847 4,790 57 1.2 C. Gross technical provisions i. unearned premiums (20) 7,879 6,946 933 13.4 ii. Provision for future policy benefits (21) 104,413 100,862 3,551 3.5 iii. Provision for outstanding claims (22) 49,501 46,846 2,655 5.7 iV. other technical provisions (23) 9,555 10,146 –591 –5.8
munich Re GRouP annual RePoRt 2010 consolidated financial statements // consolidated income statement
Notes 2010 Prev. year Change €m €m €m €m €m % Gross premiums written 45,541 41,423 4,118 9.9 1. Earned premiums (29) Gross 44,955 41,227 3,728 9.0 ceded 1,880 1,701 179 10.5 net 43,075 39,526 3,549 9.0 2. Income from technical interest (30) 6,587 5,794 793 13.7 3. Expenses for claims and benefits (31) Gross 37,747 33,163 4,584 13.8 ceded share 1,164 771 393 51.0 net 36,583 32,392 4,191 12.9 4. Operating expenses (32) Gross 11,545 10,586 959 9.1 ceded share 431 405 26 6.4 net 11,114 10,181 933 9.2 5. Technical result (1– 4) 1,965 2,747 –782 –28.5 6. Investment result (33) investment income 13,666 13,575 91 0.7 investment expenses 5,024 5,692 –668 –11.7 total 8,642 7,883 759 9.6 thereof: income from associates accounted for using the equity method 51 –126 177 – 7. Other operating income (34) 807 688 119 17.3 8. Other operating expenses (34) 849 803 46 5.7 9. Deduction of income from technical interest –6,587 –5,794 –793 –13.7 12. Other non-operating result (35) –454 –472 18 3.8 13. Impairment losses of goodwill (35) 109 117 –8 –6.8 thereof: attributable to munich Reinsurance company equity holders 2,422 2,521 –99 –3.9 attributable to non-controlling interests (18) 8 43 –35 –81.4
Consolidated income statement for the financial year 20101 1 Previous year’s figures adjusted owing to recognition of munich health as a separate segment (see “Recognition and measurement”).
munich Re GRouP annual RePoRt 2010 consolidated financial statements // statement of RecoGnised income and exPense €m 2010 Prev. year Consolidated result 2,430 2,564 currency translation
unrealised gains and losses on investments Gains (losses) recognised in equity 1,370 2,205 included in the income statement –1,240 –1,690 change resulting from valuation at equity Gains (losses) recognised in equity –8 15 included in the income statement – –
change resulting from cash flow hedges Gains (losses) recognised in equity –3 –2 included in the income statement – –
actuarial gains and losses on defined benefit plans –50 –78 other changes –20 –28 Income and expense recognised directly in equity 694 371 Total recognised income and expense 3,124 2,935 thereof: attributable to munich Reinsurance company equity holders 3,094 2,885 attributable to non-controlling interests 30 50
munich Re GRouP annual RePoRt 2010 consolidated financial statements // consolidated cash floW statement €m 2010 Prev. year1 net change in technical provisions 7,141 5,335 change in deferred acquisition costs –564 –70 change in deposits retained and accounts receivable and payable 1,152 –69 change in other receivables and liabilities 505 –94 Gains and losses on the disposal of investments –1,649 –1,612 change in securities held for trading –165 866 change in other balance sheet items 79 620 other income/expenses without impact on cash flow –93 1,114 i. cash flows from operating activities 8,836 8,654 change from losing control of consolidated subsidiaries –8 1 change from obtaining control of consolidated subsidiaries –3 –562 change from the acquisition, sale and maturities of other investments –7,042 –3,806 change from the acquisition and sale of investments for unit-linked life insurance –657 –711 other 14 –185 ii. cash flows from investing activities –7,696 –5,263 inflows from increases in capital and from non-controlling interests – – outflows to ownership interests and non-controlling interests 1,301 752 dividend payments 1,076 1,076 change from other financing activities 993 –852 iii. cash flows from financing activities –1,384 –2,680 Cash flows for the financial year (I + II + III) –244 711 effect of exchange rate changes on cash 62 6 cash at the beginning of the financial year 3,082 2,365 cash at the end of the financial year 2,900 3,082 additional information income tax paid (net) 574 239 dividends received 308 303 interest received 7,083 6,954 interest paid 672 735
Consolidated cash flow statement for the financial year 2010 1 Previous year’s figures adjusted pursuant to ias 7 (see “changes in accounting policies”).
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 application of international financial Reporting standards (ifRss)
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). insofar as we do not explicitly refer to a particular standard, we use the two terms synonymously. in accordance with the rules of ifRs 4, underwriting items are recognised and measured on the basis of us gaap (united states generally accepted accounting principles).
declaration of conformity with the german corporate governance code in accordance with section 161 of the german stock companies act in november 2010, the Board of management and supervisory Board of munich Reinsurance company published an updated declaration of compliance with the german corporate governance code as per section 161 of the german stock companies act and made this declaration permanently available to shareholders on the internet.
Consolidated companies in accordance with ias 27, the consolidated financial statements include munich Reinsurance company (the parent) and all the entities in which munich Reinsurance company owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries).
Business combinations occurring during the reporting period the following disclosures regarding first-time recognition are provisional, since among other things there may still be changes in the purchase price and in tax items in the balance sheet.
Other Germany countries Total additions 7 8 15 Reductions 4 13 17 31 dec. financial year 80 228 308 1 in addition, 64 german and 2 non-german special funds were included in the consolidated group.
acquisitions are accounted for by the purchase method. in order to determine the equity capital at the time of acquisition, we measure the acquired identifiable assets and liabilities of the subsidiary or special purpose entity at fair value. the consideration transferred in exchange for the acquired shares is netted against the equity capital apportionable to the group at the time of acquisition. any residual positive amount is capitalised as goodwill. profits earned by the subsidiaries or special purpose entities after their first consolidation are included in group equity. amounts relating to intragroup transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as not being material.
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 influence. in the case of shareholdings amounting to between 20% and 50% of the voting power, the entities in question are deemed to be associates unless it can be clearly demonstrated that there is no significant influence.
Other Germany countries Total 31 dec. previous year 45 17 62 additions 2 3 5 Reductions 2 4 6 31 dec. financial year 45 16 61
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 the revision of IFRS 3 (rev. 01/2008), Business Combinations, and IAS 27 (rev. 01/2008), Consolidated and Separate Financial Statements, mainly involves changes in the balance sheet recognition of non-controlling interests, successive share purchases, acquisition-related costs and contingent consideration. in the financial year 2010, the new rules chiefly affected munich Re with regard to the following factors: acquisition-related costs, which may no longer be capitalised; remeasurement (with recognition in profit or loss) of previously held equity interest in the case of a business combination achieved in stages; and the knock-on change to ias 7, statement of cash flows, which requires that changes in shares in subsidiaries not involving a loss of control should be classified as cash flows from financing activities. the relevant items of the consolidated cash flow statement for the previous year have been adjusted.
the changes published as part of the iasB’s annual improvement process in april 2009 are also to be applied for the first time for financial years beginning on or after 1 January 2010. involving a total of ten standards and two interpretations, they are of subordinate importance for munich Re. from the annual improvement process published in may 2008, changes to ifRs 5, non-current assets held for sale and discontinued operations, are to be applied for the first time for financial years beginning on or after 1 July 2009. these changes are not material for munich Re either.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 as from the 2010 financial year, the business field of munich health, which covers our health reinsurance business worldwide and our health primary insurance outside germany, is being shown for the first time as a separate segment in accordance with IFRS 8, Operating Segments. munich health’s business was previously disclosed for the most part in the segments “life and health reinsurance” and “health primary insurance ”. minus the business written by munich health, the segment “life and health reinsurance ” has become simply “life reinsurance”. the health primary insurance segment continues to include our german health insurance business and our travel insurance business. in addition, we have further refined the method of distributing the investment results between our segments. the figures for the previous year have been adjusted accordingly.
also as from the financial year 2010, we are presenting disposal groups only if other assets or liabilities besides the non-current asset held for sale will actually be transferred to the respective acquirer. assets or liabilities which are associated with the transferred asset but which will not be transferred are consequently not allocated to a disposal group. this concerns, for example, certain deferred tax items and provisions for deferred premium refunds.
the interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity Instruments, is to be applied for financial years beginning on or after 1 July 2010. the interpretation contains guidelines on how financial liabilities are to be accounted for in accordance with ias 39 if the creditor accepts the entity’s shares or other equity instruments to settle these liabilities fully or partially.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 the change to ias 34 extends disclosure requirements in the notes to the financial statements. of particular relevance is that significant transfers between levels of the fair value hierarchy for financial instruments will in future have to be published in interim financial statement as well. munich Re has put in place a process to ensure that such transfers are made transparent and can be disclosed in interim reports where necessary.
the amended interpretation ifRic 14 (rev. 11/2009), ias 19 – the limit on a defined Benefit asset, minimum funding Requirements and their interaction, applies when an entity is subject to minimum funding requirements and makes an early payment of contributions to cover those requirements. the amendment permits the entity to treat the benefit of such an early payment as an asset. this change has no practical significance for munich Re.
Goodwill resulting from the first-time consolidation of subsidiaries is tested for impairment at least annually, in accordance with ias 36. We additonally carry out adhoc impairment tests if there are indications of impairment. for impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating 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 cash-generating unit or a group of cash-generating 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 cash-generating unit or group of cash-generating units). if this recover able amount is lower than the carrying amount, a write-down is made on the goodwill.
Investments in affiliated companies that we do not consolidate because they are not material are carried at fair value insofar as this can be reliably measured. if the investments are quoted on a stock exchange, we use the share prices at the balance sheet date; for other 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.
Investments in associates are valued by the equity method at the group’s proportionate 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 financial statements of significant associates, appropriate adjustments 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 position are accounted for at fair value insofar as this can be reliably measured. 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 other investments, the fair value is measured using the discounted earnings or net asset value method.
Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. they are measured at cost in accordance with the effective interest method. Write-downs for impairments are made in cases where the repayment of a loan can no longer be expected.
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 securities at fair value through profit or loss are accounted for at fair value at the balance sheet date. if no quoted prices in an active market are available, fair values (particularly with derivatives) are based on recognised valuation methods. munich Re uses a range of valuation models for this purpose, details of which may be obtained from the following table: Valuation models
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 Black-scholes (european) effective volatilities cox, Ross and money-market interest rate Rubinstein (american) dividend yield monte carlo simulation equity forwards theoretical price money-market interest rate present-value method share price dividend yield equity/index futures Quoted price – – total return swaps theoretical price market values of the funds present-value method (hedge fund certificates) interest-rate curve Interest-rate risks interest-rate swaps theoretical price swap curve money-market interest-rate curve present-value method swaptions/interest-rate guarantee theoretical price at-the-money volatility matrix and skew Black-76 swap curve money-market interest-rate curve interest-rate currency swaps theoretical price swap curve present-value method money-market interest-rate curve currency spot rates interest-rate futures Quoted price – – inflation swaps theoretical price Zero coupon inflation swap rates present-value method interest-rate curve Bond futures Quoted price – – Quoted options on bond futures Quoted price – – Currency risks currency options theoretical price Volatility garman-Kohlhagen currency spot rates money-market interest-rate curve currency forwards theoretical price currency spot rates present-value method money-market interest-rate curve Other transactions insurance derivatives theoretical price market values of the cat bonds present-value method (excluding variable annuities) interest-rate curve insurance derivates theoretical price Biometric and lapse rates present-value method (variable annuities) Volatilities interest-rate curve currency spot rates credit default swaps theoretical price credit spreads present-value method Recovery rates isda cds standard model interest-rate curve commodity swaps Quoted price – – commodity options theoretical price listing of underlying shares Black-scholes (european) effective volatilities cox, Ross and money-market interest rate Rubinstein (american)
consolidated financial statements // notes munich Re gRoup annual RepoRt 2010 all unrealised gains or losses from such valuation are included in the investment result.
Other investments comprise deposits with banks and tangible assets in renewable energies. deposits with banks are measured at cost in accordance with the effective interest method. tangible assets in renewable energies are generally accounted for at amortised cost.