General information Glossary 219 Index of key terms 228 Important addresses 229
Perseverance means more than hard and persistent work. It builds leadership. It stimulates creative and flexible problem-solving. It saves energy.
Kent Nagano_ Perseverance applies to everyone who has the will and ambition to achieve something. And when one attains a certain level of success, everyone benefits. Today our world is becoming faster, and much has been written about a generation that expects immediate gratification. The longer-term concept of perseverance sometimes takes an enormous amount of will.
Nikolaus von Bomhard_ Having joined Munich Re in 1985, he spent many years in reinsurance (including a spell in Latin America) and four years as a member of the Board of Management, before becoming its Chairman in 2004. Since then, he has been consistently gearing the Munich Re Group to profitability.
In other words, your vision must be deeply rooted. Just coming up spontaneously with an idea will not take you far.
Kent Nagano_ That reflects one aspect of perseverance that is not always apparent, at least superficially: Perseverance implies a great deal of past preparation as well as a commitment to the future. It also implies study, research, past experience, work and application. All of which the public does not see.
Stubbornness is a dangerous quality, because it is fundamentally a characteristic which is very egotistical.
Kent Nagano_ One danger we have to avoid, of course, is to arrive at the opposite end of the scale of perseverance, which is stubbornness. This is a dangerous quality, because it is fundamentally a characteristic which is very egotistical. Stubbornness is self-orientated, not necessarily based upon research or experience and implies inflexibility. The choice between these two opposite poles of perseverance and stubbornness can really make the difference as to whether a company is successful or not.
Kent Nagano_ Just surround yourself with people who by their very competence will challenge you regularly and on a continuous basis – that incites the kind of constructive dialogue which is really essential. There is another aspect: if you achieve a goal through perseverance, the result is that you can help people broaden their minds: which is to say to encourage them to take action not limited by their expectations, to introduce them to a much wider world where many elements can far exceed their short-term calculations.
some failed badly, even though they were great leaders and had the right ideas, but they just could not prevail in their time, so their ideas were not recognised until later. Having said that, I think perseverance can be the more efficient approach. If you get people on your side to accompany you rather than just follow you, then you are ultimately more efficient: you save time, energy and resources by concentrating your forces to come up with what you finally want to achieve.
most successful way of differentiating yourself from competitors, to achieve a unique profile. If you leave the mainstream and do something a little bit different. We decided to do primary insurance along with reinsurance, and I have constantly been faced with comments like: “Why do you do it?” and “Don’t do it!” Now, as then, I am absolutely convinced this is the right step. Because with this integrated model, we can best profit from the synergies of diversification and from the chances in both segments. We can combine the solutions and open up new business opportunities. Of course, it will only be possible to judge the long-term success of this strategy when I’m no longer in office; but it takes some courage to go your own way, as it did for the composers.
Nikolaus von Bomhard_ On the one hand, a good track record helps. So if you have three good symphonies out there, you can risk more with the fourth.
If you get people on your side to accompany you rather than just follow you, then you are ultimately more efficient.
Interview Heike Trilovszky is head of Corporate Underwriting at Munich Re and is responsible for crossdivisional standards and quality assurance in underwriting and pricing of property-casualty business.
Heike Trilovszky_ The Stern Review’s conclusions go a long way into the future. There is certainly room for discussion about individual figures, but we share the view that the climate is changing, that we are seeing global warming, and that we are already experiencing more extreme weather. And also that climate change will be very expensive – because it’s too late to curb it immediately.
Can Munich Re maintain the capacity it offers for natural hazards?
Heike Trilovszky_ Well, it depends what you mean by insurable. Everything is insurable as long as it’s quantifiable and the overall exposure is bearable. The problem as I see it is where individual scenarios reach the limits of capacity, as with hurricane risks in the Atlantic. Here reinsurance, with its global balancing of risks, traditionally supplements the capacities of national economies or insurance industries. And the total capacity available can be increased by transferring insurance risks to the capital markets, which are not particularly fazed by events like Katrina. I don’t think state-based pools are a solution: if they only cover small regions, they have little financial strength – and, as we know, the willingness to show solidarity declines the further away one is from the event. Instead, we should concentrate our energies on curbing climate change and ensuring that the catastrophe potential remains manageable.
That’s our business: that’s risk – it’s what we live with.
Every loss is an opportunity to expand our knowledge and so improve the quality of our business.
Heike Trilovszky_ I think the key is partly a deeper technical understanding of the risk situation. But we must also be consistent and firm in putting this theoretical knowledge into practice in our underwriting. That includes sticking to our guns even if competitors accept such risks without question or at conditions we consider inappropriate: if premiums are too low, this will quickly lead to underwriting losses. Just as important, if not more so, is risk management, so that we know what burdens we would have to bear if the worst came to the worst. This is especially significant given the fact that errors may not become apparent until many decades later – that is, when such a megacatastrophe occurs again.
Bernd Ottemann_ Besides this, we will be one of the very first pure health insurance companies in India. IRDA, that is the Indian regulatory authority, is now very much in favour of developing the health insurance market.
Furthermore, Apollo is a very wellknown healthcare brand in India and this is definitely one of the biggest advantages, because if people see “Apollo” then they automatically relate it to health. So we don’t have to create a totally new health brand. We only have to build a health insurance brand.
With which products do you intend to tap into this market?
Bernd Ottemann_ Our aim is to sell products that are easy to understand. We want to provide easy access to healthcare. For the time being, we are concentrating on inpatient indemnity insurance, travel insurance and special products for expatriates.
Bernd Ottemann_ On the DKV side, we contribute the core competences of health insurance, which means all the technical skills with respect to underwriting and claims management, product design and actuarial know-how, etc. In other words, the two partners provide complementary skills and strengths: it’s an excellent fit.
Chandra S. Chivukula_ I think the first step is to obtain the regulatory licence. Presumably we will be fully licensed in the next two to three months. The other important step is to set up the infrastructure (including all the IT systems, processes and the department concepts), which we are already doing thoroughly. The third major step will be to hire people in large numbers in a very short time.
Bernd Ottemann_ At the end of the first business year we are going to have between 150 and 180 employees at the head office in Delhi. Most of these people we have to hire during April, May and June. The fourth and most important step, of course, is to develop the products suitable for the Indian market’s requirements.
Chandra S. Chivukula_ Within a period of five or seven years, we would like to bring in other kinds of products, in particular healthcare products with ageing reserves.
We don’t want to be the biggest company, but the most profitable one.
In what areas would you need to show the greatest perseverance in achieving this?
Bernd Ottemann_ You cannot simply set up a German company in India. We have to set up an Indian company and incorporate the best we have from German culture. Ultimately, we will always be an Indian company, and all Germans who work here will have to adapt to this way of life to a certain extent.
Page 17 From their base in Hyderabad, Bernd Ottemann and Chandra S. Chivukula are developing the Apollo DKV Insurance Company.
Interview Dr. Manuela Zweimüller is head of the Integrated Risk Management Division’s Risk Identification & Control Department and chairs an interdisciplinary working group which analyses the potential consequences of a pandemic for the Munich Re Group. Her work focuses on overarching accumulation scenarios and emerging risks.
Manuela Zweimüller_ First of all, we look at historical events. The Spanish flu of 1918, which killed an estimated 20 to 40 million people worldwide, is the most important reference scenario. However, it cannot be directly applied to the situation we have today. We have to bear in mind that things have changed considerably, for example due to enormous medical advances such as antibiotics and vaccines. Public and private hygiene, too, have improved significantly. There has also been a substantial increase in overall life expectancy. This is why it would be inappropriate to apply last century’s mortality rates to current population numbers. Starting from comprehensive historical and scientific research, we develop our own scenarios, which are updated on a regular basis to take account of trends and developments regarding the geographical spread of the disease, vaccination research and other aspects.
What areas of Munich Re would be affected by a pandemic, and how is it preparing for such an event?
Our overall insurance exposure from a potential pandemic does not exceed that from a major natural catastrophe.
The risk situation you describe is a very complex one. Is this complexity reflected in your pandemic working group?
Manuela Zweimüller_ Yes, definitely. In 2006, one of the main tasks of Integrated Risk Management was to evaluate the possible consequences of a pandemic for the whole Munich Re Group. To this end, we brought together all the experts we needed in an interdisciplinary team made up of physicians, actuaries, economists, risk managers and underwriters. We have also included representatives from major business units like Munich Re America or markets like Australia to reflect different supervisory regimes and create an international perspective. Since we are conducting both insurance and reinsurance business, we can also benefit from the competence of our ERGO colleagues. Moreover, we can build on work already done, because we established underwriting guidelines for epidemics and analysed our portfolios back in 2003 in connection with SARS. In the coming years, too, we will need considerable staying power when dealing with the topic of pandemics because we will have to keep adjusting our approach and take account of new trends.
Page 18 Dr. Manuela Zweimüller in the ornithological archives of the Bavarian State Collection for Zoology in Munich.
Claus Brinkmann_ You are working hard preparing for the forthcoming supervisory regime under Solvency II. What do you think the consequences of Solvency II will be for the European insurance market in general?
Hubert Rodarie_ We are also worried about a too conservative approach based on the one-year horizon. That concept ignores the reality of our long-tail business, where we have to deal with great uncertainties with a long-term horizon. More precisely, the proposed risk modelling of assets in the insurance balance sheet ignores the reality of the business and will have a negative effect on the longterm financial return, ultimately resulting in an increase in the price of insurance products for customers, especially in the case of long-tail insurance.
Philippe Marie-Jeanne_ So we are very keen for our risk expertise to be recognised along with the mathematical diversification effect. We strongly believe that experience is a key factor in managing underwriting risks and that it could be measured if an insurer is able to get historical data by line of business over a sufficient time horizon. In short, what we really need is the possibility to personalise the standard formula so that it takes into account the quality of our risk management in investments or underwriting and our long-standing expertise.
Claus Brinkmann_ Reinsurance is the classic external tool for risk capital relief. Do you think risk relief through reinsurance is given sufficient credit in Solvency II?
Hubert Rodarie_ Since non-proportional business is quite common in France and especially since we are writing more non-proportional contracts in decennial and long-tail business, this is a crucial issue for us. And the smaller the insurer is, the more reinsurance is necessary.
management. Experts also emphasise the fact that there will be a level playing field. Though we are not against the risk-based approach using economic capital as a matter of course, we are concerned that this principle may not be implemented properly and fairly, on solid and proven grounds. And we don’t share the optimism about the insurance pricing for instance, because on the US market with its risk-based regulatory system you still have pricing cycles and different pricing strategies, for instance. Moreover, if you look at the Basle II system in banking, it is not clear at this stage that the main beneficiary from the system will be the customer.
Claus Brinkmann_ If you just consider the future in five years after the implementation of Solvency II, will there be a trend towards intensified consolidation?
Philippe Marie-Jeanne_ I think that there will be a trend towards consolidation, as there was after the implementation of Basle II. But the difficulties of medium and small insurers will depend on the way the principles are applied. I believe that the specialists and real monoline insurers – big enough to have real expertise – will continue to perform better than multi-
Philippe Marie-Jeanne_ First, that you remain a financially strong partner for the future, because we need a financially healthy counterparty, especially for long-tail business and with Solvency II in mind. That is really important to us, as we have long-term relationships with our reinsurers. Second, that you will continue to follow the fortunes of your partner for the whole duration of the claims process. And third, that you remain a skilled partner, able to recognise the insurer’s experience, especially in the case of specialised companies like us, and continue to provide us with informed capacity (as opposed to more volatile and more expensive “blind” capacity ), as well as with updated offers consistent with new constraints and the state of the industry.
Claus Brinkmann_ Thank you very much for participating in this interesting discussion.
ERGO in India DKV and the Apollo Group, Asia’s largest chain of hospitals, establish a joint-venture health insurance company. It is scheduled to commence operations with inpatient indemnity, travel and expatriate insurance products in
ERGO expands its business in southern and eastern Europe by acquiring a 75% stake in the I
First signatory to the Principles for Responsible Investment At the invitation of the United Nations, Munich Re participates in the formulation of principles that provide institutional investors with guidelines for applying social and ecological criteria when making investments. In August 2007, we will provide information on this subject in our first sustainability report, thus continuing our systematic involvement in this area. Pages 92, 108
We therefore have every cause to be satisfied with the development of the last few years, and especially with the result of the past financial year. The path we have taken is proving to be the correct one. This applies particularly to our business model of conducting primary insurance as well as reinsurance in our Group: our success should convince even those who take a sceptical view of this strategy. For me, what is now important is to sustain this profit level whilst ensuring that our business grows more strongly again, without lowering our standards with regard to quality and earnings.
Munich Re Group in 2006_Letter to shareholders and, at the same time, to respond to current and future challenges. Today I can say that in the financial year 2006, we remained true to our principles and kept firmly on course. The outcome, as I think you will agree, is most satisfactory. A large part of the thanks for this must go to our staff at all the companies in the Munich Re Group, with their commitment, know-how and will to succeed. I wish to thank everyone who has contributed, enabling us to present you with such a good result for the year.
(Chairman of the Board of Management) * 1956, lawyer, with Munich Re since 1985 Group Investments; Group Development; Press; Internal Auditing; Executive Offices, Group Top Executives
(since 1 October 2006) * 1962, graduate in commercial studies, with Munich Re since 2006 Germany, Asia Pacific and Africa; General Services
Dr. rer. pol. Thomas Blunck * 1965, graduate in business management, with Munich Re since 1999 Special and Financial Risks; Organisational Design and Development; Information Technology
Georg Daschner * 1949, chartered insurer, with Munich Re since 1965 Europe and Latin America; Corporate Communications
(until 31 December 2006) * 1941, chartered marine insurer, with Munich Re since 1964 Europe 1; Corporate Communications
Dr. jur. Jörg Schneider * 1958, graduate in business management, lawyer, with Munich Re since 1988 Group Accounting; Group Controlling; Corporate Finance, M&A; Integrated Risk Management; Legal and Regulatory Affairs, Compliance; Taxes; Investor and Rating Agency Relations
Georg Daschner Christian KlugeDr. jur. Nikolaus von Bomhard Dr. oec. publ. Wolfgang Strassl
In the year under review, the Supervisory Board again fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association.
The cooperation between the Supervisory Board and the Board of Management was close and characterised by a spirit of trust. The Board of Management satisfied its reporting obligations towards the Supervisory Board in 2006 by briefing us regularly and in detail on all important business transactions. We discussed these written and oral reports intensively at our meetings. We were consulted directly and without delay by the Board of Management on all decisions of fundamental importance, and we advised it on the management of the Company and constantly monitored its conduct of the business. In addition, I kept in close contact with the Board of Management, in particular the Chairman, throughout the year under review. I regularly discussed strategic issues and, above all, the Company’s current business performance and risk management with Dr. von Bomhard. The shareholder representatives and employee representatives met him separately to prepare important topics to be dealt with at the Supervisory Board meetings. We also observed that the Board’s new committee structure, introduced on 1 January 2006, was already working well in the year under review and provided for even greater Group management efficiency. Given the Group’s economic situation, no inspection measures in accordance with Section 111 para. 2 sentence 1 of the German Stock Companies Act were required in the financial year.
Focal points of the meetings of the full Supervisory Board Four meetings of the Supervisory Board took place in the year under review. Apart from one meeting, where one member of the Supervisory Board was unable to attend, there was full attendance at all the meetings. As in the previous year, the German Federal Financial Supervisory Authority (BaFin) exercised its legal powers by sending representatives to take part as guests in two of our meetings.
Between the meetings, we received up-to-date information from the Board of Management about current business developments – for instance, an overview of the reinsurance renewals in 2006 and the establishment of a life reinsurance subsidiary in Moscow.
The Personnel Committee held five meetings in 2006, at which it formulated the individual Board members’ objectives, assessed their achievements and defined the processes envisaged. The Committee approved a specimen contract for all future appointees to the Board of Management, discussed the Board of Management’s succession planning and dealt with the appointments and contracts of Board members. In addition, on behalf of the full Supervisory Board it conducted an advance examination of the structure of the Board of Management’s compensation system. Besides this, it approved adjustments to the remuneration paid to the members of the Board of Management and their pension entitlements and authorised the acceptance of new seats on supervisory, advisory and similar boards by members of the Board of Management.
The Audit Committee met four times in the period under review. In the presence of the external auditor, it concerned itself extensively with the Company financial statements and Group financial statements, the Company management report and Group management report, the auditor’s report and the Board of Management’s proposal for the appropriation of the net retained profits for the financial year 2005. It also closely discussed the 2006 quarterly reports, made preparations for the external auditor’s appointment by the Supervisory Board for the financial year 2007, reviewed and monitored the auditor’s independence and commissioned the audit, deciding on its focal points and the auditor’s fees. The Audit Committee also requested reports from the auditor on its auditing and nonaudit -related services. The Audit Committee concerned itself on several occasions with the Company’s risk situation and the new European standards for state insurance supervision (Solvency II). Furthermore, it closely discussed not only the share buy-back programme but also reinsurance topics such as retrocession cover and the development of embedded values in life reinsurance business and in life and health primary insurance business. The Audit Committee additionally obtained information on the ongoing investigations in the USA regarding broker business and non-traditional reinsurance. Internal Auditing submitted its annual report for 2005 to the Audit Committee.
Changes on the Board of Management On 31 December 2006, Christian Kluge and Karl Wittmann retired as members of the Board of Management. Over many years, both gentlemen created substantial added value for Munich Re in responsible positions. We thank them for their long years of very successful work and exceptional personal dedication.
On 28 February 2007, Dr. Heiner Hasford retired from Munich Re’s Board of Management, of which he had been a member since 1993. We thank him as well for his most commendable and successful work for the Company and for his outstanding commitment. Dr. Hasford will continue to be available to Munich Re in an advisory capacity.
Munich Re has restrictedly transferable registered shares. Registered shares – unlike bearer shares – are issued in the name of their owner, whose name, address and date of birth are entered in the Company’s register of shareholders together with the number of shares held. This allows Munich Re to communicate directly with the owners. With respect to the Company, the only parties deemed shareholders in accordance with the German Stock Companies Act are those entered in the Company’s register of shareholders. This is one of the preconditions for attendance and exercise of voting rights at the Annual General Meeting. For our shareholders, having registered shares means, above all else, that they are informed directly, quickly and comprehensively about our Company and its current activities and that they are also personally invited to take part in our Annual General Meeting.
Based on its underwriting guidelines, Munich Re’s reinsurance agreements 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
Munich Re Group in 2006_Report of the Supervisory Board company or its ownership or control undergoes a significant change”. Such or similar clauses are typical in the industry.
The employment contracts for members of the Board of Management or other employees do not contain any clauses obliging the Company to make special payments in the event of a change of control. With regard to the shareprice -based compensation component (long-term incentive plan), however, the contractual conditions provide for special exercise options in the event of a change of control following a takeover bid. Details can be found in the notes to the financial statements on page 209.
Company and Group financial statements KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft audited the following documents and gave them an unqualified auditor’s opinion: Munich Reinsurance Company’s financial statements and Group financial statements as at 31 December 2006, and the management reports for the Company and the Group. The auditor’s reports were sent without delay to all members of the Supervisory Board. At its meeting on 18 March 2007, the Audit Committee prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. In this context, it examined in advance the Company financial statements and Group financial statements, the management reports and the Board of Management ’s proposal for appropriation of the net retained profits. It discussed them in detail with the auditor and also took the auditor’s reports into consideration. The Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting on 19 March 2007.
Words of thanks to the Board of Management and employees The Supervisory Board wishes to sincerely thank the members of the Board of Management and all staff members, whose work in the year under review significantly contributed to another outstanding result.
Price rally in the second half of the year liquidity in the markets. Closing 2006 at 6,597 points, the DAX was up 22% for the year. The most important German stock market barometer thus rose considerably more than the EURO STOXX 50. After a weak 2005, the US stock exchanges also achieved marked gains.
Insurance stocks advanced as well in 2006, the MSCI insurance index (in euros) increasing by 4.5% in the course of the year.
With a gain of 14% and a year-end price of €130.42, Munich Re shares performed better than the MSCI insurance index, but not as well as the DAX. They started 2006 at just under €115. During the first half of the year, our share price fell and reached its year low of €97.15 in mid-June. Thereafter it rose strongly, with investors rewarding the excellent performance of our business and the prospect of another record result coupled with a higher dividend. The growth in our share price was supported by our share buy-back programme and a rating upgrade from Standard & Poor’s towards the end of the year.
As with the insurance sector in general, a likely reason for the weaker performance of our shares compared with the DAX in 2006 is the assumption by some investors that –
after the lower claims burdens in 2006 – the scope for further premium increases is small. However, Munich Re will continue to adhere closely to its “profit before growth” strategy, which should benefit our shareholders.
Analysts see potential for further price gains More than 40 analysts regularly evaluate Munich Re shares. At the end of the financial year 2006, around half of them rated our shares positively, in some cases seeing substantial scope for further price gains. Only 9% of analysts gave the shares a negative assessment.
Our excellent business performance and share buy-back programme led to further price gains for Munich Re shareholders. Overall, our shares climbed in value by 14% in
The major international stock markets developed favourably in 2006, especially in the second half of the year. Back in May, there had been substantial setbacks triggered by high energy and commodity prices and fear of interest-rate hikes. Nevertheless, most indices finished the year with a pronounced rally due mainly to strong company profits, ebbing worries about inflation, and the high degree of
By reinvesting dividends to purchase further shares and making use of “opération blanche” (i.e. reinvesting the proceeds of subscription rights), a German shareholder would have been able to add a total of 1,136 no-par-value shares to the portfolio.
On the basis of a price of €130.42 per share on 29 December 2006, the value of the portfolio amounts to €408,997.12, equivalent to an increase of 451.68%. According to the internal rate of return method, this works out at an average annual return of 9.70%, compared with an average annual return of 9.83% for the DAX over the same period.
Performance of a specimen deposit as from 1 July 1988 in €’000
With a dividend yield of approximately 3.5% (in relation to the year-end share price), Munich Re shares are also included in the DivDax, a subindex of Deutsche Börse AG
that features the 15 DAX companies with the highest dividend yields.
Share buy-back programme with a volume of €1bn In addition to our shareholder-friendly dividend policy, we are intent on reducing capital costs – to the benefit of our shareholders – by employing our capital efficiently and thus managing the amount of our equity in line with operational requirements. Consequently, on 7 November 2006, the Board of Management decided to buy back Munich Re shares with a value of up to €1bn via the stock exchange in the period up to the Annual General Meeting on 26 April 2007. This step is intended to further strengthen the confidence of our shareholders and optimise our capital management.
The share buy-back was concluded by the end of February. Just over eight million shares were acquired at an average price of €124.36. These shares will be retired prior to the Annual General Meeting. Further details of the buy-back programme can be viewed under “Investor Relations > Our Shares” at www.munichre.com.
The number of international investors has continued to grow. On 31 December 2006, nearly 70% of our shares were held by foreign investors (end of 2005: around 60%). Private investors accounted for 7.7%, and it is our aim to increase this proportion.
Free float at 100% Until the end of February 2007, Allianz was Munich Re´s largest single shareholder, with 9.4% of the share capital. At the beginning of March 2007, Allianz redeemed its BITES exchangeable bond early with Munich Re shares, which reduced its stake in Munich Re to 4.9%. This shareholding
Since 2001, our shares have also been included in the Dow Jones Sustainability and the FTSEGood index family. These sustainability indices only accept companies that fulfil exacting ecological and social criteria and are among the best in their sector. Here Munich Re has played a pioneering role and enjoys an excellent reputation among socially responsible investors (SRIs). In 2006, Munich Re developed a set of sustainability guidelines to underline the importance it attaches to this topic and to establish its commitment even more strongly within the Group. Some 2% of our stock is held by SRIs.
Investor relations activities Munich Re organised more than 30 roadshows during the past year to present the Group, primarily in the USA and Europe. Management also held over 150 individual meetings with investors and analysts at our offices. Additionally, as in previous years, Munich Re participated in several investor conferences around the world.
But our activities are not only geared to institutional investors: private investors can contact Munich Re directly at any time as well. They obtain prompt answers to their enquires via our shareholder hotline or e-mail.
Weighting of Munich Re shares in various indices Status: 31 December 2006
Volume €3bn £300m US$ 500m ** First possible redemption date is 21 June 2013. ** First possible redemption date is 21 June 2018.
On 14 September 2006, ERGO International AG’s exchangeable bonds backed by Sanofi-Aventis shares were redeemed at their nominal value. The bonds exchangeable into E.ON shares were largely converted and fully redeemed on 14 September 2006.
Munich Re Group Annual Report 2006 Munich Re Group in 2006_Strategy
Extending the boundaries of insurable risk In reinsurance, we continue to see extensive growth opportunities in the medium and long term. Nevertheless, we are not prepared to lower our quality standards and write treaties that do not offer risk-commensurate prices: we consistently withdraw from unprofitable business. That is why we expect premium income in our reinsurance business to show little growth in the short term. It is therefore all the more important to acquire a predominant position in segments where intelligent growth is possible. This means venturing down new avenues, offering unconventional solutions and devising business models with which we extend the boundaries of insurable risks or win new clientele. With the setting-up of our own Risk Trading Unit last year, for instance, we improved our opportunities for making active and extensive use of the capital markets beyond the usual securitisation models. Another example is agricultural insurance in the US market, where we have tapped substantial new business potential through innovative solutions in collaboration with our cedants. In these and other activities for expanding our reinsurance business, we build on our renowned franchise strength, which we not only cultivate through active client management but also constantly adapt to changing requirements. Our aim is to achieve a unique position in the eyes of our clients that singles us out from our competitors. We were thus highly delighted to be voted “best reinsurer overall” by European primary insurers again in 2006.
Turkey) as well as emerging markets like India. Naturally, we would also like to build on our already very strong position in Germany, ERGO’s traditional main market, chiefly by enhancing our distribution strength. However, the current political climate, as reflected in the recently adopted legislation for the so-called health reform, is an impediment to the realisation of this objective.
We consistently provide distinctive risk solutions – in insurance, in reinsurance and across the segments – thus turning risk into value.
In the past year, the Munich Re Group’s management closely analysed the future prospects of the financial services sector until the year 2015 and defined the main thrusts of our activities in reinsurance, primary insurance and international health business. Our markets will continue to grow more strongly than the economy as a whole. Opportunities for us will come not only from economic growth but also from demographic change, the restructuring of social security systems, and increasingly complex relationships between risks. We see particular potential in the emerging economies and the global health market.
Profitably exploiting the value chain In our international health market strategy, we have set ourselves significant profit and growth targets. Our integrated Group-wide approach is geared to covering the profitable elements of the health segment’s value chain, as well as possible, in selected regions. We aim to link the different competences in our Group and respond to individual market situations with specifically tailored business models. Just over a year ago, we decided to coordinate all our international health market activities Group-wide. In this comparatively short time, we have launched a range of initiatives, of which the following are a few examples: the formation of Apollo DKV Insurance with a view to entering the Indian health insurance market via a joint venture; the application for a primary insurance licence in South Korea in order to set up a local health insurer there; and the development of a public health insurance system in Abu Dhabi, thereby generating reinsurance business as well as fixed management fees. With these and comparable projects, we are implementing our health market strategy and can report that we are making good progress.
With our management and information systems, we want to set standards and achieve a clear competitive advantage. This means anchoring value-based management even more firmly in all business fields and segments, further refining integrated risk management and active capital management, and supporting our operative business with effective administration and underwriting systems. We took a major step in this direction last year with the launch of Gloria, our global reinsurance core administration system. Starting with our Munich location, this new standard software provides for a high degree of process efficiency and flexibility, and will leverage Group-wide synergies.
In 2007, we will continue to pursue our strategic objectives with perseverance and determination. Our “cardinal virtues” – risk as our core business, risk diversification and operative excellence – will guide our actions. We are impatient when it comes to innovation, but we will not let ourselves be rushed into taking unconsidered steps. By combining the above qualities, we aim to achieve ambitious results on a sustained basis and to continually build on them, thus satisfying our shareholders’ interest in the long-term appreciation of the Munich Re Group’s value.
The reinsurance companies in our Group operate globally. Our primary insurers traditionally concentrate on Germany and European markets with strong growth, but are now looking to extend their activities to high-potential markets such as India. We conduct our business from our respective headquarters and also via a large number of branches, subsidiaries and affiliated companies in such countries as the USA, China, India, Australia, South Africa, Korea, Canada, the UK, France, Spain, Italy, Poland and Switzerland. Control and profit transfer agreements are in place with many subsidiaries, especially those in the ERGO Insurance Group. As a result of a Group directive of 2005 governing the distribution of responsibilities and competencies between Group management and ERGO for key decisions, there is “unified control” within the meaning of the German Stock Companies Act.
This management report summarises the activities of our Group according to the business fields of reinsurance, primary insurance, asset management and their respective segments, rather than on the basis of the Group’s legal or corporate structure. Such segmentation is determined by how we manage our business internally.
The division Life and Health underwrites our life and health reinsurance business worldwide and its structure reflects that of many of our clients, which conduct these two classes of business separately from property-casualty insurance, often through independent entities.
In Europe 1, we until recently managed the propertycasualty business from our clients in Germany, Switzerland and Austria, eastern Europe, Greece, and Turkey. With effect from 1 January 2007, the division has been divided and incorporated into the new units “Europe and Latin America” and “Germany, Asia Pacific and Africa”.
Consequently, Europe and Latin America (formerly Europe 2 and Latin America) is now responsible for our business in central and eastern Europe, as well as for our clients from northern, western and southern Europe, and from Latin America.
Germany, Asia Pacific and Africa (formerly Asia, Australasia, Africa) conducts property-casualty business with clients in Africa, Asia, Australia and the Pacific Islands, and also serves our German cedants.
Corporate Underwriting/Global Clients (CUGC) handles our accounts with major international insurance groups (hence “Global Clients”) and writes business worldwide in special classes such as agriculture and workers’ compensation. Its most important markets are Germany, the UK and the USA. In addition to this, it performs important corporate underwriting functions for the reinsurance group in the property-casualty segment: its staff clarify fundamental, cross-divisional issues of underwriting policy, oversee quality assurance, integrate mathematical methods in our business processes, and set standards for claims management. Further information on our guidelines for underwriting and pricing can be found on page 56.
Atlanta, Boston, Chicago, Columbus, Dallas, Hamilton, Hartford, Kansas City, Los Angeles, New York, Philadelphia, Princeton, San Francisco, Seattle, Montreal, Toronto, Vancouver
Primary insurance The second main pillar of the Munich Re Group is primary insurance business. Beyond our core markets of Germany and Europe, we are seeking to develop business in Asian primary insurance markets long term. In 2006, some 30.7% of our premium income totalling €16.7bn derived from property-casualty and 69.3% from life and health insurance.
D. A. S. Subsidiaries and branches in Austria, Belgium, Canada, the Czech Republic, Estonia, Greece, Hungary, Italy, Luxembourg, the Netherlands, Poland, the Slovak Republic, Spain, Switzerland and the UK
Subsidiaries in the Czech Republic, Denmark, France, Italy, Spain, Sweden, and the UK, and participating interests in Austria, Hungary, the Netherlands, the Slovak Republic and Ukraine.
Our primary insurance operations have essentially been combined in the ERGO Insurance Group. But our primary insurance segment also includes Europäische Reiseversicherung, the Watkins Syndicate, and the assistance services provider Mercur Assistance. We sold our majority stake in the Karlsruher Insurance Group in late 2005.
The main emphasis of the ERGO Insurance Group’s business is on personal lines, especially insurances of the person, i.e. life, health, and personal accident insurance. Another segment of ERGO’s business is insurance for small and medium-sized firms and also, on a selective basis, industrial business. Moreover, ERGO is one of the leading providers in the market for company pensions. In health insurance and legal expenses insurance, it is market leader in Europe.
ERGO’s marketing strategy is built on the interplay of different distribution channels. Apart from its own strong sales organisations, its exclusive banking partnership with the HVB Group in Germany plays an important role. ERGO also has a joint venture with KarstadtQuelle AG for the sale of insurance products.
With offices in New York and Hong Kong, MEAG is internationally oriented, offering global competence and knowhow across a wide range of asset classes to institutional investors and private clients. In July 2006, MEAG acquired a 19% stake in PICC Asset Management Company Ltd. (PAMC) in Shanghai – the asset manager of one of the largest Chinese insurance groups, the People’s Insurance Company of China (PICC Group).
Munich Re’s value-based management philosophy The Munich Re Group’s objective is to analyse risk from every conceivable angle and to handle it successfully, thereby creating lasting value for its shareholders, clients and staff. A guiding principle of our corporate thinking and activity is to increase Munich Re’s share price on a sustained basis. The main features of this shareholder value approach in practice are the consistent application of robust, value-based management systems within the Group and a clear focus on future prospects of success.
Besides value-based performance measures, we observe a range of important additional conditions in managing our business. These conditions may be reflected in supplementary targets within the Group, or in isolated cases may even determine a unit’s short-term orientation in a particular situation. They include the rules of local accounting systems, tax aspects, liquidity requirements, supervisory parameters, and our shareholders’ legitimate interest in attractive regular cash distributions and an appropriate return on the overall capital invested.
The key factor in our business decisions is to increase corporate value, which we do in the following ways: – We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed, which is material in measuring added value. Only the risk-return relationship reveals how beneficial an activity is from the shareholder’s point of view.
The products of life primary insurance and reinsurance, 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 use the European Embedded Value method. Embedded value is the present value of future net earnings from business in force plus the value of shareholders’ equity, less the cost of holding capital. All assets and liabilities are valued consistently with how financial markets price tradeable instruments (”market-consistent embedded value”). Policyholders ’ options and guarantees are explicitly taken into account using stochastic simulations. By setting a minimum return requirement, we aim through value-based management to ensure an adequate return on the capital employed and an appropriate value added.
What we aim to achieve Starting point 2006 In the past year, the Munich Re Group’s business performed very well. Thanks to the excellent business experience in reinsurance, the gratifying performance in primary insurance and the very good investment result, we recorded an outstanding consolidated profit of over €3.5bn. We achieved a return of 20.3% on our risk-adjusted capital, thus surpassing our target of 15%. Our return on investment was a very satisfying 5.0% (5.9%). This is the ratio of the investment result of €8.9bn to the average market value of the investment portfolio at the balance sheet and quarterly reporting dates, totalling €178bn.
Our combined ratio, a much-heeded performance indicator in property-casualty insurance, was convincing in both reinsurance and primary insurance. For better comparability, we divide the combined ratio into property-casualty and health. The combined ratio in property-casualty includes all the business attributable to this segment, whereas in health it refers only to health insurance that is not conducted like life insurance. Calculated as the percentage ratio of the sum of net expenses for claims and benefits plus net operating expenses to net earned premiums, the combined ratio corresponds to the sum of the loss ratio and the expense ratio. Put simply, a combined
In the property-casualty reinsurance segment, there were net expenses for claims and benefits of €8,925m (11,329m) and net operating expenses of €3,846m (3,827m) in 2006, compared with net earned premiums of €13,795m (13,565m). The combined ratio thus amounts to 92.6% (111.7%), an excellent figure, significantly due to the fact that we were largely spared major losses from natural catastrophes last year.
The combined ratio in the health reinsurance segment amounts to 96.3% (93.0%), with net expenses for claims and benefits of €748m (658m) and net operating expenses of €303m (324m) comparing with net earned premiums of
The combined ratio in primary insurance is determined solely for the property-casualty segment (including legal expenses insurance), as most of the health primary insurance business is conducted like life insurance. In 2006, paid claims and the change in claims provisions totalled €2,218m (2,338m) and net operating expenses €1,390m (1,390m), compared with net earned premiums of €3,975m (4,005m). Our combined ratio in primary insurance thus amounts to 90.8% (93.1%), an outstanding figure both in absolute terms and in comparison with competitors.
– Another important distinguishing feature relates to the time-lag between premium being received and claims being paid. The longer these periods are, the longer the premiums received can be invested in the capital markets. High combined ratios in classes of business in which claims settlement takes a long time (e.g. casualty) therefore generally entail higher returns from investments with which the loss reserves are covered. These returns are not reflected in the combined ratio.
On the basis of further assumptions we make and publish regarding key indicators, our shareholders can form their own opinion regarding our target’s achievability, and can assess Munich Re’s business performance and economic value added.
What assumptions is this target based on? In both primary insurance and reinsurance, we are proceeding on the basis of statistically expectable claims experience. Provided there are no significant shifts in the composition of our business portfolio, we reckon with a combined ratio of below 97% in property-casualty reinsurance, which includes an amount equivalent to approximately 5.0% of premiums as projected claims expenditure for natural catastrophes costing over €5m per event. In property-casualty primary insurance, we expect a combined ratio of under 95%.
Lastly, our target is based on a largely stable currency environment. Changes in tax treatment are only considered to the extent that they are already known today.
Embedded values as additional performance indicators In life primary insurance and reinsurance and in German health primary insurance, we will use key indicators primarily based on European Embedded Value (EEV, see p. 52 f.).
The numerator in the formula comprises the published IFRS net income adjusted for post-tax income (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. The basis for the adjustment is the capital exceeding the necessary risk-based capital (additional available equity). This is calculated as follows: the starting point is the equity recognised in the IFRS financial statements, from which the “economic equity” is derived by means of various adjustments. These include the addition of the unrecognised valuation reserves and the unrecognised portion of the embedded values in life and health insurance, and the subtraction of goodwill and deferred tax assets. From this economic equity a margin is deducted for the settlement of expected claims payments in following years. The difference between the amount then remaining and the required riskbased capital is the additional available equity, which is also necessary for rating and solvency purposes, as well as for profitable growth, but which we strive to keep lean through our active capital management. This is because the additional available equity in the system presented here only earns a risk-free interest rate, as all the risk components of the investment and underwriting are covered with risk-based capital by the internal risk model, and thus assigned appropriate return requirements. Even though we take a risk-adjusted return as our target, we aspire to
Our targets – Ambitious but attainable In selecting suitable targets, contrasting aspects have to be considered and weighed up. On the one hand, undue complexity has to be avoided in order to ensure transparency for investors, staff and the public. On the other hand, the challenge lies in reflecting economic realities as closely as possible, avoiding oversimplification, and enshrining added value as the Group’s overriding guiding principle. As the above description shows, the background is complex, especially as the parallel use of different performance indicators is unavoidable. That is why we have devoted considerable space to this topic. We are convinced that we are on the right track with the key performance indicators of RORAC and embedded value. Taking into account all the relevant factors, we consider that our targets are economically meaningful – ambitious, but attainable nonetheless.
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) (Chairman of the Group Committee) Group Investments (from 1 March 2007) Group Development Press Internal Auditing Executive Offices, Group Top Executives
Dr. rer. pol. Ludger Arnoldussen (from 1 October 2006) Asia, Australasia, Africa (until 31 December 2006 together with Mr. Wittmann) Germany, Asia Pacific and Africa (from 1 January 2007) General Services (from 1 March 2007)
Dr. rer. pol. Thomas Blunck Special and Financial Risks Organisational Design and Development (from 1 March 2007) Information Technology
Georg Daschner Europe 2 and Latin America (until 31 December 2006) Europe and Latin America (from 1 January 2007) Corporate Communications (from 1 January 2007)
Dr. rer. nat. Torsten Jeworrek (Chairman of the Reinsurance Committee) Corporate Underwriting/Global Clients Reinsurance Investments Accounting, Controlling and Central Reserving for Reinsurance
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) Life and Health Human Resources
Karl Wittmann (until 31 December 2006) Asia, Australasia, Africa (as from 1 October 2006 together with Dr. Arnoldussen)
Prof. Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Chairman of the Supervisory Board of Siemens AG
Dr.-Ing. e. h. Bernd Pischetsrieder Chairman of the Board of Management of Volkswagen AG (until 31 December 2006)
Dr. jur. Dr. h. c. Albrecht Schmidt Former Chairman of the Supervisory Board of Bayerische Hypo- und Vereinsbank AG
Board of Management1 Seats held on supervisory Membership of comparable bodies boards of other German of German and foreign business companies enterprises
Dr. oec. publ. Wolfgang Strassl DKV Deutsche Krankenversicherung AG* Munich American Reassurance Company, Atlanta*
Prof. Dr. rer. nat. Drs. h. c. mult. Hubert Markl Bayerische Motoren Werke AG Sanofi-Aventis S. A., Paris Georg von Holtzbrinck GmbH
Prof. Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Deutsche Bank AG – Hochtief AG Siemens AG (Chairman) ThyssenKrupp AG Volkswagen AG
Audi AG* (Chairman) Scania AB, Södertälje* (Chairman) SEAT S. A., Barcelona*
Our business environment is marked to an increasing extent by growing complexity – together with an upward trend in natural catastrophes. There has also been a disproportionate rise in man-made losses in relation to economic activity. The reasons are many and varied, ranging from technological progress and the advancing geopolitical interdependencies to climate change and trends in international liability. In addition, concentrations of values are mushrooming and regions are becoming more dependent on each other, giving rise to new risk potentials and accumulation hazards. These phenomena present demanding challenges for the insurance industry, but also opportunities. It is therefore imperative to carry on refining risk models and to swiftly incorporate new findings.
Fundamental changes are also resulting from unprecedented demographic trends. People are living longer – good news, but also an enormous strain on social security systems. By 2030, every two people in Europe in paid work will have to finance one person who is not. This means Europeans can only maintain their standard of living and high-quality healthcare in the medium term if they make additional private provision – a great opportunity for insurers. Many countries are in the process of realigning their social security systems to these demographic requirements, and so for the time being insurers will have to cope with an uncertain legal and political climate. Speed and flexibility in product design are becoming increasingly important competitive factors. At the same time, primary insurers are having to adjust to the growing group of older people with special needs.
At present, one of the most important issues for private health insurance in Germany is the debate regarding the recently adopted health reform legislation. The German health reform will not solve the problems of the compulsory health insurance scheme – so private health insurance, which is demography-resistant and provides guaranteed benefits, remains the only alternative to statutory health insurance.
In addition, the insurance industry’s regulatory environment is being affected by profound changes. The introduction of Solvency II in Europe and new accounting standards have implications for insurers’ capital requirements and income statements. The new circumstances will have considerable implications for primary insurers’ business models. They will also influence the demand for reinsurance cover and trigger changes in its supply. A group like Munich Re, among the leaders in integrated risk management, can utilise the changing industry dynamics to its advantage and exploit the business opportunities they present – in both reinsurance and primary insurance.
In the USA, the world’s largest insurance market, momentum remained at about the level of the previous year on average, despite growth slowing considerably between July and December, for which a slackening of the housing market was chiefly responsible. The mainstays of the US economy were private consumption and corporate investments, with real GDP rising by 3.3% compared with the previous year.
Economic growth in Japan was 2.2% in real terms last year – slightly higher than in 2005.
The German economy grew by 2.7% in real terms in 2006 – a considerable improvement on the previous year. The pleasing aspect of this development was that growth derived not only from exports and corporate investments but also from private consumption, which also made a more positive contribution again for the year as a whole (buoyed by the resurging labour market). An initial estimate indicates an annual average rise of approximately 176,000 in the number of employees with jobs subject to social insurance, whilst the unemployment rate stood at 9.6% in December, a year-on-year decrease of 1.5 percentage points.
Economic development in the UK was also up appreciably year-on-year, driven mainly by domestic demand.
Among the central and eastern European countries, Russia and Poland added to the momentum, whereas in Turkey the expansion slowed somewhat, due not least to a strong depreciation of the currency in May and June.
Due to falling oil prices since August, rates of inflation around the world dropped especially in the final quarter – in some cases considerably. However, the annual average inflation rate remained at around last year’s level in the USA and the eurozone. This environment led to further interest-rate increases by a number of central banks. The US Federal Reserve raised its reference interest rate from 4.25% at the start of the year to 5.25% at the end of June, but then left it unchanged up to the end of the year. The European Central Bank increased its reference interest rate from 2.25% to 3.5% during the course of the year, and the Bank of England raised its key interest rate from 4.5% to 5.0%.
In the USA, the S&P 500 also recorded presentable growth of 13.6%. The Japanese Nikkei Index, however, recorded an increase of only 6.9%.
In most other European markets, the trend continued towards more direct provision for old age through insurance products. In France, premium volume in life insurance grew by a strong 19% in the first three quarters. Over the same period, premiums in health and personal accident rose by 9%, whereas growth in property-casualty only amounted to around 2%. Initial estimates indicate that the Spanish life insurance market grew by 9.8%, with non-life insurance expanding at a rate of 6.5%. In Switzerland, property -casualty business showed growth of around 1.8%. Premiums in individual life insurance fell by an estimated 3.4%, whilst the decrease in group business (occupational
Impulses for growth in life primary insurance and reinsurance continue to come from the long-term trend towards more private provision. With the worldwide ageing of society, pressure on social security systems is mounting, so that private life insurance is generally growing more strongly than the economy as a whole. Health reinsurance is benefiting from the further privatisation and liberalisation of healthcare systems.
Given the absence of major natural catastrophes in 2006, insurers in the USA were able to achieve exceptionally good results in property-casualty insurance. Premium
In private health insurance, the VVG reform is intended to create a framework for case and healthcare management and to open up opportunities for insurers to offer other services.
Munich Re Group Annual Report 2006 Management report_Parameters credited with part of their ageing reserves. It is not yet possible to judge the effect the new regulations will have on the premiums paid by other insureds. This will be determined largely by client behaviour.
The part of the Act relevant to private health insurance relevant is expected to come into force on 1 January 2009.
The European Commission’s Solvency II project will have the greatest effect on the insurance industry. This is scheduled to involve a comprehensive reorganisation of insurance supervisory law within the EU, taking a riskbased approach, one of the core ideas of which is to consider individual risk exposure. Preparations for this are increasingly picking up steam. The Commission plans to publish a draft framework directive in July 2007.
In the USA, there have been discussions for quite some time on the introduction of an integrated federal supervisory authority for reinsurance companies. At present, the insurance industry is supervised by 50 insurance commissioners in the individual US federal states. There is now virtual unanimity that this system is inefficient and costly, weakening the competitiveness of the US market overall. In 2006, bills to revise the supervision of primary insurers and reinsurers were introduced in both the Senate and the House of Representatives. Each of these bills envisages federal supervision for insurance companies. For international reinsurers in particular, this would have the advantage that legally binding international agreements on the supervision of insurance companies could be concluded.
Nieuwe Hollandse Lloyd Verzekeringsgroep (NHL) in 2005. We were unable to fully compensate for the lower premium income in life insurance with growth in propertycasualty insurance and the health segment. Particularly the sale of the Karlsruher Insurance Group, whose business focused on life insurance, made itself felt in life premiums. The very satisfactory development in the health segment, where gross premiums rose by 4.3%, was driven mainly by extensive new business in supplementary health insurance, where we recorded growth of 15.6%. Claims experience in property-casualty insurance, including legal expenses insurance, was again very favourable in the year under review. This enabled us to achieve a combined ratio that was considerably better than our target of 95%.
The Munich Re Group’s business performed very well in the past year. With an outstanding consolidated result of €3.5bn, we clearly surpassed our expectation of €2.6-2.8bn in 2006, making it the third record year in succession. Our return on risk-adjusted capital (RORAC) amounted to 20.3% after tax, thus markedly exceeding our long-term target of 15%. This was due to the very good results of our primary insurers and reinsurers, which were successful both in their underwriting business and in the investment of their managed assets.
Outstanding consolidated result of €3.5bn Return on risk-adjusted capital (RORAC) of 20.3% after tax Planned dividend increase to €4.50 per share
Result before amortisation and impairment losses of goodwill 5,498 4,150 3,369 1,971 –20 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
– In primary insurance, the pleasingly low claims expenditure and appreciably lower administration costs were significant factors in the successful result. The combined ratio, including legal expenses insurance, was 90.8% (93.1%), yet another year-on-year improvement.
– Strong regular income and realised capital gains (especially from the sale of non-fixed-interest securities) increased the investment result in both reinsurance and primary insurance. At 5.0%, the return on investment (based on the average investment portfolio at market values) outperformed our target of 4.5%.
– Deferred tax assets from loss carry-forwards at our subsidiary Munich Re America were written off in our accounts for 2006, producing deferred tax expenses totalling €770m.
Premium Approximately 55% of our Group premium income was earned from reinsurance and 45% from primary insurance. Whereas in reinsurance we operate on a global basis, in primary insurance 78% of our premium comes from the German market; but in both fields of business, the share of premium from outside Germany is increasing appreciably.
In primary insurance, gross premiums were down on the previous year, falling by 4.7% owing exclusively to changes in the consolidated group, above all to the sale of the Karlsruher Insurance Group and NHL (Nieuwe Hollandse Lloyd Verzekeringsgroep). Adjusted to eliminate the effect of these changes, premium rose by 0.5%. Growth was again driven by health insurance in 2006, where the notable expansion in premium volume was attributable to premium increases and additional sales of supplementary insurance policies. The property-casualty business of our ERGO companies in Poland and the Baltic States developed pleasingly, achieving double-digit growth rates.
Share of reinsurance and primary insurance – Life and health and property-casualty – in Group premium income*
Life and health 18.5% Property-casualty 36.8% Life and health 31.0% Property-casualty 13.7%
Events after the balance sheet date On 18/19 January 2007, Winter Storm Kyrill crossed central Europe with wind speeds of well over 100 km/h on a widespread scale. The countries hardest hit by the storm were Germany and the UK, but it also affected the Benelux countries, Austria, Poland, the Czech Republic, and to a lesser degree Switzerland. The Munich Re expects its claims costs in primary insurance and reinsurance to be significantly lower than the €600m before tax originally anticipated on the basis of initial estimates.
Of the owner-occupied and investment property recognised in the consolidated balance sheet as “held for sale”, ownership of items with a carrying amount of €215m had been transferred by the end of February 2007, realising a gain on disposal of €294m.
Exceptionally favourable claims experience in property-casualty Good business development in life and health
We have taken the first big step in the global standardisation of our business processes and data resources on the new reinsurance platform Global Reinsurance Application (Gloria). In spring 2006, the first productive version of the SAP-supported IT system, which is tailored to our requirements, was successfully implemented at Munich Reinsurance Company in Munich. Once Gloria has been introduced worldwide, the internationally integrated data resources will allow us to analyse, manage and control our reinsurance business even better.
Result The two reinsurance segments life and health and property -casualty accounted for €0.6bn (1.0bn) and €2.1bn (0.4bn) of the consolidated result respectively. Our overall result for reinsurance was thus 92.9% higher than in the previous year.
In addition, as part of our portfolio management, we converted our reinsurance treaties in certain market segments and for specific clients to non-proportional covers if this allowed us to create higher added value. We are prepared to accept that the premium volume generated in these cases is lower than under proportional treaty forms of cover. Nevertheless, we largely offset the lower volume with the substantial rate increases we achieved in the last renewals for property and offshore energy risks with natural catastrophe exposure in the USA and Latin America (especially oil platforms).
In life and health reinsurance, the unrelenting demand worldwide for privately financed provision products largely made up for premium reductions from individual high-volume treaties. This kept our premium income stable, despite our selective underwriting policy and our stringent profitability requirements. About 34.5% of our total premium income was attributable to life and health reinsurance and 65.5% to the property-casualty segment.
Life – Slight decline in premium income with stable operating result Health – Premiums at previous year’s level with good growth opportunities Favourable result of €561m
At €7.7bn (7.8bn), gross premiums written in life and health reinsurance were just below the previous year’s level. Currency translation had a positive impact on our premium income in 2006. Adjusted to eliminate effects from changes in exchange rates, premium declined by 2.8%. The operating result of €922m (1,105m) and the consolidated result of €561m (977m) showed a marked decrease, largely owing to lower income from investments. Expenditure for taxes on income in the financial year rose to €265m (48m). In the previous year, tax expenditure had been exceptionally low, owing to the impact of loss carry-forwards within the Group.
In the USA, our subsidiary Munich American Reassurance Company (MARC) increased its premium volume slightly to US$ 1.6bn (1.4bn) in a generally contracting life reinsurance market, thus maintaining its position among the leading life reinsurers. Given our cedants’ cession quotas, which in many cases are declining in the segment of pure mortality covers, our strategy of diversifying into products for disability and long term care is paying off.
The markedly improved result for the year of US$ 37.0m (28.5m) partly reflects the improved profit margins we achieved in the last round of price increases and despite a negative fluctuation in mortality experience.
In the rest of western Europe, interest is growing in reinsurance solutions that have a positive effect on primary insurers’ capital and solvency position. Altogether, premium income in these countries rose to €482m (474m). We offer expertise and individually tailored solutions, and expect life reinsurance in particular to enjoy new business
In eastern, central and southern Europe, Munich Re was able to develop its business according to plan again in 2006, with premium income rising by a good 31%. We worked very closely with our cedants to improve the quality of the business, so that the profitability still meets our expectations. The growth was also due to the region’s positive economic development, which economists predict will continue in the coming years, not least due to the stabilising influence of EU expansion. The outstanding measure taken by Munich Re in 2006 to maintain its involvement in this development potential was to set up a subsidiary in Moscow for the reinsurance of life business in the Commonwealth of Independent States.
In its life reinsurance business on the African continent, our subsidiary Munich Re of Africa (MRoA) kept its premium income stable at €83m (83m). This was mainly due to its consistently profit-oriented underwriting approach, as well as the consolidation process in the primary insurance market. Proceeding from its leading position in group insurance, the plan is to drive future business growth with product innovations and the profitable expansion of individual life business.
Health The global health insurance market with its segments “financial protection”, “health services” and “provision of care” offers considerable growth opportunities. Our key sector “financial protection” is particularly promising. Two main factors are stimulating higher demand here: healthcare is gaining in significance, and healthcare systems worldwide are undergoing further liberalisation and privatisation. As the world’s leading provider in this field, with a product portfolio that integrates reinsurance and services, Munich Re is well prepared for these developments. The USA remains the largest single market for us. Beyond this, we expect strong growth in the Gulf region and Asia.
Despite an appreciable decrease in our share of a major client account, the acquisition of good new business enabled us to write overall premium income of €1.3bn, thus maintaining the previous year’s level. At 96.3% (93.0%), the combined ratio again remained within the target figure
New legislation such as the Medicare Modernization Act will open up new growth areas in the USA for primary insurers and reinsurers, e.g. in care for the chronically ill. We are well-positioned in this area with a minority stake in the disease management company Health Dialog, a specialist firm for the holistic management of chronic illnesses. We expect this sector to develop positively.
In Germany, there was a great deal of debate about the health reform in 2006. The government coalition parties finally agreed on a compromise, although the specific
Management report_Reinsurance implications for private health insurance are not yet fully clear. The division of the German health insurance market into statutory health insurance and private health insurance is to remain in principle, thus preserving comprehensive health cover as a field of business for private health insurers. One of the main advantages of private health insurance is the presence of ageing reserves to absorb demographically related cost increases. It is envisaged that ageing reserves will to some extent have to be transferred between private health insurance companies. We assume that this will have only a small impact on reinsurance.
Increasing expenditure for healthcare is to be expected in both statutory and private health insurance. In this environment, we continue to see a strong demand for reinsurance solutions for individual high-cost cases.
In China, premiums increased to €6m (3m) in 2006, thus more than doubling compared with 2005, albeit at a still moderate level. Given the economic boom and the rise in private incomes, we expect health insurance to grow dynamically. In other words, China remains one of our priority target markets – one that is increasingly opening up and becoming more differentiated. We were able to establish relations with the new specialist health insurers formed in 2005, supporting these treaty partners in nearly all sections of the value chain. Given the distribution possibilities of the individual insurance groups, we expect business to develop dynamically in the coming years. We are working very closely with the supervisory authorities to help achieve suitable regulatory parameters. An example of our good cooperation can be seen in the health insurance regulations that have applied since 2006 and which we had a hand in designing.
Other markets such as the Netherlands and Italy also contributed to the health segment’s good performance in 2006. Since premium volume and result are fed by many regions, the political and economic risks of our business are adequately spread.
Profit-oriented underwriting policy continued Exceptionally low burden from natural catastrophes Outstanding combined ratio of 92.6% Record result of €2.1bn In the year under review, we benefited from exceptionally favourable claims experience, especially in lines of insurance with natural catastrophe exposure, as well as from the improvements in our basic business that we had achieved in the last few years’ renewals. This led to an excellent result in our property-casualty reinsurance segment.
Munich Re Group Annual Report 2006 Management report_Reinsurance the significantly lower combined ratio of 92.6% (111.7%). Adjusted to eliminate the effects of major losses, the combined ratio of 86.4% (87.4%) again impressively underscores the improvement in the quality of our business over several years.
Natural catastrophe losses affected our result with an amount of only €177m (2,629m), representing 1.3 (19.4) percentage points of our combined ratio. The only really significant loss in this category was Cyclone Larry, which in the first quarter of 2006 wreaked severe damage in Australia, costing us some €39m. Natural catastrophe losses of smaller dimensions were caused by heavy monsoon rains in India and Typhoon Shanshan in Japan. These loss events had an impact on the results of our Asia, Australasia, Africa Division.
At €677m (664m), man-made losses were above the long-term average, with high loss amounts – together totalling some €128m – resulting from three industrial fires.
Our premium development also reflects the fact that various cedants are seeking higher retentions – especially for claims-free business – as a consequence of their improved capital position, which is partly linked to consolidation trends in the insurance markets. One of the consequences of our consistently profit-oriented underwriting policy was that, as part of our portfolio management, reinsurance treaties in certain market segments and for specific clients were converted to non-proportional covers, which reduced premium volume.
In liability reinsurance, the pricing structure remained largely stable at a good level. In credit and aviation reinsurance, the good results of the previous few years, in which extreme loss events had been lacking, put prices under pressure and also led to cedants raising their retentions. On balance, these trends caused our premium income to remain stable at €14.5bn (14.5bn). Currency translation had a negative impact on our premium income in 2006. Adjusted to eliminate effects from changes in exchange rates, it rose by 0.7%.
Decrease of 9.0% in premium Market dynamics exploited in acceding EU countries
Unlike in 2005, we sustained no market-wide losses from natural catastrophes, but some cedants were substantially hit by extreme regional events, such as the hailstorms in Leipzig and Villingen-Schwenningen. Expenses for major losses not caused by natural catastrophes were around the same level as in the previous year. The largest industrial fire and business interruption loss in the German market came from a fire at a steelworks on 22 July 2006. The loss was settled by insurers at €285m, of which our share is a low two-digit million amount.
With premium income of around €1.0bn (1.1bn) or about 65% of gross premiums written, Germany is easily the division’s most important market. The renewed decrease in premium here was due to the following causes: a further reduction in quota share treaties and higher retentions among our clients, mergers among primary insurers, and a decline in original rates. In isolated cases, we also had to withdraw from business because of inadequate margins.
Owing to the absence of major losses, our result was clearly positive and well above the previous year’s figure, which had been burdened by natural catastrophes.
In the acceding EU member states, insurance penetration increased further in 2006, and we were able to profit from the markets’ growth. Our business experience in the individual countries and regions of eastern Europe varied. Especially in the countries joining the EU, there was an upward trend in mergers among primary insurers, consequently reducing reinsurance cessions. By contrast, our business developed positively in the Russian Federation, where insurance penetration is steadily increasing, infrastructure measures are being intensified and industrial firms are being expanded and overhauled. We again recorded the highest premium income in the Czech Republic, a total of €43m (34m), followed by Russia with €33m (24m) and Poland with €19m (22m).
We continue to see good growth opportunities in eastern Europe, but also growing competition, which we expect to exert increasing pressure on margins in reinsurance as well.
In Greece and Turkey, after several years of higher growth, we recorded a moderate fall in premium to €106m (131m), with another positive result. Prices in property business fell in individual cases.
In the year under review, our premium income was up by 8.5% to €3.0bn. This pleasing growth was partly due to an appreciable increase in rate levels in those markets that had been hit by natural catastrophes in the previous year. Prices in the other markets remained generally stable. In some segments, we were able to acquire promising new business. Changes in exchange rates had only a small effect on our business result. The combined ratio improved to 97.2%, as our basic business performed positively overall thanks to our profit-based underwriting approach, and natural catastrophes affected us to a below-average extent.
The United Kingdom is still the division’s largest individual market. Premium here was up 16% to €1.1bn, boosted by the acquisition of managing-agent business. The premium volume for a large proportion of existing treaties stayed largely unchanged, since we had already terminated treaties with inadequate prices, terms and conditions in the previous years. 2006 did not produce any significant claims burdens from large losses or natural catastrophes. The result was positive. We are proceeding on the assumption that we can maintain our leading market position.
Our subsidiary in Italy, which operates in propertycasualty, health and life business, recorded growth of 6.5% to €642m (603m). Rates in the Italian reinsurance market remained stable overall, and in some cases we were able to increase prices. The higher gross premium volume is partly due to our taking over the management of the Italian environmental pool in 2006, enabling us to expand our share of this business. Premium in life and health business was virtually unchanged. The result for the year showed a substantial improvement. Owing to the continuing consolidation in primary insurance, we have to reckon with smaller reinsurance cessions in future, especially in property -casualty business.
In the Netherlands, we defended our very good market position with a stable premium volume of €137m, and the result was satisfactory. We invested further in the marketing of non-traditional coverage models.
In the Nordic countries, we increased our premium income by around 14% to over €135m in 2006, benefiting in particular from the higher prices for natural catastrophe covers. We also won new business in property reinsurance, thus strengthening our large market share in this line. Thanks to the absence of natural catastrophes and other major losses, here too we were able to post a very satisfactory result. We expect the market environment in the Nordic countries to remain stable in both primary insurance and reinsurance.
Despite unchanged exposure to natural hazards, 2006 was a satisfactory year for the division Asia, Australasia, Africa. Tropical storms gave rise to little damage in Asia last year. At €1.9bn (1.9bn), premium income held steady compared
In addition to the region of Greater China (PR China, Taiwan, Hong Kong) and Southeast Asia, the markets of Japan, South Korea and Australia remain the division’s core markets, altogether contributing 74% of the premiums. To support the expansion of our business, we provide individual and innovative solutions as well as additional services, such as those for integrated risk management.
Higher cedant retentions – above all in Japan and Australia – work against business expansion, but greater risk awareness among our business partners has led to an improvement in the quality of our portfolio.
Whereas our Australian and New Zealand non-life business was transferred to the parent company in 2005, the life segment continues to be handled by our subsidiary Munich Reinsurance Company of Australasia (MRA) in order to comply with supervisory requirements. Premium volume for this segment rose slightly in comparison with the previous year. The following table only includes the figures for life business.
Premium income stable at €1.9bn Pleasing business performance Portfolio quality improved in core markets
Middle East, Africa, Asia, Australasia, Greater China, Southeast Asia 2006 2005 2004 2003 2002
Management report_Reinsurance political conditions in Southeast Asia and expect additional growth impulses for the region, in particular against the background of closer cooperation between the ASEAN nations and China.
In India, we envisage reinsurance demand reaching about €4bn in ceded premiums in the medium term. Owing to local restrictions, however, the reinsurance volume is currently limited to around €1bn, of which only about a third is accessible to foreign providers. Losses from the monsoon season had less impact on reinsurance treaties than in the previous year.
In the Middle East and North Africa, we benefited from high economic growth in individual countries and from our intensified acquisition efforts. We were able to expand our participations, particularly in a whole range of major projects in the energy sector and infrastructure. Premium income climbed by 7% to €90m (84m). Despite the harder competition, business performance was in line with our expectations.
In Israel, there was a further decline in the original prices of indemnity insurance, especially industrial fire insurance, so that we reduced our involvement. In liability business, on the other hand, we were able to retain our shares of business to a pleasing extent, despite the keener competition.
These favourable underwriting-year results were significantly masked by adverse loss development from old underwriting years. In addition, Munich Re America wrote off a large portion (US$ 993m) of its deferred tax asset relating to tax net operating losses, thus taking a more conservative position with respect to this intangible asset. These are the two primary factors responsible for the 2006 calendar-year loss of US$ 1,034.8m.
Munich Reinsurance Canada Non-Life Group (Munich Reinsurance Company of Canada (MROC) and Temple Insurance Company) continued on course in 2006. It again surpassed its profit objectives and sought further growth opportunities. In recent years, our Canadian operations have consistently excelled.
The strong profits posted by insurance companies over the past four years have led to inevitable competition and downward pressure on primary insurance rates. This trend is expected to continue, although most companies currently maintain that their rates remain technically adequate.
Unlike in 2005, catastrophe activity was negligible in the Canadian market. Awards for severe bodily injury cases, however, continued to escalate at a strong pace due to increasingly generous court awards and a more litigious social environment.
The 2006 result was not impacted by any exceptional loss events, so that the combined ratio fell to a gratifying
Accident reinsurance is experiencing further demand for catastrophe covers for accumulation events. Our personal lines business chiefly comprises motor reinsurance. The results of these classes of business were positive.
In property reinsurance, we provide protection mainly for high exposures to natural catastrophes such as windstorm and earthquake. Following the hurricanes in the previous year, the prices for such reinsurance covers rose significantly, and reinsurance capacity in the markets became decidedly scarcer. Given the lack of major losses in the USA and Europe in 2006, pressure on capacity will reduce somewhat. We nevertheless expect the rate level to remain adequate.
In agricultural reinsurance, we extended our leading position. The business we wrote mainly comprised state-supported crop insurance programmes, with a large portion stemming from the USA. Apart from this, we work closely with selected cedants in applying our global experience and competence to individual segments and regions with high growth potential.
In workers’ compensation reinsurance, the consolidation of our portfolio led to a reduction in premium volume. With a view to exploiting business potentials, we actively support international reform processes at international level, in particular with regard to adjusting national legal parameters for workers’ compensation insurance.
In the highly specialised segment of customised portfolio solutions, we provide our international clients with tailor-made reinsurance solutions for loss portfolios. We continue to see attractive long-term business opportunities in this area.
Claims costs for major losses were considerably lower than in the previous year. All segments contributed to a very satisfactory combined ratio of 81.1%.
In view of the considerable opportunities we see in structuring, trading and placing capital market products, we have set up a Risk Trading Unit, which commenced operations in the second half of 2006.
In credit and bonding business, we reinsure default risks that are related to the sale of goods and services worldwide or accepted via bonds. We again recorded a clear profit in credit and bonding reinsurance in 2006, with only a few major losses and a basically unchanged number of small and medium-size (frequency) losses. As major
Result target clearly surpassed New Risk Trading Unit established Financial institutions segment especially successful
Munich Re Group Annual Report 2006 Management report_Reinsurance risk on the capital markets. The transaction, effected by Carillon Ltd., provides us with cover for up to four hurricane seasons. If hurricanes give rise to market losses of US$ 45bn or over in the USA, Munich Re will receive the bond proceeds of up to US$ 84.5m. Shortly before the end of the year, we successfully placed another natural catastrophe bond transferring earthquake risks from subsidiaries of Zurich Financial Services Group to the general capital markets. With this transaction, we supported a key client in specifically developing a capital market solution for the management of its peak risks. Together with the natural catastrophe bond issued by Aiolos Ltd. in the previous year for loss events from windstorms in western Europe, the volume securitised by the Munich Re Group on the capital markets has thus increased to a total of €307m.
We focus here on clients that have a high level of risk management, which includes effective loss prevention measures and substantial retentions. We critically analyse our clients’ risk management, working with companies and their brokers to devise customised covers.
Our liability business in 2006 was marked by the expansion of special lines, such as directors’ and officers’ liability (D&O), and the development of new policies, such as those for protecting intellectual property rights (patent rights, trademarks, etc.).
In our property reinsurance, we succeeded in improving our strong position, especially in global oil and gas business and in mining insurance, whilst still achieving adequate prices, terms and conditions. Here we are among the few providers whose competence in the underwriting of major risks and the settlement of large claims allows them to play a leading role. We also expanded our knowhow and our business in other difficult lines, such as telecommunications. On the other hand, prices and conditions in property business often deteriorated to such an extent last year that we had to decline significantly more business than in previous years.
Beyond this, the coverage of our clients’ natural catastrophe and terrorism exposures remains a challenge. The detailed risk information they provide us with, which we analyse in our systems, enables us on the one hand to continue providing substantial cover and on the other to control the accumulation of possible losses from natural catastrophes and terrorism.
Altogether, MARP wrote premium of about the same level as in the previous years. Despite a few large losses, we were again able to record a satisfactory combined ratio.
Investments Sfr m 4,066 3,542 *Financial statements in accordance with national accounting law.
Development was also very positive at our Swiss subsidiary New Re, which in traditional reinsurance focuses on non-proportional covers and writes a considerable amount of natural catastrophe business. New Re grew its premium volume by 16% to Sfr 1,007m and substantially increased its profit to Sfr 299.4m. Growth and earnings were driven both by property-casualty business, with a premium volume of Sfr 552m (+12%) and a combined ratio of 96.8%, and by life reinsurance. The life and health segment posted a rise of 21.3% to Sfr 455m. New Re benefited not only from its professional underwriting and good market conditions but also from the absence of major losses in 2006.
The Group’s primary insurers essentially comprise the ERGO Insurance Group, Europäische Reiseversicherung and the Watkins Syndicate.
Marketing The brands of ERGO’s operative insurance companies (see list on page 50) continue to be of great significance. They are the cornerstones of ERGO’s franchise strength, as its strategy involves using multiple sales channels to gain access to clients. In addition to working with a variety of independent insurance agents, ERGO also cooperates with brokers and strong business partners. Its exclusive cooperation with HypoVereinsbank accounted for new business of €342m (298m) in 2006. KarstadtQuelle Versicherungen, a member of the ERGO Insurance Group and Germany’s most popular direct insurer, welcomed its three millionth client in the year under review.
Combined ratio property-casualty, including legal expenses insurance % 90.8 93.1 93.0 96.4 99.9
Our primary insurance business was very successful in the past year.
Despite a decline in premium income, our primary insurers achieved very good results thanks to continued positive underwriting and good investment returns. Nevertheless, a comparison with the previous year’s results is difficult because of three significant effects. – Firstly, the changes in the consolidated group: our sale of the Dutch Nieuwe Hollandse Lloyd Verzekeringsgroep (NHL) on 30 June 2005 and the Karlsruher Insurance Group on 30 September 2005, and our acquisition of the Turkish I
– Secondly, the conversion of our HVB shares into UniCredit stock in the fourth quarter of the previous year, which had a very favourable impact on results. Both effects are reflected in all the main items of our income statement, although their influence on life and health was greater than on property-casualty.
A look at the result shows a very gratifying picture. The unadjusted figures amounted to €1,278m (1,526m) for the operating result and €1,062m (1,179m) for the consolidated result. Without the effects mentioned above, both our operating result after tax and consolidated result clearly exceeded the previous year’s figures.
Life and health The consolidated result in life and health business, which following the sale of the Karlsruher Insurance Group is written exclusively by ERGO, totalled €336m (594m). The relatively high effective tax rate for 2006 is primarily attributable to foreign withholding taxes. Policyholders’ participation in this tax had the effect of raising the pretax result and tax position by the same amount, thereby distorting the tax rate. The rate was also impacted by the conversion of HVB shares into UniCredit shares in the previous year, leading to a significant rise in the amount of foreign dividends.
Karlsruher Insurance Group. However, even without the changes in the consolidated group there would have been a decline in premium volume of 3.6%. Total premium income (including the savings premiums of unit-linked life insurance and capitalisation products) posted by the companies remaining in the consolidated group, decreased by 1.9% to €7.4bn (7.5bn).
In health, premium income grew by 4.3% to €5.1bn (4.9bn) – the strongest growth of all. This increase was due to the further expansion of new supplementary health insurance business in Germany, where we recorded a rise of 15.6% to over four million clients, and to the very satisfactory growth rate of 15.1% in other countries, above all Belgium and Spain. In German comprehensive health insurance, the political debate about health reform continued to cause uncertainty among clients, curbing the growth that would normally be present in this segment.
The investment result in life and health totalled €4.1bn (5.1bn), a decline of 18.5% due not only to the conversion of HVB shares and the sale of Karlsruher in the previous year, but also to interest-rate trends. The rise in interest rates in the first six months, which was partially reversed between July and December, triggered a loss of about €283m in the value of our long-term hedges against changing interest rates. We account for these hedges at fair value and recognised the fall in value as an impairment loss. The purpose of these derivative financial instruments is to cover the interest rates guaranteed to our life insurance customers, enabling us to meet our commitments, even if interest rates remain very low for a long period of time, without having to forgo the opportunities presented by rising interest rates. The value of these derivatives fell by €330m to €105m towards the middle of the year as a result of rising interest rates, but rose again to €153m in the second half of the year. In the previous year, the investment result had been positively affected by particularly high gains from the disposal of shares in the financial sector.
As expected, expenses for claims and benefits were also affected by the investment result, which is particularly significant in this respect in life and health business. These expenses were up as a result of payouts in life insurance and rising prices in healthcare, but this increase was offset by lower net allocations to the provisions for future policy benefits and the provision for premium refunds. Expenses therefore experienced an overall decrease of 7.0%.
Costs also developed very favourably. Despite high expenses for new IT systems in health, the administrative expense ratio remained constant at a favourable 3.4%. In life, the administrative expense ratio was reduced from 4.5% to 4.4%, reflecting our firm cost discipline, which we intend to maintain.
The situation in other countries was particularly satisfactory. The ERGO companies in Poland and the Baltic States developed especially well, with growth clearly into double figures. Personal accident business in Germany also grew satisfactorily (+1.6%), as did German commercial property business (+2.8%), even though we remained committed to our profit-based underwriting policy. By contrast, motor insurance had a curbing effect on growth, since fierce competition and an increased number of policyholders reassigned to higher no-claims bonus classes caused premium income to fall. We also took a very selective underwriting approach towards motor fleet business. Gross premiums in legal expenses insurance were up by 0.8% to €870m (863m), with a rise in foreign business and a marginal decline in German business. We registered growth in Spain, Belgium and the Netherlands. Europäische Reiseversicherungsgruppe recorded an improvement in premium volume to €359m (343m), the share of foreign business in premium increasing to 47% (46%). In 2006, the Watkins Syndicate posted a rise of 30.2% in premium income to £323m (248m).
At 90.8% (93.1%), the combined ratio for propertycasualty business including legal expenses insurance was excellent – even better than the previous year’s figure – not only because of the favourable claims situation in the year under review but also because of further cost improvements.
The loss ratio was further reduced to an outstanding 55.8% (58.4%). Legal expenses insurance performed especially well, with the loss ratio falling from 60.7% to 55.7%. In property-casualty insurance (without legal expenses insurance), the decrease in the loss ratio (57.8% to 55.8%) was somewhat smaller but began from an already low level.
At €685m (853m), the investment result remained at a high level, with regular income improving here too. However, the balance of realised gains on disposal, write-ups, losses on disposal and write-downs declined considerably.
Our other primary insurance subsidiaries – Europäische Reiseversicherungsgruppe and the Watkins Syndicate – also made positive contributions to the result.
Expansion of international activities In July 2006, ERGO signed an agreement with the Balci family of Turkey for the acquisition of a majority stake in the I
now holds a 75% stake in the I . sviçre Group, whilst the Balci family has retained 25%. The group includes Turkey’s fifth-largest propertycasualty insurer (I . sviçre Sigorta), which focuses on personal lines business, but it also operates in the strongly growing segments of life and health. Thus we are now very well positioned to tap the great opportunities offered by the Turkish market in the years ahead.
We made headway in our efforts to enter the Indian market. DKV International founded a joint venture with the Apollo Group – Asia’s largest chain of hospitals. In the areas of life and property-casualty, ERGO is holding discussions with potential joint-venture partners as well.
In the following, we report on the performance of the Group’s own investments, which derive almost entirely from our core business fields of reinsurance and insurance. In addition, we provide information on third-party business, where we manage the assets of non-Group institutional investors and private investors.
MEAG New York, MEAG Hong Kong and ERGO Trust, a former ERGO asset management company, have been united under the MEAG umbrella since 2005. Through the merger of ERGO Trust into MEAG, the latter is taking greater advantage of the opportunities offered by the international real estate markets, as well as expanding institutional third-party business systematically to real estate assets.
In July 2006, MEAG acquired a 19% stake in PICC Asset Management Company Ltd. (PAMC), Shanghai, the asset manager of the PICC Group and one of the largest insurance groups in China. MEAG thus participates directly in the development of PAMC’s business. Due to its immense growth potential, China is set to become an economic superpower. There is substantial demand for the investment of Chinese assets, and old-age provision will also increase in importance in future. China therefore offers rich opportunities for asset management companies with insurance-related know-how. For MEAG, this is the first participation in an insurance asset manager outside Germany.
In asset management, we recorded a profit of €53m (31m) in the year under review.
Investment principles Security, liquidity, mix and spread of investments are the main principles of our investment strategy. We invest only in assets from which we expect an appropriate return, our asset managers paying strict attention to the risk tolerance of each company. In reinsurance in particular, we limit 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. Besides this, the Munich Re Group keeps sufficient liquid funds available to be able to meet its payment obligations at all times.
The methods we use to control investment risks are described in detail in the risk report on page 124 ff.
In 2002, we determined that our investments in shares and corporate bonds should meet sustainability requirements. One of our goals is to ensure that 80% of our equities and corporate bonds are included in recognised sustainability indices or satisfy the sustainability criteria of renowned sustainability rating agencies. We have already surpassed this target. In the case of government bonds, we have achieved a rate of around 95% compliance in terms of the aforementioned criteria.
Munich Re also considers sustainability factors in its long-term investments. We use an appropriate set of criteria when acquiring participations and take sustainability aspects into account when performing regular analyses of our shareholdings.
Development and structure of investments As at 31 December 2006, the Group’s own investments totalled €176.9bn (177.2bn). In the year under review, our assets decreased by €0.3bn or 0.2%. Our portfolio predominantly consists of interest-bearing investments.
We invested the inflows from our excellent underwriting business and from sale proceeds realised in the year under review largely in fixed-interest investments. The amount of interest-sensitive items “fixed-interest securities ” and “loans” rose by €2.1bn to €127.5bn in the course of the year and made up 72.1% of our total investments at the end of the year.
Our portfolio of equities and shareholdings grew by €0.9bn in the course of the year, primarily owing to increases in the market value of our non-fixed-interest securities available for sale. Investments and shareholdings in affiliated companies and associates totalled €25.8bn (24.9bn) at the end of the year and constituted 14.6% of our investments at carrying value.
Real estate Our objective is to ensure a high and predictable earnings contribution from our investments in real estate. To this end, we continually monitor existing items with regard to their long-term profitability and future exposure to risks. We have been selling directly held property in Germany for many years. In 2006, we took a further step in improving the structural and regional composition of our real estate portfolio. In the fourth quarter, we contractually committed to sell commercial and residential buildings in Germany with a total value of approximately €1.5bn, of which some €1.3bn was attributable to property used by third parties.
Life and health Property-casualty Life and health Property-casualty 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev. 31.12. Prev.
All figures in €m* 2006 year 2006 year 2006 year 2006 year 2006 year 2006 year
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 1,820 1,430 – – – – 1,820 1,430 *After elimination of intra-Group transactions across segments.
Fixed-interest securities and loans Investments in fixed-interest securities and loans dominate our investment portfolio, jointly accounting for €127.5bn (125.4bn) or 72.1% of our total assets. We increased our investments in loan items such as registered bonds and borrower’s note loans – valued at amortised cost – by €4.7bn, mostly at our primary life insurers.
Following a mid-year correction, the markets recovered between July and December, registering gains once more. The good performance of the stock market caused the balance sheet reserves of our equity portfolio to grow in the course of 2006. At the end of the year, net unrealised gains on non-fixed-interest securities available for sale totalled €8.5bn (7.3bn), thus exceeding the volume of the previous year by 16.0%.
Valuation reserves Our off-balance-sheet valuation reserves, i.e. the difference between the fair value of our investments not accounted for at fair value and their carrying amount, totalled €1.9bn (2.6bn) as at 31 December 2006. Although valuation reserves for land and buildings and for associates grew, the interest-rate trend meant these reserves showed a negative development for our portfolio of loans (in spite of its overall increase in size). Detailed information on the valuation reserves recognised in the balance sheet is provided on page 180 of the notes to the financial statements.
The development of the capital markets is described in detail in the section “Economic parameters” on page 61 f.
Result In the financial year 2006, we posted an excellent investment result of €8.9bn, albeit 18.0% below that of the previous year (10.8bn).
All figures in €m 31.12.2006 31.12.2006 31.12.2006 Prev. year Prev. year Prev. year *Including owner-occupied property.
MEAG offers retail and segregated funds for private and institutional investors. It largely uses the distribution channels of the ERGO Insurance Group companies for marketing retail funds in private-client business, where MEAG’s investment funds are offered as a supplement to conventional insurance products. When newly investing in MEAG investment funds, private investors continue to place great emphasis on security. Client demand remains strong especially for bond funds, where MEAG essentially pursues a conservative investment strategy.
In September 2006, MEAG successfully tendered for mandates for the statutory protection fund being developed since October 2006 by Protektor, the German life insurers’ protection facility. MEAG was awarded the contract for the entire administration, including risk management and accounting, as well as a partial mandate of over €100m for the portfolio management of securities. These funds already bolstered the assets managed for institutional clients in 2006.
In order to further extend its institutional real estate business, MEAG offers its property expertise in segregated real estate funds focusing on investments in office properties in Germany and the rest of Europe, and in large-scale European retail property. Last year, MEAG acquired mandates with a volume of over €250m in this segregated fund business.
As at 31 December 2006, MEAG had assets under management of €8.5bn (7.2bn) for institutional investors outside the Munich Re Group, recording growth of €1.3bn in external institutional business in the year under review.
Assets managed in private-client business totalled €2.7bn (3.3bn). After ERGO Trust GmbH was integrated into MEAG MUNICH ERGO AssetManagement GmbH in the first quarter of 2006, the private-client business managed by ERGO Trust was returned to ERGO, which explains the decrease in the figure for assets managed for private clients.
Investments for the benefit of life insurance policyholders who bear the investment risk 100 170 –41.2
liabilities, which are described on page 210 of the notes to the financial statements. Off-balance-sheet financing does not play a significant role in the Munich Re Group.
Essentially, we see efficient and transparent capital management as an appropriate means of achieving our goal of being recognised as a reliable partner in the capital markets. This should guarantee our ability to raise capital quickly and easily on the capital markets, especially for large potential growth opportunities.
Our internal risk model, which we use to analyse how certain risk scenarios affect segment results and investments, plays a central role in capital management. We determine our economic capital on the basis of the internal risk model data so that we are able to absorb two successive annual losses of a size expected only every 100 years. Next, the determined capital is allocated proportionately to divisional units in line with the volatility of their business activities. Our procedure in the primary insurance group also takes account of management factors arising mainly out of supervisory restrictions and clients’ participation in surpluses. We continuously review the assumptions on which the internal risk model is based and adjust them as required.
– By the balance sheet date, we had bought back shares to the value of approximately €250m within the framework of the share buy-back approved on 7 November 2006. The costs have been offset against retained earnings.
For further information regarding the valuation reserves for assets not accounted for at fair value, please see page 180.
As at 31 December 2006, Munich Reinsurance Company’s share capital of €587.7m was divided into 229,580,233 registered, no-par-value, fully paid shares. The shares are endowed with full voting and dividend rights, with the exception of the 3,964,060 shares held by the Munich Re Group itself (Section 71b of the German Stock Companies Act).
Changes in Group equity and in the valuation reserves not recognised in the balance sheet
Valuation reserves not recognised in the balance sheet, including those apportionable to minority interests and policyholders (before tax) 1.9 2.6 3.2 1.8 1.1 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
issued to staff were subject to a restriction on disposal until 30 November 2007. The control rights are exercised directly by the employees. There are no direct or indirect shareholdings in Munich Reinsurance Company that exceed 10% of the voting rights, nor are there any shares with special control rights.
Strategic debt We define as strategic debt all financial instruments with the character of outside financing that do not have a direct link with our operative business. It supplements our equity and is essentially designed to reduce the cost of capital and ensure that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we detail below the calculation of 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.
In 2003, the Munich Re Group strengthened its capitalisation with the subordinated bonds issued by Munich Re Finance B.V., which are recognised in part as own funds by the German Federal Financial Supervisory Authority (BaFin). They were placed in two tranches with nominal values of €3,000m and £300m each and will mature in 2023 (euro tranche) and 2028 (pound sterling tranche). The first possible redemption dates are 21 June 2013 (euro tranche) and 21 June 2018 (pound sterling tranche).
The bank borrowing of ERGO AG shown in the previous year was repaid as planned. The other strategic debt was incurred to finance our operating activities in the long term.
The interest expenses for strategic debt are shown separately in the consolidated income statement under “finance costs” and are explained in detail in the notes to the financial statements (see page 197 f.). As at 31 December 2006, our debt leverage was 13.3%, down 4.5 percentage points on the previous year, due to a reduction in strategic debt and an increase in Group equity. There are currently no plans to increase strategic debt.
solvency, the minimum equity required for the volume of business (required solvency margin) is compared with the eligible equity actually available (actual solvency margin) on the basis of the IFRS consolidated financial statements. In determining the eligible capital elements, the IFRS equity is adjusted; specifically, it is increased by portions of the subordinated liabilities and reduced by intangible assets. The Munich Re Group’s eligible capital is more than three times higher than the legal requirement.
Group solvency The Munich Re Group is subject not only to the supervisory requirements applying to individual insurance companies but also to supervision at Group level. Munich Reinsurance Company as the parent has introduced suitable control methods, and its reports to the German Federal Financial Supervisory Authority (BaFin) responsible for the Munich Re Group include supplementary aspects at Group level, such as shareholdings, consolidated financial data and intra-Group transactions. Solvency in the case of insurance companies is generally understood to be the ability of an insurer always to meet the obligations assumed under its contracts. This means an insurance company must fulfil specific minimum capital requirements. The aim of the “adjusted solvency” rules is to prevent the multiple use of equity to cover risks from underwriting business at different levels of the Group hierarchy. To calculate the adjusted
Rating Munich Re’s financial strength is generally evaluated by the leading rating agencies as very positive, and our ratings remain at a high level. In December 2006, Standard & Poor’s upgraded our rating from the third-best category, A+ (strong) to the second-best category, AA– (very strong) with a stable outlook. The reasons given by Standard & Poor’s for the upgrade are the sustained good operating performance, strong risk management, increased certainty about the adequacy of Munich Re’s reserves, and our strong competitive position, capitalisation and financial flexibility. Moody’s, A.M. Best and Fitch retained their good ratings from the previous year.
Analysis of the consolidated cash flow statement Our primary insurance and reinsurance operations have a significant influence on the cash flow of the Munich Re Group. We generally first collect the premiums for the risks assumed and do not make payments until later, in the event of loss. The cash flow statements of insurance companies are therefore of limited relevance. The cash flow statement is adjusted to eliminate the effects of fluctuations in exchange rates and changes in entities consolidated.
Munich Re Finance B.V., 6.75%, €3.0bn, Subordinated Bonds 2003/2023 a A A2 A
Munich Re America Corporation*, 7.45%, US$ 500m, Senior Notes 1996/2026 bbb A2 A–
Cash flows for the financial year –106 290 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Munich Re Group Annual Report 2006 Management report_Financial situation ing decline in policy terminations and to portfolio development and strong new business production, particularly at recently established companies abroad. Conversely, these provisions fell at our reinsurance companies as a result of our planned reduction in a high-volume quota share reinsurance treaty. The loss reserves at the reinsurers in the Munich Re Group declined primarily because of the settlement of a large number of claims from prior years in respect of which we had posted reserves, and the reduced need for new reserves due to the absence of severe natural catastrophes. The positive cash flow generated by the fall in the balance of other receivables and liabilities of €1,303m resulted from rearrangements of the investment portfolio. The net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows from operating activities – are essentially attributable to the disposal of securities available for sale.
The cash outflows for investing activities were determined by payments for the acquisition of investments. These exceeded the inflows from the sale/maturity of investments by €4,157m. The inflows from the sale of consolidated companies include the ADA-HAS Group. The sales consideration of €10m was received in cash. In the financial year 2006, we acquired a 75% stake in the I
Primary insurance In primary insurance, our products and services are mainly for private clients throughout Europe, who make up the bulk of our clientele, along with small and medium-sized firms. They can choose from the full range of product groups: life and health insurance, property-casualty insurance, legal expenses insurance, travel insurance and assistance services, fund products offered by MEAG as the asset manager of Munich Re and ERGO, and bank products from our cooperation partner HypoVereinsbank. With this
ERGO’s professional client management has been tested for client satisfaction and service by the German technical inspection agency TÜV and rated as “good”. The quality of its claims management is ISO9001-certified, for which regular on-the-spot checks are made in addition to the extensive audit and claims controlling that occurs.
There are now more than 40 topic networks, in which 650 staff from over 20 countries are engaged. They expand our know-how, package it, and liaise with clients and colleagues alike.
Thus, for example, in the health markets of Asia and Latin America, we are implementing a new business model called CRI (Consultative Reinsurance). Companies in these regions are faced with the challenge of utilising growth opportunities but at the same time managing the rising health costs and risks. We offer our clients ongoing consultancy as an integrated component in a reinsurance programme. Through our international network of health market specialists, we support them in introducing appropriate actuarial methods, in improving the efficiency of their underwriting, and in managing insurance fraud more effectively. CRI strengthens our role as an active partner in risk management.
Innovative solutions that tap into new business potential are also developed by the divisional units from their direct contact with clients. This is the case, for example, in agricultural insurance in the US market, which is subject to extensive state regulation. Services, however, provide a lever for winning a larger market share. Munich Re has successfully taken advantage of this situation by entering
In order to be able to work with all the available information, ERGO collaborates closely with the Intergenerational Compacts Research Centre at the Albert Ludwig University in Freiburg, whose areas of research include old-age provision, healthcare, long term care and tax. Our product development combines the scientific findings of the research centre with our own knowledge and ERGO insurers’ own extensive experience with clients.
ERGO’s life insurers also use their own mortality tables in order to have customised data available for their specifically structured portfolios. The health insurers make use of the mortality tables developed by the German Association of Private Health Insurers. Our actuaries work closely with the German Association of Actuaries to constantly extend and update their knowledge of client life expectancy.
Facts and figures On 31 December 2006, 37,210 (37,953) staff were employed with the Munich Re Group worldwide, 6,928 (6,798) in reinsurance, 29,509 (30,465) in primary insurance and 773 (690) in asset management. In primary insurance, the number of employees sank by 956 to 29,509 compared with the end of 2005. This largely reflects the changes in Group companies: ERGO’s sale of the IT service provider ADA alone resulted in a reduction of around 1,100 employees in Germany. The acquisition of the Turkish I
Munich Re’s staff turnover rate has been consistently low for years, a fact that indicates our attractiveness as an employer and our employees’ identification with the Company. ERGO’s higher figure is mainly attributable to group acquisitions and disposals.
The charities Victorianer helfen and DASler helfen have the same objective. Financed mainly from donations of a few cents that Victoria and D.A.S. staff make from their salaries and commissions each month, they support social projects in Germany and abroad. Employees of KarstadtQuelle Versicherungen collect money on campaign days each year for the Madeleine Schickedanz KinderKrebsStiftung, which carries out research into child cancer.
Munich Re Group Annual Report 2006 Management report_Other success factors physically disabled colleagues – a project supported by the company’s own foundation, Fundación Integral. Inspired by this idea, ERGO Hestia in Poland has set up a similar foundation.
Information security Munich Re ensures the security of all its data, computers and networks worldwide. IT security in primary insurance and reinsurance is organised in separate, but individually effective structures.
However, the security organisation does not just concern itself with protective measures. It also acts as a consultant for the divisional units in jointly assessing information security risks at potential clients. To this end, it has delegated a permanent representative to the Information Technology Topic Network and carries out or partners information risk assessments.
ERGO’s IT security is part of our cross-corporate IT security management, which embraces four levels: security policy, guidelines, concepts and technical implementation. Responsibility for the management of information security in the ERGO Group lies with the IT Security Officer, who is supported by the IT Security Management Board – a strategy and controlling body.
ERGO’s security management is being continually improved and extended with a view to gearing it to international standards – we are aiming for certification to ISO 27001 by 2009. We are also preparing for the developments of Solvency II and the requirements of ISO 27001, which go beyond the basic protection demanded by the German Federal Office for Information Security, by building up an information security management system in conjunction with operational risk management in the IT sector. This involves investigating all the main points of IT security, analysing the risks identified in their entirety, and putting in place security measures where there is a need for protection.
GENESYS Our primary insurers are also standardising their business processes and developing new software applications for this purpose. Since 2003, ERGO has gradually been introducing a uniform IT landscape as the precondition for harmonised processes. The Hamburg-Mannheimer companies were successfully integrated into the system in 2003, followed by D.A.S. and Victoria in 2004. At the start of 2005, we began work on the project GENESYS in health business. Victoria Krankenversicherung AG was converted in 2006 and will be followed by DKV in April 2007. IT systems at ERGO’s companies outside Germany are also being gradually standardised – a process steered by an international IT Board.
Corporate legal structure Munich Re 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 are derived from this Act and the
Board of Management Duties and responsibilities of the Board of Management The Board of Management is responsible for managing the Company. In doing so, it must safeguard Company interests and endeavour to achieve a long-term increase in the value of the Company.
In compliance with the law and the Company’s Articles of Association, Munich Re’s Supervisory Board has 20 members. Half are elected representatives of the employees, and half representatives of the shareholders, elected by the Annual General Meeting.
Last year, the Supervisory Board again reviewed the efficiency of the Board of Management’s activities. The main focus was on the content and timing of reports from the Board of Management to the Supervisory Board. This was assessed as generally positive and efficient, as was the improvement in the efficiency of the Supervisory Board’s work in the financial year 2006.
Recommendations and suggestions of the German Corporate Governance Code In November 2006, the Board of Management and the Supervisory Board published the following declaration of conformity, in accordance with Section 161 of the German Stock Companies Act: ”Since 24 July 2006, Munich Re has complied with all the recommendations of the Government Commission’s German Corporate Governance Code of 12 June 2006 (published on 24 July 2006).
Since the last declaration of conformity in November 2005, Munich Re has fulfilled – with only one exception – the recommendations of the Government Commission’s German Corporate Governance Code in the version of 2 June 2005 (published on 20 July 2005). The exception involved the since-deleted recommendation in item 4.2.4 sentence 2 of the German Corporate Governance Code (individualised disclosure of the Board of Management’s remuneration in the notes to the consolidated financial statements).”
Munich Re also complies with all the suggestions of the Code with only one exception. This concerns item 5.4.7 paragraph 2 sentence 2 of the Code, which suggests that the result-related remuneration of members of the Supervisory Board should include components based on the company’s long-term performance. We consider that a convincing remuneration model for this is still lacking and that our remuneration model, approved by the Annual General Meeting in 2005, is a good solution in terms of corporate governance.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits are granted according to function, and are in line with market trends. Tax on the related benefits is subject to the individual tax rates of the respective Board member; the tax burden is borne by the Company.
Variable components Short-term compensation component – Annual bonus This compensation component is based on different categories of objectives. The targets and scaling for Group, corporate and divisional objectives are geared to particular indicators; individual objectives form the basis for the achievement of personal targets. The key indicator used for the Group objective is return on risk-adjusted capital – RORAC, which is comprised of key figures from external accounting, and from other key portfolio and performance data. Information on the definition of RORAC is provided on page 54 f. We use the performance measures embodied in value-based management for the corporate and divisional objectives.
The processes defined to specify objectives and assess their achievement also involve the external auditor, who examines targets and their fulfilment for correctness, objectivity and reliability. The audit results and any poten-
Structure of the remuneration system for the Board of Management In compliance with the German Corporate Governance Code, we here explain the principles of the remuneration system for Munich Re’s Board of Management and the structuring of the individual remuneration components.
Structure and system of the Board of Management’s remuneration effective 1 January 2006
Basic remuneration, remuneration Function, responsibility, Fixed Contractual stipulations Monthly in kind/fringe benefits (company length of service on Board car, healthcare, security measures, insurances)
Share-price-based Appreciation in share price 0–150% > End of vesting period As from third year of compensation component (two years) plan until end of plan Long-term incentive plan > 20% share price increase (stock appreciation rights; > MR shares have outperformed term: seven years) EURO STOXX 50 twice at the end of three-month period during the term of the plan
Retirement plan Basic remuneration Fixed > Retirement – Pension entitlement Number of years on the Board > Insured event > Premature termination or non-extension of employment contract under certain circumstances
Share-price-based compensation component – 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 is set up each year, and the participants receive 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 at least twice at the end of a three-month period during the term of the plan. The exercise hurdles are exacting and in keeping with the German Corporate Governance Code.
In the case of 100% achievement of objectives (annual bonus, medium-term bonus) and based on the imputed value of the share-price-linked compensation (long-term incentive plan) at the granting date, the weightings of the individual components in terms of total remuneration are as follows: basic remuneration approximately 25%, annual bonus approximately 35%, medium-term bonus approximately 20%, and long-term incentive plan approximately 20%. Annual bonus, medium-term bonus and long-term incentive plan together form a well-balanced incentive system.
A different arrangement applies to the remuneration structure of Mr. Phelan, who is not only a member of the Board of Management but also the President, Chief Executive Officer and Chairman of the Board of Munich Re America Corporation. He therefore has special remuneration agreements, with the major portion of his income derived from the USA.
The variable compensation includes allocations to provisions for the annual bonus likely on the basis of current estimates and for the medium-term bonus. The sharepriced -based compensation component is accounted for at fair value at the granting date. Information on the fair value can be found in the notes to the consolidated financial statements on page 207 f. Whether the variable components 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, and on the exercise conditions of the long-term incentive plans. Munich Re shares have been acquired to cover future obligations arising from the long-term incentive plans so as to neutralise the expenses resulting from a growth in value of the stock appreciation rights with an increase in the value of the share portfolio.
2 Member of the Board of Management since 1 October 2006. 3 Remuneration in kind and fringe benefits include travel expenses from Princeton to Munich.
increase was solely attributable to the high provisions for the variable remuneration, mainly due to the very good result for the year under review.
The compensation components that Mr. Phelan received for his functions at Munich Re America Corporation is included in the total remuneration.
Pension commitments Personnel expenses of T€17 (120) were incurred for retired members of the Board of Management. As at 31 December 2006, the pension provisions and provisions for comparable benefits for the retired members of the Board of Management or their surviving dependants amounted to T€0 (0) after deduction of plan assets held by a separate entity (e.g. under a contractual trust agreement).
Total remuneration of the Supervisory Board The remuneration of the Supervisory Board was restructured by resolution of the 2005 Annual General Meeting to take account of the increased demands placed on the activities of Supervisory Board members in connection with the corporate governance discussion concerning transparent company management. At the same time, the change counters reservations about linking performance-oriented remuneration components to the dividend. The regulation applicable since then provides for a fixed remuneration component of €45,000 and a variable result-related remuneration component. The Chairman of the Supervisory Board receives twice, and the Deputy Chairman one-anda -half times, this fixed and variable remuneration.
The result-related annual 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
Name Pension Commitments Personnel commitments for bridging expenses for as at amounts increasing All figures in € 1.1.2007 the provision
Karl Wittmann 244,800.00 – 0.00 1 Pension commitment per annum after the age of 60. 2 Bridging amounts for the period between retirement and reaching the age of 60 (March–November 2007). 3 Pension commitment from Munich Re America.
Adherence to “profit before growth” strategy Result target of 15% on risk-adjusted capital
In reinsurance, we will continue to systematically pursue our policy of risk-adequate prices, terms and conditions. We aim for profitable growth in both renewal business and new business. There is no alternative to profitable underwriting and active risk diversification: it is the only way to create long-term added value for our shareholders and clients alike.
Our commercial success in 2006 and the gratifying trend of the past three years are proof that we are on the right track with our strictly profit-based corporate policy. Given the very good performance of our business, bolstered by a low major claims burden from natural catastrophes and favourable developments in the capital markets, we clearly surpassed our target by achieving a profit for the year of over €3.5bn (2.8bn) and a return on riskadjusted capital (RORAC) of 20.3%. For 2007, we are adhering to our objective of a 15% RORAC independent of the market cycles. Although we will not finalise and publish the risk-adjusted capital applicable for 2007 until we have comprehensively assessed and published our risk position in May 2007, the resultant consolidated profit should lie between €2.8bn and €3.2bn. This would be equivalent to a return on equity (ROE) ranging between nearly 11% and 12%. Details of our corporate steering systems and in particular of our RORAC target figure are provided on page 52.
We estimate that growth in the United Kingdom will also lose momentum.
The anticipated gradual slowing of the global economy is likely to be reflected in economic development in the emerging countries as well. Growth rates should decelerate somewhat in most regions, including Latin America, and central and eastern Europe. The Asian export markets will probably be affected by the economic slowdown in the US and the slightly reduced economic growth forecast for China.
Capital markets The environment for the most important international stock markets is likely to become more difficult as a consequence of the anticipated cooling of the economy in the USA and the eurozone. Despite interest-rate increases by a number of central banks, there will probably be only limited scope for significantly higher long-term yields on the bond markets.
Insurance industry If the dynamics of the world economy gradually slow down as expected in 2007, growth in the global insurance industry is likely to be subdued. The demand for insurance cover in the emerging markets should remain comparatively high, however. The German economy will probably also provide only weak impulses for property-casualty insurance in 2007, a situation that is bound to be aggravated by the current stage of the insurance cycle. The concept of private provision is likely to come more strongly to the fore in the medium to long term, not only in Germany but also in many other industrial nations, given that demographic trends are increasingly pushing state social security systems to their limits. Private health insurance should benefit from this environment, yet the political risks remain, as is illustrated by the discussion about healthcare reform in Germany. We feel that only by strengthening, not weakening, private provision and expanding its funding basis can Germany’s structural problems be solved in the long term.
In the renewals of reinsurance treaties at the turn of the year 2006/2007, price trends varied between classes of business and regions. Overall, rates fell slightly, but they still offer a good level of profitability. We anticipate that the market will tend to become more difficult. In an environment of increasing competition, it is especially in the interests of end-clients, primary insurers and reinsurers alike to make sure that prices, terms and conditions remain riskadequate.
The insurance industry must cope not only with macroeconomic uncertainties but also with political risks, including state influence on private health insurance and other disadvantageous measures in the field of social, economic and tax policy. Political influences have grown steadily in recent years and these are complicating business management prognoses.
Reinsurance Reinsurance offers considerable promise for the future, and we project that it will grow worldwide in the next decade. The development of property-casualty business is likely to be surpassed by the dynamic growth of life and health reinsurance. We predict the highest percentage growth rates will come from the emerging markets of Asia and Latin America. Given their higher starting level, Europe and North America should attain significantly greater absolute growth, albeit with lower percentage increases. Thanks to our global presence and special initiatives to expand our business in rapidly growing regions, the Munich Re Group is excellently positioned to take advantage of market opportunities in all areas of the world and in all fields of business.
In life reinsurance, premium income will experience a moderate decline in 2007, due to the scheduled reduction of a reinsurance treaty with a large premium volume. To consistently exploit new opportunities in the emerging markets, we have appreciably expanded our units specialised in the private-provision market, most recently by setting up a new life reinsurance subsidiary in Moscow. Fundamental growth impulses for our future new business should also come from other developments, e.g. the restructuring of the European solvency regime (Solvency II), the continuing privatisation trend in old-age and disability provision, and the dynamic expansion of the life insurance markets in Asia and eastern Europe.
Chinese market. Rates for the renewed portfolio were slightly lower overall, but remain at a good profitability level.
We are proceeding on the assumption that premium development in the health segment will exceed market growth in 2007. Our product sales in supplementary health insurance should be further invigorated by the growing awareness among clients that they themselves must bridge the gaps in state health insurance coverage by taking out private insurance. Our planning for German comprehensive health cover is currently based on the assumption that the health reform’s introduction of a three-year waiting period for those wishing to switch over to private health insurance will impact new business development negatively by approximately 15%. Business outside Germany should continue to develop strongly.
Premium income in property-casualty insurance should grow significantly, mainly owing to good foreign business buoyed by the consolidation of the Turkish I
All in all, gross premiums written by our primary insurers, which in addition to the ERGO Insurance Group essentially comprise Europäische Reiseversicherung and the Watkins Syndicate, should total between €17.0bn and €17.5bn in 2007, an increase of 1.5% to 4.5%.
In 2007, we will adhere to the measures previously introduced to improve our result. Cost discipline remains a central issue for us, and we will consistently take advantage of further possibilities for reducing costs. Overall, we aim for a consolidated result in primary insurance of €600m to €750m. The fact that higher results were achieved in 2005 and 2006 was attributable to the exceptionally good investment result in both years and to the one-off tax effect in 2006. We expect we will be able to maintain our successful course of the past few years in our operative business in 2007.
The US dollar has lost considerable ground in foreign exchange markets since November 2006. For 2007, we expect the euro to remain strong and the US dollar to trend somewhat higher again in the course of the year.
Share prices should experience a moderate increase by the end of 2007. In view of the risks described, we will, if necessary, reduce the proportion of our investments in equities.
In 2006, we consistently pursued our strategy of reducing the historically evolved concentration of our investments in the financial services sector and will continue to actively diversify our investment risks in future, too.
In 2007, we intend to sell our shares in the segregated real estate fund OIK MediClin, in which we hold a majority stake via two Group companies. The fund itself owns 21 hospital properties in Germany.
By achieving a 5.0% return on investment in the past financial year, we again exceeded our target of 4.5%. For the current financial year, we project that the return on investments at market values will again amount to 4.5%, equivalent to an investment result of approximately €8.0bn (which will be credited to the segment results in primary insurance and reinsurance).
With our effective integrated risk management we aim to: – protect the reputation of the Munich Re Group; – ensure the highest degree of confidence in meeting policyholders’ claims; and – enable the Munich Re Group to protect and sustainably generate shareholder value.
Risk management framework: Principles and governance The functions and responsibilities of all participants – be they members of the Board of Management, executives, decentralised or central risk controllers or risk managers – are clearly defined. The Board of Management is responsible for the Group-wide, cross-divisional planning, steering and controlling of the risk landscape as a whole.
By separating accountability and monitoring within insurance and asset management, we ensure the effective management of our risks.
Risk appetite and risk-based capital The basis for accepting risks is determined by the Board of Management’s requirements and decisions on risk appetite. These are defined by the Group’s strategic risk management framework (developed in 2006 and implemented as from 2007) and consider the impact on capitalisation, liquidity and earnings volatility. They include “whole portfolio criteria” as well as “supplementary” criteria designed to limit and steer peak exposures, concentrations, accumulations and systematic risks across the Group.
We determine our required economic capital using a robust market-consistent economic capital model, the Munich Re Capital Model. It is calibrated to absorb two successive annual losses of a size only to be expected every 100 years. The model is built using a series of modules for each of our business segments. For example, for our scenarios of natural hazards worldwide, we utilise the expertise of our geoscience teams, who together with our Corporate Underwriting unit test and refine external models and internally-built models to represent our global exposures to hurricanes, winter storms, typhoons, earthquakes, flood and other natural perils. The modules are aggregated using a conservative measure of the dependence of the risks in the portfolio, and a series of stress tests are applied to check the resilience of the implied “economic capital buffer” (i.e. excess of available financial resources over required risk capital). In the next step, the required risk capital is allocated to the individual divisional units on a proportional basis in line with the volatility of their business activities.
In primary insurance, the procedure is substantially influenced by other steering aspects, such as supervisory restrictions and policyholders’ participation in surplus. At the present time, for our primary insurance operations, required risk capital is therefore determined at a legal-entity level, taking these features into account. In reinsurance, where the majority of our business is written through Munich Reinsurance Company or one of its branches, we aggregate risk capital requirements at reinsurance-segment level. In this way, we evaluate the Munich Re Group’s risk capital with regard to the fungibility of risk and capital.
Solvency II requirements (such as recognition of internal models, diversification benefits and the lead regulator concept ) may make it easier in the future to recognise diversification benefits between primary insurance legal entities (and between reinsurance and primary insurance business segments) and reduce required capital accordingly.
Risk measurement As a global risk carrier, we can diversify our portfolio through the broadest possible mix and spread of individual risks, thus significantly reducing the volatility of total claims payments and substantially increasing the value added by all divisional units.
We are constantly refining the tools with which we monitor and manage risks. Our suite of tools for measuring risks is tailored to the business or operational segment we are monitoring. In each case, the lead risk measure is an economic risk measure designed to best reflect the risk in our portfolio. We also regularly compare these economic risk measures with both regulatory and rating-agency measures as part of our active capital management process. These comparisons are performed at many levels including Group, segment, legal entity, risk type, geographical and line of business. We also regularly perform outside-in benchmarking of our capital model results and participate in industry surveys to constantly challenge and continuously refine our risk measurement tools so that they continue to reflect the most faithful representation of the economic risks in our portfolio. We have also adopted the Group of 30 recommendations for disclosure of economic capital to assist users of financial disclosures in making comparisons with our peers. In this context, we have published the results of our Munich Re Capital Model on our website and have also presented them to analysts for each year commencing 1 January since the calendar year 2001. The results of this for the year commencing 1 January 2007 will be published in May 2007. To improve supervision of risks, we distinguish between market, credit, liquidity, insurance and operational risks.
Munich Re Group Annual Report 2006 Management report_Risk report is an internal ad-hoc reporting process to ensure we can take immediate action if risks or hazards emerge suddenly. The Board of Management or its respective committees may also be called within 24 hours’ notice in addition to the regular meetings. Thanks to information from the risk assessments, the Board of Management is notified at an early stage about risk-relevant developments, and riskreduction measures can be recommended and coordinated.
Quantitative risk measurement: Modelling and aggregation For a quantitative assessment of the overall risk situation, an internal model has been developed and maintained. The design of our internal model follows a bottom-up approach. We have selected the financial year as the period for evaluating risk capital requirements at Group level. Risks within this period are covered by risk-based capital derived from our specified risk tolerance. All risks beyond the annual timeline are accounted for by the costs of holding risk-based capital over time. In so doing, we follow the “cost of capital” approach.
When determining risk-based capital, we distinguish between market, credit, insurance and operational risks. Within insurance risks, we distinguish between propertycasualty and life and health risks. Further subcategories are applied to these risk types – for example, for the property -casualty reinsurance segment, we distinguish between natural catastrophe risks, other accumulation losses (such as terrorism or “liability catastrophes”), large losses and basic losses. Basic losses can also be broken down into premium insufficiency risks and the risks of adverse loss development. Those risks are first modelled separately. In a further step, the risks are aggregated using a combination of empirical and judgemental techniques that allow for the risks of so-called “tail dependencies” (e.g. the risk that extreme events happen at the same time in different lines of business, geographies, and risk types) and the overall risk is thereby quantified.
Furthermore, for individual reinsurance products involving explicit market risks, such as interest-rate or currency risks, asset-liability management principles are applied at micro (e.g. treaty) level when the products are being designed and priced. This is especially important for life business and long-tail property-casualty business, where long time horizons are involved. The companies entrusted with our asset management, in particular MEAG, are given mandates by the insurance and reinsurance companies in the Munich Re Group based on uniform investment criteria (General Investment Guidelines) established by the Board of Management.
When modelling these risks, state-of-the-art models are used which allow, for example, for “fat tails” in equity market risk distributions or all different shapes of interestrate curves within the interest-rate modelling. Our stochastic modelling is supplemented by applying stress tests, sensitivity and duration analyses.
In our real estate investments, we are constantly optimising the return and risk profile. We are achieving this by rejuvenating our portfolio on an ongoing basis, diversifying internationally and investing in top-class commercial real estate primarily located in major European cities. In addition, we are pursuing the aim of reducing the concentration of our real estate investments in Germany, of which we sold a significant package in 2006. To mitigate the risk of loss of rental income, we structure our portfolio by selecting tenants of high credit-standing.
We only run currency risks to a small extent, since we practise a policy of currency matching. This means that we
The following sensitivity analyses for market risks serve to estimate potential changes in the value of investments under hypothetically possible market scenarios.
The review is based on the investments of the Munich Re Group at 31 December 2006.
Credit risks Risk management processes Our internal risk model also takes account of a wide range of specific drivers that impact on our credit exposure. Credit risks emanating from the insurance and investment sides of the balance sheet are considered. On the insurance side, we model trade credit, surety and bonding, credit enhancement, and political risks. We also take into consideration credit risks associated with claims on our retrocessionaires after allowing for any collateralisation. On the investment side, credit risks are measured and limited using the credit-value-at-risk (CVaR) approach with a standard “asset value” model. The main input parameters are our investment volume, the migration matrix between different rating classes, discounting curves and recovery rates. The correlated rating class migrations and defaults of the respective bond issuers are modelled using a Monte Carlo simulation. Revaluation of our investments under these rating scenarios ultimately leads to a future profit and loss distribution. Hence, we can then adequately capitalise for this risk and manage our portfolio with respect to its expected and unexpected loss.
This allows us to control the exposure on a single debtor and to steer towards a well-balanced credit risk portfolio. Furthermore, we are able to shift available capacities between the insurance and investment sides of the balance sheet.
Insurance risks We define technical insurance risk as the risk of insurance losses exceeding our expectations. Such a development may result from different sources (cf. section on quantitative risk management on page 127). We supplement our quantitative risk management of these risks with qualitative considerations. For example, our Corporate Under-
The interaction of risks of change and risk concentrations may lead to considerable loss potential. This not only involves regional concentrations but can also occur within a class of business or across several classes owing to events like natural catastrophes, pandemics or terrorist attacks. Our Integrated Risk Management Division is responsible for identifying, analysing, monitoring and coordinating cross-segment and cross-balance-sheet accumulations or concentrations. It works closely with the experts in each segment to advise the Board of Management ’s relevant Risk Committees on the likely impacts of such accumulations on our Group-wide exposures, utilising the expertise in our various underwriting and technical specialist areas.
Within the Munich Re Capital Model, risks from natural catastrophes are represented in their entire stochasticity, i.e. by aggregating the full distributions. With this method, it is assured that the tails of the nat cat loss distributions – and the associated possible losses – are captured when determining the capital requirements needed to back nat cat business.
For Munich Re, terrorism does not constitute an insurable peril like earthquake, storm or flood. Unlike natural hazards, terrorism does not occur randomly, and its probabilities and consequences cannot be modelled and quantified with scientific data and methods. The assessment of terrorism risk is therefore based on a mixture of qualitative and quantitative data (e.g. for estimating property damage consequent to an attack of a predefined magnitude), with information on terrorism being inconsistent and not available to all parties in the same detail. This means that accumulation scenarios are extremely difficult to gauge. Significant attacks, particularly those conducted with chemical, biological, radioactive or nuclear devices, might far exceed the capability of the insurance industry as a whole. Given the additional uncertainty about the frequency of terrorism attacks, it is evident that only governments
Munich Re Group Annual Report 2006 Management report_Risk report can act as viable reinsurers of last resort. Munich Re therefore actively supports long-term market solutions, requiring a risk partnership between risk managers, insurers, reinsurers, capital markets and governments. The challenge is to find the most efficient way to achieve such publicprivate partnerships.
A pandemic is defined as a geographically widespread outbreak of an infectious disease with many people being affected at the same time. Infection figures may slowly increase over time – such as with AIDS – or suddenly explode, e.g. in case of an influenza pandemic. The latter is considered a shock event and may affect our portfolio in manifold ways. The major difference to nat cat risks is that sound statistical data are lacking, as only few pandemics have occurred in the past.
Munich Re has been addressing the issue of pandemics for several years, in particular in life reinsurance and primary insurance. In 2006, scenarios for a flu pandemic were refined to comprehensively assess the Group exposure for all relevant segments. It is important to mention that mortality – basically due to better hygienic conditions and medical progress – improved significantly during the first half of the last century. Therefore, historical death tolls, e.g. from the Spanish Flu, cannot be simply extrapolated to today’s world. Additional risk-limiting measures are a global surveillance system and local emergency plans. However, global air travel as well as increasing areas with high population density (so-called megacities) might accelerate the spread of infectious diseases and thus aggravate the risk.
Insurance risk: Property-casualty Risk management processes Binding underwriting guidelines and limits and clear underwriting authorities precisely regulate who is authorised and accountable for concluding insurance and reinsurance contracts in the Munich Re Group and at what prices, terms and conditions. We regularly check compliance with these guidelines in our underwriting reviews. We closely observe developments in our portfolio, reacting where necessary with guidance for our underwriting in the form of “mandatory guidelines”, “divisional guidelines” or “best-practice standards”. Deviations from the mandatory guidelines are only permitted with the approval of the Board of Management or one of its Risk Committees and require a comprehensive assessment of the risks associated with such deviations. In the case of divisional guidelines, the responsible Board member decides who in the divisions is authorised to allow deviations.
Risk exposures The notes to the consolidated financial statements include a differentiated analysis of the factors influencing the technical provisions in property-casualty insurance, such as estimating claims expenditure. This presentation is in compliance with IFRS 4 accounting requirements.
In reinsurance, we calculate the biometric risk mainly on the basis of tables relating to mortality and claims development, published by national actuarial associations. These tables are modified in accordance with the experience observed in the reinsured portfolios and with the assistance of our Centre of Competence for Biosciences to reflect future trends. Lapse risks can be reduced in insurance and reinsurance by means of suitable product and contract design. We estimate the residual lapse risk by means of product-specific portfolio analyses and take this into account in our pricing.
Furthermore, as a matter of principle, we use marketconsistent assumptions for determining the technically risk-adequate price for each contract.
Risk exposures The notes to the consolidated financial statements include a differentiated analysis of how the parameters determining the underwriting items of the balance sheet affect the risks in life insurance and reinsurance. This presentation is in compliance with IFRS 4 accounting requirements.
For our life reinsurance and primary life and health insurance business, our embedded value disclosure provides details of the sensitivity of the embedded value and the value added by new business to factors such as changes in mortality/morbidity, lapse rates, expenses, interest rates, and equity and property market value changes. The disclosure follows the Additional Guidance on European Embedded Value Disclosures as published by the CFO Forum, an organisation of the Chief Financial Officers of large insurance companies, in September 2005.
Compliance with antitrust regulations is a basic principle of Munich Re’s business policy. To prevent violations, staff are informed about antitrust regulations and are expected to comply with them. Line managers have been entrusted with delegated responsibilities to ensure compliance in this regard.
We attach particular importance to precautionary measures that ensure continuity of our operations in an emergency or crisis situation. Business processes critical to value creation can be maintained or resumed as quickly as possible in such cases. Responsibility for establishing and monitoring this business continuity process in the Munich Re Group has been entrusted to a separate unit, which is guided by internationally recognised business continuity management standards (e.g. PAS 56).
Risks in the area of information technology and project risks Munich Re’s global business and Group-wide risk management require an organisational and technical networking of our business units and systems. We are dependent on electronic communications technology, the complexity of which is continually increasing. The significance of the stored and transmitted information is growing as well. As a result, we are also increasingly exposed not only to IT security risks (such as breakdowns and outages, disruptions due to viruses, attacks by hackers and theft of data) but also to the risk of theft of information through the deception of staff (”social engineering”).
These risks are identified and limited by decentralised security organisations that liaise closely. Their procedures are constantly being improved and adjusted to take into account the latest knowledge and state-of-the-art techniques. Our security regulations embrace not only the technical design of hardware and software systems but also functional security structures and organisational measures, including training staff in the proper handling of systems and data.
Various major projects are currently being realised in our primary insurance and reinsurance business that, among other things, are integrating information architecture in the back-office area to an ever greater extent. Considerable project risks are related to size and complexity of such projects. Proceeding from project management, Munich Re’s project landscape will be made more transparent and the interfaces of individual projects enhanced by means of multi-project management designed to assess and control interdependencies better. In addition, the dependencies and priorities within the systems architecture are analysed and addressed by specially appointed committees.
The conclusion of our internal IT project Gloria in 2006 marked an important milestone in the unification – on the basis of an SAP standard product – of the entire reinsurance group’s IT and process landscape (more information on this may be found on page 109). This system, which has now gone live at Munich Re Munich, will successively be extended to the rest of the reinsurance companies in the Group, whilst additional systems that build on it are being designed and implemented.
ation requirements of other countries are enforced by means of intensive and widespread training measures for our staff.
With our specially tailored programme of qualification and further training measures, we make sure that our staff are able to adapt to current market demands.
Targeted personnel marketing measures, staff potential assessment and development schemes, and systematic succession planning are designed to reduce the risk of shortages in qualified staff. Modern management tools and adequate monetary and non-monetary incentives ensure a high level of motivation.
– In connection with the attack on the World Trade Center of 11 September 2001, a federal court has upheld two district court rulings which had earlier found that the attack on the two WTC towers should be treated either as one or as two separate events, depending on the wording of the insurance policies. The remit of the Court of Appeals was solely to establish whether procedural errors alleged by the parties to the dispute warranted fresh proceedings in a court of the first instance. As the objections were dismissed, the legal uncertainty regarding the loss event issue is now finally resolved. Since the rulings of the courts of first instance are already reflected in our ultimate loss estimates, the decision will not affect our projected US$ 2.6bn total WTC claims bill. Confirmation of the Wilprop decision will, however, enable Munich Re to defend itself against additional financial burdens.
– As a consequence of the severe hurricanes of 2005, particularly Katrina, hundreds of lawsuits against diverse insurers are still pending in the affected US states. Plaintiffs with private buildings insurance are attempting to circumvent the exclusion of all flood damage routinely
Munich Re Group Annual Report 2006 Management report_Risk report contained in such policies. The fact is that the damage along the coast was caused mainly by the storm surge accompanying Katrina rather than as a direct result of the wind. Despite the good arguments of the insurers (the exclusion of flood damage in private buildings insurance policies has been established practice for years and has been approved by the regulatory authorities ) the outcome of the lawsuits is at present difficult to assess, not least owing to public pressure on the insurance industry and the uncertainties inherent in jury decisions.
As a matter of general principle, our economists constantly study and monitor the economic and political situation of our main markets and inform the Board of Management without delay about relevant trends so that, if necessary, suitable risk mitigation or management measures can be taken. Conceivable scenarios are also discussed and coordinated with our asset management company MEAG to enable us to react promptly and appropriately in respect of our held investments.
One of the main risks for any company is failing to recognise new business opportunities that maximise the company ’s franchise value. We counter this danger by, among other things, integrating innovation teams into our operative reinsurance units in order to tap into new product and client segments at an early stage. This approach is also designed to ensure that we identify and work on topical market and client issues, as well as fields of knowledge that are of critical importance for the future. Furthermore, our steering tools are increasingly oriented towards the key drivers of new business value – for example, in the life reinsurance and primary life and health segments, management compensation is explicitly linked to the meeting of value added by new business targets. These targets are not top-line growth-oriented, but rather bottom-line-oriented – meaning that management is incentivised to grow the franchise in a sustainable and profitable way.
Status quo We see ourselves in a position to sustain the level of profitability we have achieved in recent years, adjusted to eliminate the effects of exceptionally low claims expenditure for natural catastrophes and particularly favourable capital market conditions. We therefore assess the Munich Re Group’s risk situation as manageable and under control.
Making our underwriting profitable and managing our processes with expertise and a constant view to optimisation – these are key to our success.
Munich Re Group Annual Report 2006 Consolidated financial statements and notes
Standards or changes in standards not yet entered into force 158
(C) Investments for the benefit of life insurance policyholders who bear the investment risk 160
(23) Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 187
Consolidated financial statements Consolidated balance sheet as at 31 December 2006
II. Investments in affiliated companies and associates (4) 1,303 1,312 –9 –0.7
V. Deposits retained on assumed reinsurance (9) 11,931 14,581 –2,650 –18.2
C. Investments for the benefit of life insurance policyholders who bear the investment risk 1,820 1,430 390 27.3
D. Ceded share ot technical provisions (11) 6,593 7,980 –1,387 –17.4
Thereof: – Owner-occupied property held for sale (16) 66 – 66 –
IV. Consolidated result attributable to Munich Re equity holders 3,440 2,679 761 28.4
II. Provision for future policy benefits (20) 94,660 94,445 215 0.2
III. Other liabilities (27) 10,015 12,288 –2,273 –18.5 Thereof: – Amounts due to banks relating to disposal groups (16) 231 – 231 –
Items Notes Prev. year* Change €m €m €m €m €m %
2. Investment result (29) – Investment income 12,382 13,415 –1,033 –7.7
– Ceded share 1,131 2,208 –1,077 –48.8 5. Operating expenses (32)
Total expenses (4–6) 40,876 44,343 –3,467 –7.8 7. Result before impairment losses of goodwill 5,498 4,150 1,348 32.5 8. Impairment losses of goodwill (1) 4 7 –3 –42.9
Thereof: – Attributable to Munich Re equity holders 3,440 2,679 761 28.4 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Currency translation – Gains (losses) recognised in equity –594 651 – Included in the income statement – –
Total recognised income and expense 3,065 4,494 Thereof: – Attributable to Munich Re equity holders 3,020 4,452 – Attributable to minority interests 45 42
Share buy-backs – – – –43 – – – – – –43
Munich Re Group Annual Report 2006 Consolidated financial statements_Consolidated cash flow statement
Change in deposits retained and accounts receivable and payable 1,967 –1,268
Change from the acquisition and sale of investments for unit-linked life insurance –289 –20
Cash flows for the financial year (I + II + III) –106 290
Interest paid 715 421 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
I. Land and buildings, including buildings on third-party land 585 663 766 759 Thereof: – Investment property held for sale 102 – 128 –
Thereof: – Other segment assets relating to disposal groups 4 – 8 –
The individual fields of business are shown after consolidation of internal transactions within the individual field but before consolidation across segments. This is shown separately in the “consolidation ” column.
IV. Other technical provisions 1,114 888 232 190 Thereof: – Provision for deferred premium refunds relating to disposal groups – – – –
C. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders – – – –
Thereof: – Other segment liabilities relating to disposal groups 15 – 19 –
Investments* Reinsurers Primary insurers Asset management Total 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year €m €m €m €m €m €m €m €m
Africa, Near and Middle East *After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 66).
Declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act In November and December 2006 respectively, the Board of Management and Supervisory Board of Munich Reinsurance Company and the corresponding Boards of ERGO Versicherungsgruppe AG published, in each case, an updated declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act and made this declaration permanently available to shareholders on the internet.
On 2 October 2006, a 75% stake in the share capital of I . sviçre Sigorta A. Ş., Istanbul, was purchased at a price of €212.8m. This sum includes all incidental acquisition expenses and other expenses for consulting services, as well as taxes incurred. The I
Group comprises not only I . sviçre Sigorta A. Ş., one of Turkey’s largest property-casualty insurers, but also the life insurer I . sviçre
Hayat Sigorta A. Ş., Istanbul. The group’s income and expenses for the fourth quarter were recognised in the consolidated income statement. All in all, the I . sviçre Insurance Group contributed a break-even result to the
Munich Re Group’s net income for 2006. For the whole year under review, the two insurers wrote gross premiums totalling €319.1m, of which €82.5m was included in the consolidated financial statements for 2006. Disclosure of the IFRS result in accordance with IFRS 3.70, i.e. as if the acquisition had been effected at the beginning of the financial year, is impracticable, since IFRS financial statements were prepared for the first time during the financial year, and disclosure of the IFRS result for the full reporting period would have involved a great amount of extra work, thereby jeopardising the group’s inclusion in the Munich Re Group’s consolidated financial statements.
The two insurance companies’ opening balance sheets at the acquisition date include the following IFRS (local) figures: intangible assets of €86.7m (0.2m), investments of €124.3m (139.7m), a ceded share of underwriting provisions of €68.8m (58.6m), other assets of €143.9m (117.2m), gross technical provisions of €260.2m (232.0m), other liabilities of €25.7m (25.0m) and equity of €51.7m (58.6m). In connection with our acquisition of the stake in I
. sviçre Sigorta A. Ş., goodwill of €118.5m was capitalised, as were other intangible assets. This capitalisation is based on our expectations regarding the group’s profitability and growth potential, resulting in particular from efficient market-wide sales network, good reputation and brand, experienced management team and integration in ERGO’s international insurance network.
In accordance with IAS 8 and the transitional provisions of IAS 19 (rev 2004), we have adjusted the figures for the previous year retrospectively. This has the following effects on the consolidated balance sheet as at 31 December 2005: Consolidation principles The balance sheet date of the consolidated companies is generally 31 December. Some of the special funds have other balance sheet dates. These funds are consolidated on the basis of interim accounts as at 31 December.
Profits earned by the subsidiaries or special funds after their first consolidation are included in Group equity. Amounts relating to intra-Group 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 rights, the entities in question are deemed to be associates. Investments in associates are valued at equity unless they are not material for assessing the Group’s financial position.
Germany Other Total countries *In addition, 69 German and 9 non-German investment funds were included in the consolidated group.
First-time application of other new or amended IFRSs has had no material impact.
Standards or changes in standards not yet entered into force IFRS 7, Financial Instruments: Disclosures, is compulsory for accounting periods beginning on or after 1 January 2007. In addition to the already extended disclosure obligations in respect of recognition and measurement of financial instruments, the new standard requires enhanced disclosure of information on the type and extent
Total expenses 44,356 –13 44,343 7. Result before impairment losses of goodwill 4,137 13 4,150
C. Gross technical provisions IV. Other technical provisions 10,551 –17 10,534
IFRS 8, Operating Segments, contains new rules for segment reporting and is to be applied as from 1 January 2009. It is not yet possible to give a conclusive assessment of the effects of first-time application on the Munich Re Group’s segment reporting.
Intangible assets In accordance with IFRS 3, goodwill from the first-time consolidation of subsidiaries is tested for impairment at least once annually, i.e. the carrying amount of goodwill is compared with the recoverable amount and, if this recoverable amount is lower, a write-down is made for impairment equivalent to the amount of the difference.
Investments Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated on a straight-line basis in accordance with the component approach over 40 to 55 years, depending on the weighted useful life for their specific building class. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount. Impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income. Land and buildings classified as “held for sale” are recognised at the lower of book value or fair value less sales costs.
Securities held for trading comprise all fixed-interest and nonfixed -interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments (derivatives ) with positive fair values which we have acquired for hedging purposes but which do not meet the strict requirements of IAS 39 for hedge accounting. Securities held for trading are accounted for at fair value at the balance sheet date. If there are no stock market prices available, fair values (particularly with derivatives) are based on recognised valuation methods. All unrealised gains or losses from such valuation are included in the investment result.
Other investments are measured at amortised cost. Financial assets in our direct portfolio are generally accounted for at the settlement date. Investments held in special funds are accounted for at the trade date.
Securities that we lend by way of securities lending continue to be recognised in our balance sheet, as there is no transfer of risks and rewards; securities that we have borrowed are accounted for by the lender. Fees from securities lending are shown in the investment result.
In the case of all fixed-interest securities held to maturity or available for sale, as well as all non-fixed-interest securities, impairments in value – in contrast to temporary diminutions – are recognised as an expense in the income statement. IAS 39.59 contains a list of factors providing substantial objective evidence of impairment of such financial assets. In addition, IAS 39.61 states that for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. These rules are given more concrete form by means of appropriate internal guidelines.
Ceded share of technical provisions The share of technical provisions for business ceded by us is determined from the respective technical provisions in accordance with the terms of the reinsurance agreements, cf. the notes on equity and liabilities item C. Appropriate allowance is made for credit risk.
Receivables Receivables on primary insurance business, accounts receivable on reinsurance and other receivables are accounted for at face value. Adjustments of value are made if there is objective evidence of impairment, cf. assets item B (Impairment)
Deferred acquisition costs Deferred acquisition costs comprise commissions and other variable costs directly connected with acquisition or renewal of insurance contracts.
Deferred tax assets Under IAS 12, deferred tax assets must be recognised in cases where asset items have to be valued lower, or liability items higher, in the consolidated balance sheet than in the tax accounts of the Group company concerned and these differences will be eliminated at a later date with a corresponding effect on taxable income (temporary differences). Also included are tax assets deriving from tax loss carry-forwards. We take into account the tax rates of the countries concerned and the company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries. Where unrealised losses on
Other assets Other assets are generally carried at amortised cost. Owner-occupied property is accounted for as outlined under notes on assets item B “Land and buildings”. Impairment losses and impairment losses reversed in owner-occupied property are distributed between the underwriting functional areas.
Equity The item issued capital and capital reserve contains the amounts that the equity holders of the parent have paid in on shares. The capital reserve is reduced by the externally generated costs directly connected with equity capital measures, after taking into account tax effects.
Munich Re Group Annual Report 2006 Notes_Assets / Equity and liabilities
For contracts in accordance with FAS 60, the provision for future policy benefits is calculated from the present value of estimated future policy benefits (including claims adjustment expenses) less the present value of future net level premiums. Net level premium is that part of the gross premium that is needed to finance future policy benefits. Life primary insurance contracts with limited premium payment as per FAS 97 are generally valued in the same way as contracts falling under FAS 60. For all other contracts as per FAS 97, an account is kept to which net level premiums and interest earnings are credited and from which risk premiums and administration expenses are debited, not all credits and debits being contractually fixed at the time the contracts are concluded. The provision for future policy benefits for life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance) is shown separately under equity and liabilities item D. In the case of contracts as per FAS 120, the provision for future policy benefits comprises the net level premium reserve and liabilities for terminal dividends. The net level premium reserve is calculated from the present value of guaranteed policy benefits (including acquired bonuses but excluding claims adjustment expenses) less the present value of future net level premiums. The net level premium is the net premium less the portion of the premium envisaged for covering claims adjustment expenses. The actuarial assumptions are generally the same as those used for premium calculation. The provisions for terminal dividends is built up proportionally with a fixed share of the expected gross profit margins. The same method is used for this as for determining the amortisation of the deferred acquisition costs.
The provision for outstanding claims is for payment obligations arising from insurance contracts in primary insurance and reinsurance at the balance sheet date. Part of the provision is for known claims for which individually calculated provisions are posted. Another part is for expenses for claims whose occurrence are not yet known (e.g. because they have not been reported yet or have not yet manifested themselves). A third class of provisions covers claims which are known but whose extent has turned out to be greater than originally foreseen. All these provisions include expenses for internal and external loss adjustment expenses. The provision for outstanding claims is based on estimates: the actual payments may be higher or lower. The amounts posted are the realistically estimated future amounts to be paid; they are calculated on the basis of past experience and assumptions about future developments (e.g. social, economic or technological parameters). Future payment obligations are generally not discounted; exceptions are some provisions for occupational disability pensions and annuities in workers’ compensation and other lines of property-casualty business, which we discount. For determining the provision for outstanding claims, the Munich Re Group uses a range of actuarial projection methods. They include the chain ladder method and the Bornhuetter-Ferguson method. In applying the statistical methods, we regard large exposures separately. The standard actuarial methods we use are applied both to the run-off triangles for the payments and to the run-off triangles for the reported claims, so that we obtain a range of estimates for the ultimate loss. Within this range, a realistic estimated value for the ultimate loss is determined for the balance sheet date. By deducting the payments already made, we arrive at the provision for outstanding claims recognised in balance sheet.
All technical provisions are regularly subjected to a liability adequacy test in accordance with IFRS 4. If current experience shows that the provisions posted on the basis of the original assumptions – less the related deferred acquisition costs and the present value of the related premiums – is inadequate to cover the expected future benefits, we adjust the technical provisions with recognition in profit or loss. The appropriateness of unearned premiums and of the provision for outstanding claims is assessed in relation to the realistically estimated future amount to be paid. The appropriateness of the provision for future policy benefits is assessed on the basis of realistic estimates of the actuarial assumptions, the proportional investment result and, for contracts with participation in surplus, the future profit sharing.
panies’ obligations. Under defined benefit plans, the staff member is promised a particular level of retirement benefit either by the companies or by a pension fund. The companies’ contributions needed to finance this are not fixed in advance. If pension obligations are covered by assets held by a legally separate entity (e.g. a fund or a contractual trust agreement in the form of a two-way trust) – assets that may only be used to cover the pension commitments given and are not accessible to creditors – the pension obligations are shown less the amount of these plan assets. If the fair value of the plan assets exceeds the related outsourced pension obligations, this repayment claim is shown under “other receivables”. Pension obligations are recognised in accordance with IAS 19 (Employee Benefits) using the projected unit credit method and based on actuarial studies. The calculation includes not only the pension entitlements and current pensions known on the balance sheet date but also their expected future development.
The interest rate at which the pension obligations are discounted is based on the yields for long-term high-quality bonds (e.g. government bonds). Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognised directly in equity, without impact on profit or loss.
Liabilities This item comprises bonds and notes issued, deposits retained on ceded business and other liabilities. Financial liabilities are recognised at amortised cost. The value of the option components of ERGO International AG’s exchangeable bonds converted or redeemed in the financial year was determined as the difference between the market price of the exchangeable bonds and the value of the bond components calculated on the basis of current market yields. Direct minority interests in special funds are measured at fair value.
Munich Re’s presentation currency is the euro (€). The balance sheets of foreign subsidiaries whose national currency is not the euro are translated in accordance with the functional currency principle using the year-end exchange rates, and their income statements using quarterly average exchange rates. Any exchange differences arising in the process are recognised in equity (“other reserves”). Foreigncurrency transactions are essentially translated into the Group companies ’ respective national currencies in accordance with IAS 21. In the case of reinsurance, the principle of currency matching also applies. This means that Group companies which write a significant portion of their business in foreign currency generally safeguard themselves against exchange losses by attempting to match assets and liabilities in the same currency. Where exchange gains or losses occur nevertheless in the translation of foreign-currency transactions into the national currencies of the consolidated companies, they are accounted for under “other income” and “other expenses” respectively. The following table shows the exchange rates of the most important currencies for our business: Currency translation rates
The goodwill from the acquisition of Munich Re America (carrying amount of €1,046m) and from the acquisition of shares in the ERGO Insurance Group (carrying amount of €1,754m) was allocated to the cash generating units “reinsurance property-casualty segment” and “ERGO” respectively. The recoverable amount of these units was determined on the basis of the value in use. During the financial year 2006, the impairment test did not give rise to any need for writedowns of goodwill for these cash-generating units.
Significant assumptions In the detailed planing phase, we expect stable premium For the detailed planning, reasonable growth in results regarding cash flow income with a slight decrease in claims expenditure is expected on average. This is based on the assumption planning and loss ratios. Our general assumption is that there that there will be moderate upward movement on the will be upward movement on the equity markets and a equity markets and in interest-rate levels. moderate rise in interest-rate levels.
Discount rate 10–12% 8–9% The discount rate has been determined in the form of the weighted average cost of capital, using the Capital Asset Pricing Model (CAPM). The discount rate is calculated from a risk-free basic interest rate plus a risk loading and the market interest rate for borrowing, taking into account the capital structure. To derive the capital cost components (risk loading, capital structure), a peer group of international insurers and reinsurers is used, in accordance with IAS 36. The derivation of the risk-free basic interest rate and the borrowing costs is based on market data. It is a pre-tax calculation. A reconciliation to Munich Re´s cost of capital after tax is not possible.
The figures shown under acquired insurance portfolios include amortised carrying amounts of €392m resulting from the assumption of CNA Financial Corporation’s life reinsurance business and the acquisition of additional shares in the ERGO Insurance Group. The additions for software concern €17m for the Gloria project. The impairment losses are distributed between the different Group segments as follows: In reinsurance, – (€1m) is apportionable to property -casualty; in primary insurance, €2m (3m) is apportionable to life and health and – (€2m) to property-casualty. The remaining other intangible assets include land rights amounting to €2m (1m). Assets pledged as security and other restrictions on title amount to €2m (1m). Commitments to acquire other intangible assets total €2m (2m). Costs of €103m (151m) for research and development incurred in connection with software projects were not capitalised but recognised as expenses.
Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 450 520 232 1,202 1,099
Carrying amount at 31 Dec. previous year 393 577 66 1,036 1,243
Gross carrying amount at 31 Dec. financial year 903 1,099 383 2,385 2,238
The additions under “change in consolidated group” are mainly due to the acquisition of the I
Of the carrying amount of €4,720m as at 31 December in the financial year, €1,164m (–) concerns investment property classified as “non-current assets held for sale”; cf. (16) “Non-current assets and disposal groups held for sale”.
The fair values of the loans at the balance sheet date amounted to €29,312m (25,666m).
Over three years and up to four years 39 43 40 45
Over five years and up to ten years 29 94 30 101
Munich Re Group Annual Report 2006 Notes_Notes to the consolidated balance sheet – Assets refunds, deferred taxes, minority interests and consolidation effects – unrealised gains and losses of €6,184m (6,036m) have been posted in equity (other reserves).
The corporate debt securities mainly comprise mortgage bonds with a high credit rating. Items pledged as security and other restrictions on title amount to €6,141m. €2,671m (6,166m) of the securities shown are loaned to third parties. Measurement at fair value results in valuation reserves of €9,287m (10,973m) in comparison with amortised costs. Of this – after deduction of provisions for deferred premium
Over one year and up to two years 7,120 8,905 7,040 8,843
Over three years and up to four years 6,580 8,146 6,583 7,988
Over four years and up to five years 7,552 6,742 7,411 6,568
Positive No Investments, other securities held for trading 494 970 Yes Other assets 16 66
Periods to maturity in years All figures in €m < 1 1–2 2–3 3–4 4–5 > 5 31.12.2006 Prev. year
Fair values – – – – – – – 5 Notional principal amounts – – – – – – – 70
Notional principal amounts – – 8 – – – 8 164
Interest-rate risks in life primary insurance have been hedged using swaptions. These options to receive a fixed-interest rate are shown in the category “interest-rate risks/over-the-counter”. At the reporting date, the fair values of the swaptions totalled €160m (652m), and the underlying notional principal amounts €16,933m (15,639m). The investment result from derivatives includes a loss of €297m (–82m) from fluctuations in value of these options.
(9) Deposits retained on assumed reinsurance Deposits retained on assumed reinsurance serve directly as collateral for technical provisions covering business assumed from cedants in reinsurance. The counterparty risk is therefore limited. The amount of and changes in deposits retained on assumed reinsurance in the balance sheet year generally derive from the values for the changes in the related technical provisions for the reinsured business.
All figures in €m* 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year
Details of the ceded share of underwriting provisions are shown in
(15) Other assets These mainly comprise owner-occupied property totalling €2,534m (2,680m), plant and equipment and inventories totalling €335m (352m), deferred expenses from the conclusion of insurance contracts amounting to €60m (82m), and other deferred items of €82m (175m).
Claims equalisation provisions – 3,296 – 2,854 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Accumulated depreciation and accumulated impairment losses at 31 Dec. previous year 736 141
Items for which ownership was transferred before the end of the financial year and which were therefore no longer recognised at the balance sheet date involve investment property amounting to €82m and owner-occupied property totalling €50m.
I. Other assets 3,541 3,964 Thereof: – Owner-occupied property held for sale 66 –
Thereof: – Provision for deferred premium refunds relating to disposal groups –169 –
G. Deferred tax liabilities 8,156 7,201 Thereof: – Deferred tax liabilities relating to disposal groups 65 –
Reductions – Acquisition of shares for cancellation (share buy-back programme) 2,036,061 –
At its meeting on 7 November 2006, Munich Re’s Board of Management decided on a share buy-back programme, thus availing itself of the authorisation granted by the Annual General Meeting on 19 April 2006, in accordance with Section 71 para. 1 item 8 of the German Stock Companies Act. In the period from 8 November 2006 to the Annual General Meeting on 26 April 2007, up to 11,000,000 Munich Re shares would be acquired via the stock exchange. The share buy-back was restricted to a total purchase price (excluding incidental expenses) of €1bn. The purpose of the share buy-back is to retire the repurchased shares in order to optimise the Company’s capital structure. At 31 December 2006, a total of 2,036,061 shares had been purchased at an average price of €122.79. The share buyback was successfully concluded in February 2007.
For the employee share programme set up by Munich Reinsurance Company in 2006, the 130 shares left over from the 2005 employee share programme were supplemented by 12,225 shares purchased at an average price of €124.00 and sold to staff at an average price of €91.90. For the employee share programme set up by MEAG MUNICH ERGO AssetManagement GmbH in 2006, 2,293 shares were purchased at an average price of €112.16, which staff acquired at an average price of €82.84. At 31 December 2006, there were no shares remaining in the portfolio.
In addition, one subsidiary holds 1,463,578 shares to safeguard stock appreciation rights granted to the Board of Management and top Munich Re executives since 1999. In 2006, a total of 400,000 shares were acquired for this programme at an average price of €106.69, and 139,691 shares were sold at an average price of €121.51.
In the financial year 2006, companies of the ERGO Insurance Group acquired 121,196 shares at an average price of €110.16 each to cover future commitments from the long-term incentive plans launched since 2002, and sold 43,921 shares at a price of €125.16 each. Together with the remaining Munich Re shares acquired to safeguard the stock appreciation rights granted in 2002–2005, the ERGO Insurance Group had a total portfolio of 377,510 shares at 31 December 2006.