Net expenses for claims and benefits €bn 39.9 41.0 40.9 36.6 32.4
Munich Re’s market capitalisation at 31 December3 €bn 28.7 24.4 17.0 21.4 21.5 Book value per share € 146.45 152.34 129.99 126.31 114.89 Investments €bn 209.5 213.8 201.7 193.1 182.2
Off-balance-sheet unrealised gains and losses4 €bn 8.7 11.0 5.7 3.6 3.2
Munich Re’s global presence1 1 Including Munich Health’s primary insurance and reinsurance activities in the health market as at 31 December 2013.
General information 287 Glossary 288 Index of key terms 296 Important addresses 297 Imprint/Service Inside back cover
For several years, Munich Re’s US business has made an important contribution to our consolidated profit. For example, in 2013, our subsidiaries in the USA posted a result of US$ 1.3bn, and the combined ratio of our US property-casualty business was well below 90%. This renewed good performance also
underlines the success of our strategy in the USA, which is based on close relationships with clients and brokers, a strong presence in selected niches of the primary insurance market, and a generally disciplined underwriting policy.
26 April 2013 Munich Re pays a significantly increased dividend of €7.00 per share for the financial year 2012 (previous year: €6.25). Munich Re’s payout to shareholders thus totals almost €1.3bn. With the dividend payout, the amount returned to Munich Re’s shareholders since 2006, including the share buy-backs carried out, will total over €14bn.
3 June 2013 ERGO announces it will offer a fully revamped life insurance product line as from 1 July 2013. ERGO Annuity Guarantee combines security, return and flexibility in a hitherto unique manner. This product is supplemented by ERGO Annuity Opportunity, a new unit-linked annuity insurance cover without a premiumrelated guarantee.
12 August 2013 ERGO publishes a comprehensive programme which will gear management of its business even more strongly to its clients in future. Important new management modules include the introduction of a new customer satisfaction index and the planned creation of a Chief Operating Officer (COO) division for all customer services and group processes.
1 October 2013 Wolfgang Strassl, member of the Munich Re Board of Management, will leave the company at the end of 2013. His functions on the Board of Management are split: Nikolaus von Bomhard will take sole charge of Munich Health as from 1 January 2014. Responsibility for Human Resources and the function of Board member responsible for personnel and welfare matters is transferred to Joachim Wenning, in addition to his responsibility for life reinsurance business.
Bernhard Kaufmann is appointed new Chief Risk Officer of Munich Re (Group) with effect from 1 January 2014. Kaufmann most recently served as Chief Risk Officer and Head of Integrated Risk Management at ERGO.
4 December 2013 ERGO appoints Silke Lautenschläger to its Board of Management with effect from 1 January 2014. She will assume the newly-created function of Chief Operating Officer and thus also responsibility for the new Customer and Sales Services Division. Silke Lautenschläger became a member of the Board of Management of DKV Deutsche Krankenversicherung in 2011.
Nikolaus von Bomhard (Chairman of the Board of Management, Chairman of the Group Committee) Group Development Group Investments Group Communications Group Compliance Group Audit Health (since 1 October 2013; until 31 December 2013 together with Wolfgang Strassl)
Joachim Wenning Board member responsible for personnel and welfare matters (since 1 October 2013) Life Human Resources (since 1 October 2013)
In 2013, the sovereign debt crisis, low interest rates and the recession in the eurozone all again cast a shadow over the development of the capital markets. In early May, the yield on ten-year German government bonds fell to a historical low of under 1.2%. Shares thus gained in attractiveness as an asset class, buoyed further by the stabilisation of public finances in several crisis-hit European countries and the continued high liquidity of the stock markets. At the end of the year, the European share price index1 was at a year high and the DAX 30 even reached a record level.
As a consequence, the capital strength of the insurance sector again improved distinctly. The agreement reached at European level concerning the content and timetable of the new supervisory regime Solvency II, which is scheduled to come into force in 2016, was also positively received. Towards the end of the year, the insurance sector was at times able to rally to valuation levels last reached prior to the outbreak of the financial crisis.
To our shareholders Munich Re shares 1 European share price index = DJ EURO STOXX 600 2 European bank index = DJ EURO STOXX Banks
Following a strong performance the previous year, Munich Re shares again showed a pleasing growth in value in the year under review, thus reaffirming their importance as an attractive investment. Towards the end of the year, the share price reached a level last achieved in 2002. The price performance was underpinned by a good earnings position, based on a risk- and earnings-conscious underwriting policy in all business areas. The comfortable capitalisation situation prompted the Board of Management to launch a share buy-back programme with a volume of €1bn in November. This underscores the Board’s commitment to disciplined and responsible capital management in line with shareholders’ interests.
Around 40 analysts from banks and brokerage houses regularly evaluate our shares. At the end of December 2013, 40% of the analysts gave our share a positive assessment, 42% a neutral one, and only 18% a negative rating.
Munich Re shares DAX 30 DJ EURO STOXX Insurance (total return) Munich Re (total return) Source: Datastream
Active capital management is an integral part of our business policy. We thus wish to give our shareholders an appropriate share in the Company’s success. Bearing this in mind, we generally aim to pay out at least 25% of the annual result as a dividend. We pursue a policy of stable dividends with increases where possible. This is why we take the current dividend level as a basis which we will strive not to undercut in future dividend payments, subject to the actual results and the capital position. There have not been any cuts in dividend since 1969.
For the financial year 2013, the Board of Management and the Supervisory Board intend to propose a dividend of €7.25 (previous year €7.00) at the Annual General Meeting on 30 April 2014. Altogether, this would mean a total payout of €1.3bn (previous year: €1.3bn). Subject to approval by the Annual General Meeting, the dividend will be paid on 2 May 2014. With an increase in the dividend, we are again underlining the sustained profitability of our business model and the solidity of our capital position.
Year-end closing price € 160.15 136.00 Annual performance (excluding dividend) % 17.8 43.5 Beta 250 relative to DAX (daily, raw) % 1.0 0.9 Market capitalisation at 31 December €bn 28.7 24.4 Market value/equity at 31 December1 1.1 0.9 Average trading volume ’000 667 796 Earnings per share2 € 18.50 17.94 Dividend per share € 7.25 7.00 Dividend yield at 31 December % 4.5 5.1 Dividend payout (status at 6 March 2014) €bn 1.3 1.3 1 Including minority interests.
Our risk management encompasses much more than just the risks from our insurance business. It includes investments, for example, and also models interactions between the different risks. It is firmly embedded Group-wide and actively practised. Our selection of investments takes into account the due dates, the currencies and the inflation intensity of our underwriting liabilities, thus reducing reinvestment, currency and inflation risks. With our active capital management, we ensure that Munich Re’s capitalisation is always appropriate. Our economic equity covers the capital requirement derived from our internal risk model and takes into account the stipulations of regulators and rating agencies. Excess capital is returned to our shareholders in the form of dividends and share buy-backs.
Munich Re’s primary insurance operations are concentrated in the ERGO Insurance Group. ERGO offers a comprehensive range of insurances, pension products and services, and is one of the leading insurance groups in Germany and Europe. It is represented in over 30 countries, focusing mainly on Europe and Asia.
Our extensive knowledge in identifying and assessing risks and in structuring insurance solutions enables us to create value in a highly dynamic and global environment and to stand out from our competitors. Thanks to our capital management expertise, we are also a sought-after partner for products geared to our clients’ balance-sheet,
A responsible approach is an integral part of our corporate strategy. By supporting the UN Global Compact, we commit ourselves to the United Nations’ ecological and social principles. Our primary goal is the integration of the aspects of ecology, social responsibility and corporate governance along the entire value chain of our insurance business and in our investments. By signing the Principles for Responsible Investment (PRI) and the Principles for Sustainable Insurance (PSI), we have made a clear commitment to sustainable management. We protect natural resources with our environmental management system, and aim to make the Group as a whole carbon-neutral by 2015. Our social commitment prioritises business-related activities such as projects to prevent losses in the event of natural catastrophes, but also includes the promotion of cultural and social initiatives at our business locations. A key aim of our business strategy is to create long-term value for our clients, shareholders, employees and society as a whole.
More information about our Group-wide activities in the area of corporate responsibility can be found at www.munichre.com/cr/en
Corporate governance report 024 How we view corporate governance 024 What rules apply to Munich Re? 024 Corporate legal structure 025 Board of Management 025 Collaboration between Board of Management and Supervisory Board 025 Supervisory Board 026 Annual General Meeting 027 Share trading and shares held by Board members 027
Focal points of the meetings of the full Supervisory Board There were six meetings of the Supervisory Board in the year under review. Two representatives of the German Federal Financial Supervisory Authority (BaFin) routinely attended one of the meetings as guests. At five meetings, we discussed the business performance of Munich Re (Group) and other current topics. The Board of Management reported regularly on the situation of Munich Re’s investments, addressing the development of the global economy and financial markets in detail, and their impact on the Group’s assets and earnings. It also kept us informed about the relevant supervisory requirements, particularly regarding the systemic importance of insurers and the introduction of Solvency II, Europe’s new supervisory regime. We took a very close look at the Board of Management’s strategic considerations regarding the individual fields of business. In this context, we also always critically examined developments in life primary insurance and Munich Health. We also dealt with the following topics in the individual meetings in 2013: The meeting on 11 March focused on the Company and Group financial statements for 2012 and the motions for resolution by the 2013 Annual General Meeting. We gave details of this in our report for the financial year 2012. Moreover, we obtained an overview of Munich Re’s handling of compliance requirements and its anti-fraud management. We conferred and took decisions regarding the extension of appointments to the Board of Management and the assignment of responsibility for personnel and welfare matters to another Board member, and regarding related adjustments to the
Board of Management’s distribution of responsib il ities. In addition, we established the personal objectives for the Board members’ variable remuneration for 2013. Finally, we appointed the auditor for the financial year 2013 and for the review of the half-year financial report 2013.
The meeting on 24 April was devoted solely to matters involving the Board of Management, specifically the evaluation of the individual Board members’ annual performance for 2012 and their multi-year performance for 2010–2012.
On 11 December, the CEO of ERGO presented “Moving forward – My ERGO 2018”, ERGO’s strategy for the coming five years. Besides this, the Supervisory Board obtained an overview of development, succession planning and appointments at management level. After a detailed consultation, we decided on the Board of Management’s remuner ation with effect from 1 January 2014 and the assessment bases for the variable remuneration for 2014 (financial objectives for annual and multi-year perform ance). We took a close look at the report on the Group’s risk situation and riskbearing capacity, and its risk strategy. In its report on Group planning for 2014 to 2016, the Board of Management provided explanations in cases where actual business performance deviated from the planning for the year under review.
Work of the committees There are five Supervisory Board committees. They prepare the topics to be addressed and resolved by the full Supervisory Board. At each Supervisory Board meeting, information about the work of the committees was provided to the full Board by the respective Chairs of the committees.
Details on the composition of the committees can be obtained on page 43 and from our website at www.munichre.com/
Munich Re Group Annual Report 2013 limits. It reviewed changes in the memberships of supervisory and advisory boards and comparable offices held by members of the Board of Management, and extended the agreement with a former member of the Board of Management regarding the unremun erated assumption of mandates and representational functions. Besides this, the Committee took a close look at succession planning for members of the Board of Management.
The Conference Committee pursuant to item 7.5 of the rules of procedure for the Supervisory Board did not need to convene in the past financial year.
Corporate governance and Declaration of Conformity The Supervisory Board pays close attention to good corporate governance. Together with the Board of Management, we therefore published the compulsory annual Declaration of Conformity pursuant to Section 161 of the German Stock Corporation Act (AktG) in November 2013. We again complied with all the recommendations of the German Corporate Governance Code and intend to continue to comply with it in future. We confirmed the assessment we made in 2012 that all 20 members of the Supervisory Board are to be regarded as independent and that they do not have any conflicts of interests.
Company and Group financial statements for 2013 KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft duly audited the Company and Group management reports and financial statements as at 31 December 2013 and issued them with an unqualified auditor’s opinion. The respective reports and the Board of Management’s proposal for appropriation of the net retained profits were subsequently submitted directly to the members of the Supervisory Board. At its meeting on 3 February 2014, the Audit Committee had the opportunity to confer in detail about the preliminary year-end figures as at 31 December 2013. On 18 March 2014, it prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. To this end, the Audit Committee examined the Company and Group financial statements, the management reports and the Board of Management’s proposal for appropriation of the net retained profits. It discussed these at length with the auditor, who was present at the meeting, and gave detailed consideration to the auditor’s reports. The Chair of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting.
Details of this can be found in the corporate governance report on page 24 ff.
Good corporate governance creates lasting value. We therefore apply the highest standards to our operations and activities, complying with all the recommendations and proposals of the German Corporate Governance Code. Beyond this, we have our own Munich Re Code of Conduct specifying high-level ethical and legal requirements that must be met by employees. Since 2013, this has included a reference to the principles of the United Nations (UN) Global Compact, which are included in an annex to the Code of Conduct. Further information on Munich Re’s corporate governance is included in the Statement on Corporate Governance. In accordance with Section 289a of the German Commercial Code (HGB), the Statement on Corporate Governance forms part of Munich Reinsurance Company’s management report.
Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. One of our aims in this context is to foster the confidence of investors, clients, employees and the general public. Also of great significance for us are efficient practices on the Board of Management and Supervisory Board, effective collaboration between these bodies and with the Group’s staff, and open and transparent corporate communications.
The German Corporate Governance Code contains the main legal rules to be observed by listed German companies. In addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. Every year, Munich Reinsurance Company’s Board of Management and Supervisory Board make a declaration of how far they have complied, and are complying, with the Code’s recommendations.
Pursuant to Article 16 of the Articles of Association, the Board of Management must consist of at least two members; beyond this, the number of members is determined by the Supervisory Board. The Board of Management of Munich Reinsurance Company had nine members in the year under review.
During this reporting period, there were five women on the Supervisory Board, three of whom were shareholder representatives and two who were employee representatives.
The Supervisory Board is of the opinion that all 20 of its members are to be regarded as independent within the meaning of Section 5.4.2 of the German Corporate Governance Code. The Supervisory Board is not aware of any business or personal relationship between a member and the Company, its governing bodies, a controlling shareholder or an entity affiliated with such a shareholder, as a result of which a major and more than temporary conflict of interest could arise. The Supervisory Board assumes that the members elected in accordance with the Act on the Co-Determination of Employees in Cross-Border Mergers and the co-determination agreement are independent as a matter of principle.
The principle of “one share, one vote” applies at the Company’s Annual General Meeting. With the aim of making it easier for shareholders to take part and exercise their voting rights, the Company provides the option of online participation at the Annual General Meeting and an (electronic) postal vote.
Business performance 065 Board of Management’s overall assessment of the business performance and situation of the Group 065 Munich Re’s business performance – Overview and key figures 065 Reinsurance – Life 068 Reinsurance – Property-casualty 071 Primary insurance – Life 076 Primary insurance – Health 078 Primary insurance – Property-casualty 079 Munich Health 081 Investment performance 084
Financial position 092 Financial strength 092 Analysis of our capital structure 092 Asset-liability management 094 Capital management 094 Information in accordance with Section 315 para. 4 of the German Commercial Code (HGB) and explanatory report of the Board of Management 095 Group solvency 098 Analysis of the consolidated cash flow statement 099
Stakeholders 100 Clients and client relationships 100 Staff 103 Shareholders 105 Environment and society 107
Risk report 109 Risk governance and risk management system 109 Economic risk capital 118 Available financial resources 124 Selected risk complexes 125 Summary 130
All Munich Re’s primary insurance business is combined in ERGO with the exception of health insurance business outside Germany, which is handled by Munich Health. Some 78% (77%) of gross premiums written by ERGO derive from Germany, and 22% (23%) from inter national business, mainly from central and eastern European countries. ERGO has also been looking to extend its activities to Asian markets such as India, China and Vietnam.
— Majority of primary insurance operations concentrated in ERGO Insurance Group
— Health primary insurance outside Germany and international health reinsurance business combined under the Munich Health brand
Reinsurance In reinsurance, we operate in life and property-casualty business. Under reinsurance, we also include specialised primary insurance activities that are handled by the divisions of the reinsurance organisation and business from managing general agencies (MGAs).
Four other divisions conduct property-casualty reinsurance. We intend to further strengthen our competitiveness by introducing various structural adjustments scheduled to be implemented by the end of 2014.
Global Clients and North America handles our accounts with major international insurance groups and globally operating Lloyd’s syndicates as well as Bermuda comp anies. It also pools our know-how in the North American market. It is responsible for our property-casualty subsidiaries there and for international special lines business such as workers’ compensation.
Our Europe and Latin America Division is responsible for property-casualty business with our clients from Europe (except Germany), Latin America and the Caribbean. In future, the four market units will be condensed into three, with the exact split to be decided on in the first half of 2014.
North America American Family Home Insurance Company, Jacksonville, Florida American Modern Home Insurance Company, Amelia, Ohio American Modern Insurance Company of Florida, Inc., Jacksonville, Florida American Modern Insurance Group, Inc., Amelia, Ohio American Modern Select Insurance Company, Amelia, Ohio American Modern Surplus Lines Insurance Company, Amelia, Ohio American Southern Home Insurance Company, Jacksonville, Florida American Western Home Insurance Company, Oklahoma City, Oklahoma Beaufort Underwriting Agency Ltd., London Bell & Clements (London) Ltd., London First Marine Insurance Company, Amelia, Ohio Global Standards, LLC, Wilmington, Delaware Groves, John & Westrup Ltd., London HSB Engineering Insurance Ltd., London HSB Group, Inc., Dover, Delaware HSB Professional Loss Control, Inc., Lenoir City, Tennessee HSB Solomon Associates LLC, Dover, Delaware HSB Specialty Insurance Company, Hartford, Connecticut MSP Underwriting Ltd., London Munich Re Holding Company (UK) Ltd., London Munich Reinsurance America, Inc., Wilmington, Delaware3
Munich Re, Milan Munich Re, Paris Munich Re, London (General Branch)
With effect from 1 April 2014, ERGO is grouping all customer-oriented back-office, benefits and claims-service operations, including the management of applications and contracts, in a new client and sales division. Life and health insurance in Germany will also be managed under one Board member’s area of responsibility from that date.
Germany, Asia Pacific and Africa Great Lakes, Sydney Great Lakes, Auckland Munich Re, Sydney Munich Holdings of Australasia Pty. Ltd., Sydney Munich Mauritius Reinsurance Co. Ltd., Port Louis Munich Re, Kuala Lumpur Munich Re, Kuala Lumpur (Retakaful Branch) Munich Re, Beijing3
Life ERGO Direkt Lebensversicherung AG, Fürth ERGO Insurance N.V., Brussels ERGO Lebensversicherung AG, Hamburg ERGO Pensionskasse AG, Düsseldorf ERGO Previdenza S.p.A., Milan ERGO Versicherung AG, Vienna Hamburg-Mannheimer Pensionskasse AG, Hamburg Sopockie Towarzystwo Ubezpieczen na Zycie Ergo Hestia Spolka Akcyjna, Sopot Victoria Lebensversicherung Aktiengesellschaft, Düsseldorf Vorsorge Lebensversicherung AG, Düsseldorf Vorsorge Luxemburg Lebensversicherung S.A., Munsbach
Property-casualty D.A.S. Deutscher Automobil Schutz Allgemeine Rechtsschutz-Versicherungs-Aktiengesellschaft, Munich DAS Legal Expenses Insurance Company Limited, Bristol DAS Nederlandse Rechtsbijstand Verzekeringmaatschappij N.V., Amsterdam D.A.S. Rechtsschutz Aktiengesellschaft, Vienna D.A.S. Société anonyme belge d’assurances de Protection Juridique, Brussels ERGO Assicurazioni S.p.A., Milan ERGO Direkt Versicherung AG, Fürth ERGO General Insurance Company S.A., Athens ERGO Russ Versicherung AG, St. Petersburg ERGO SIGORTA A.S., Istanbul ERGO Versicherung AG, Düsseldorf MTU Moje Towarzystwo Ubezpieczeniowe S.A., Sopot Sopockie Towarzystwo Ubezpieczen Ergo Hestia Spolka Akcyjna, Sopot 1 A detailed list of shareholdings can be found on page 276 ff. in the notes to the consolidated financial statements. 2 Only subsidiaries with premium volume exceeding €50m are listed.
We manage our worldwide activities via five decentralised units. The regions of northern, eastern and central Europe are managed from Munich, as are southern Europe and Latin America. Our North American business is based in Princeton, where a significant change has occurred: as at the end of the year, we withdrew from US primary insurance business, previously written by the Windsor Health Group. The Middle East and Africa are managed from Abu Dhabi and Dubai, and the Asia-Pacific region via our office in Singapore.
Apollo Munich Health Insurance Co. Ltd., Hyderabad Daman – National Health Insurance Company, Abu Dhabi Daman Health Insurance – Qatar LLC, Doha, Qatar DKV Belgium S.A., Brussels DKV Luxembourg S.A., Luxembourg DKV Seguros y Reaseguros, Sociedad Anónima Española, Saragossa ERGO Generales Seguros y Reaseguros, S.A., Madrid ERGO Vida Seguros y Reaseguros, Sociedad Anónima Española, Saragossa Globality S.A., Luxembourg Marina Salud S.A., Alicante MedNet Holding GmbH, Munich Munich Health Holding AG, Munich Munich Health North America, Inc., Wilmington, Delaware Munich Re Stop Loss, Inc., Wilmington, Delaware Unión Médica la Fuencisla, S.A., Compañía de Seguros, Saragossa
Our value-based management is characterised by the following aspects: — We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed. Only the risk-return relationship reveals whether an activity is beneficial from the shareholder point of view.
Details of our capital management are provided on page 94 f.
Economic earnings The starting point for value-based management is the economic value added in a reporting period. We calculate the value we have created in a given period at Group level using the key performance indicator economic earnings, largely in alignment with the future Solvency II supervisory regime. Economic earnings are defined as the change in economic equity in a given period, adjusted for capital inflows and outflows, including dividend payouts and share buy-backs.
In applying the uniform Group performance measurement model of economic earnings in the individual business fields, we use conceptually consistent measurement approaches that are individually geared to the characteristics of each of the respective businesses and responsibilities. They include the value added by property- casualty reinsurance and Munich Health, and the excess return from our investment activity (asset-liability management). In life insurance and the bulk of our health primary insurance business, the “value added by new business” and the “change in value of in-force business” on the basis of Market Consistent Embedded Value (MCEV) are additionally applied. The performance metric economic earnings is used directly for ERGO’s primary insurance business, as no adjustments for this field of business are necessary. Group corporate management is designed so that we are in a position to maximise value creation while observing subsidiary parameters.
Return on risk-adjusted capital (RORAC) To highlight Munich Re’s value orientation, we also use the after-tax return on riskadjusted capital (RORAC) as a Group performance indicator applied uniformly at Group level. RORAC relates the performance indicator customary in the capital markets (IFRS consolidated result), which we adjust to eliminate the return on additional avail able equity, to the risk-based capital required (economic risk capital). We determine the level of risk-based capital with our internal, economically focused risk model that is oriented towards future regulatory frameworks.
Information on how the economic equity is calculated is provided on page 124 f.
RORAC is a pragmatic mixture of accounting ratios and economic indicators. Only when the requirements of Solvency II for capital resources and performance calculation have been reliably established and tested do we intend to gear our targets to these performance measures. Although we emphasise risk-based perspectives, we always aspire to meet the high, but fair, expectations of our investors with regard to the return on the total capital placed at our disposal – the return on equity (RoE).
Other performance indicators Market Consistent Embedded Value (MCEV) For life insurance and most of our health primary insurance business, Group corporate management is carried out on the basis of Market Consistent Embedded Value (MCEV), which is valued on the basis of the European Insurance CFO Forum Principles of Market Consistent Embedded Value©1. The change in MCEV within one year, adjusted for effects from exchange-rate fluctuations, acquisition or sale of companies, dividends and capital injections, is shown as the total embedded value earnings. Additional adjustments to eliminate the influences of changes in fiscal and capital market parameters result in the operating embedded value earnings, which are a -measure of the operative business performance for one year. This performance indicator can be broken down into parameters including “value added by new business” and “changes in value of in-force business”. Our corporate management takes these two parameters into account.
Value added We use value added as a component of economic earnings for corporate management in property-casualty insurance and Munich Health. The respective value added (adjusted for random fluctuation for this purpose) is determined as follows: We explain how the additional available economic equity is calculated on page 125
=–Adjusted result Cost of equity Value added 1 © Stichting CFO Forum Foundation 2008.
In addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff-training level and client satisfaction also play a part. In the long term, a firm can only be successful if it operates sustainably and takes account of such future-oriented qualitative factors. On the basis of a comp re hensive understanding of value creation with short-term and long-term, financial and non-financial parameters, we closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards”, from which we derive initiatives, performance measures and responsibilities. The scorecards have four perspectives: “financial”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and account ability, recognising wherever possible how much the individual, unit or field of business contributes to increasing long-term value. Our incentive systems for staff, executives and Board members support this orientation: in general, the higher the hierarchical level, the more remuneration is based on performance.
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) (Chairman of the Group Committee) Group Development Group Investments Group Communications Group Compliance Group Audit Health (since 1 October 2013; until 31 Dec. 2013 together with Dr. Strassl)
Dr. rer. nat. Torsten Jeworrek (Chairman of the Reinsurance Committee) Reinsurance Development Corporate Underwriting Corporate Claims (since 1 January 2014) Accounting, Controlling and Central Reserving for Reinsurance Information Technology Global Business Architecture Geo Risks Research/ Corporate Climate Centre
Dr. jur. Jörg Schneider (Chief Financial Officer) Group Reporting Group Controlling Corporate Finance M&A Integrated Risk Management Group Legal Group Taxation Investor and Rating Agency Relations
Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chairman) Member since 17 April 2002, last re-elected 22 April 2009 Former Chairman of the Board of Management of Volkswagen AG
Hans Peter Claußen (Deputy Chairman) Member since 22 April 2009 Employee of D.A.S. Deutscher Auto - mobil Schutz Allgemeine Rechts- schutz-Versicherungs-AG
Silvia Müller Member since 22 April 2009 Employee of ERGO Versicherungsgruppe AG
Reinhard Pasch Member since 22 April 2009 Employee of ERGO Versicherungsgruppe AG
Standing Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Herbert Bach Hans Peter Claußen Prof. Dr. rer. nat. Dr. Ing. E. h.. Henning Kagermann Wolfgang Mayrhuber
Audit Committee Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann (Chair) Christian Fuhrmann Marco Nörenberg Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder Anton van Rossum
Nomination Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Peter Löscher
Munich Re Group Annual Report 2013 2 Own group company within the meaning of Section 18 of the German Stock Corporation Act.
Herbert Bach – – Dina Bösch – – Annika Falkengren Volkswagen AG Securitas AB (publ), Sweden Frank Fassin ERGO Versicherungsgruppe AG2
Dr. jur. Benita Ferrero-Waldner – Gamesa Corporación Tecnológica S.A., Spain (until February 2013) Alpine Bau Holding GmbH, Austria (until April 2013)
Prof. Dr. rer. nat. Peter Gruss Siemens AG Actelion Ltd., Switzerland Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann
AUA Austrian Airlines, Austria (until June 2013) Österreichische Luftverkehrsholding GmbH, Austria (until June 2013) Heico Corporation, USA UBS AG, Switzerland (until May 2013)
In the second year, on con­ dition that 50% of the net amount paid out is invested by the Board member in Munich Re shares that must be held for at least a four­ year period 70% multi­year performance (for 100% performance evaluation/ achievement of objectives)
In the fourth year, on con­ dition that 25% of the net amount paid out is invested by the Board member in shares that must be held for at least a two­year period
Achievement and evaluation of objectives is measured at the end of the periods under consideration, there being no adjustment of targets during these periods. Payouts are made at the end of the one­year and three­year periods under consideration. With a view to promoting a management approach that takes due account of the Company’s long­term interests, members of the Board of Management are obliged to invest 50% and 25% respectively of the paid­out variable remuneration in Munich Reinsurance Company shares.
Variable remuneration based on multi­year performance For the multi­year performance remuneration component, three­year targets based on the financial results of the reinsurance, Munich Health and primary insurance segments and on individual objectives are fixed every year. In addition, multi­year performance plans in effect since 2013 envisage an assessment by the Supervisory Board of the overall performance of the Board of Management and the individual Board members. This allows for a response to developments during the three­year appraisal period that are beyond the influence of Board members, and which can also be taken into account along with performance not included in the agreement of objectives. Full achievement of the multi­year objectives (100%) allows for payment of 70% of the overall target amount for variable remuneration.
Details of the assessment bases for the multi­year performance can be seen in the following table: 1 The objectives are weighted individually according to the responsibilities of the individual Board members. 2 Further information on RORAC is provided on page 38 f. 3 Further information on economic earnings is provided on page 38.
Category of objective Share1 Assessment basis Parameters Collective contribution 30%–60% to corporate success Group objective Derived from key performance indicators Return on risk­adjusted capital, RORAC2 in external reporting and other important portfolio and performance data Business field objectives – Reinsurance Value­based economic Components of economic earnings:3 performance indicators: – Property­casualty reinsurance – Value added – Life reinsurance – Value added by new business – Change in the value of in­force business – Primary insurance Value­based economic Economic earnings3 performance indicator Individual contribution 20%–50% to corporate success Divisional objectives Value­based economic Components of economic earnings:3 performance indicators: – Property­casualty reinsurance – Value added and Munich Health – Life reinsurance – Value added by new business – Change in the value of in­force business Personal objectives Personal objectives per Board member Special focal points such as – Pricing and cycle management – Client management Overall performance evaluation 20% Performance of individual Assessment by Supervisory Board taking Board members and of Board as a whole into account Section 87 of the German Stock that is not considered in the objectives or Corporation Act and the German subject to developments during the year Corporate Governance Code
The variable remuneration for the multi­year performance is determined on the basis of evaluation by the full Supervisory Board and then paid out in the year after the three­ year assessment period. Payment is effected on condition that 25% of the net payout amount is invested in Munich Reinsurance Company shares that must be held for at least a two­year period.
The exercising of the rights and proceeds obtained depended on the development of the share price and on fulfilment of the exercise conditions. The amount of income from the stock appreciation rights was limited. The members of the Board of Management were only able to exercise stock appreciation rights under the plans set up in 1999 and 2003– 2009. As at 31 December 2013, no further exercisable stock appreciation rights existed.
Further information about the Long­Term Incentive Plan can be found in the notes to the consolidated financial statements on page 267 ff.
In the event of a change of control, only the conditions of the Long­Term Incentive Plan provide for special exercise options.
Beginning in 2009, pension plans for Board members were changed to a defined contribution system. The main aim of this change was the fullest possible outsourcing of all pension­specific risks from the Company’s balance sheet. This major risk transfer was achieved by financing increases in entitlements exclusively by paying premiums into insurance policies concluded to cover these benefit obligations. This means the Company is no longer liable for the pension benefits, as these are covered by the afore­ mentioned insurance policies. The longevity risk, the biometric risks of premature occurrence of a pensionable event (e.g. disability or death of a member of the Board during active service), and the capital market risk were thus transferred to the insurer and the individual Board members.
Board members who had not reached the age of 55 by the end of 2008 retained as a vested pension their pension entitlement under the previous defined benefit plan (fixed amount in euros) existing at the point of transition on 31 December 2008. For future service years as of 1 January 2009, these Board members receive an incremental pension benefit generally based on the defined contribution plan for Board members first appointed as from 2009. Since the conversion of the pension system took place while Board members’ contracts were still in force, the pension contributions were calculated in such a way that the total of vested pension, pension­fund pension and incremental pension benefit results in an expected pension at age 60 equivalent to that of the previous pension benefit based on realistic estimates.
Benefits on termination of employment Occupational pension Board members first appointed prior to 1 April 2012 are entitled to an occupational pension on retiring from active service with the Company after reaching the age of 60 or, at the latest, at the end of the calendar year in which they turn 65.
Benefit amount: — For a period of six months, previous monthly basic remuneration (only for Board members appointed prior to 2006)
— For members of the Board of Management transferred from the old system to the new: The entitlement under the vested pension is a proportion of the vested pension based on the ratio of actual service with the Company to the period the Board member would have worked for the Company altogether up to the fixed retirement age (Employers’ Retirement Benefits Act, Section 2 para. 1). The entitlement from the incremental pension comprises the pension benefits fully financed under the insur­ ance contract up to the occurrence of the insured event and based on the pension contributions made up to the date of leaving the Company (Employers’ Retirement Benefits Act, Section 2 para. 5a). This entitlement is paid out as an annuity or a lump sum
The improved vested benefits do not apply to Board members first appointed as from 2009. For Board members transferred from the old system to the new, the improved vested benefits apply only to that part of their pension resulting from the vested pension under the defined benefit plan.
— For the share from the defined benefit plan: Entitlement of between 30% and 60% of pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 60th birthday
— Orphan’s pension amounting to 20% of the defined benefit or insured occupational pension per orphan
The benefits for surviving dependants are not payable for widow(er)s or registered civil partners if the marriage or registered civil partnership was not contracted until a point in time when the Board Member was already drawing the occupational pension, and for orphans if they were not born until after such a point in time. The entitlement for orphans ceases on their reaching the age of 18 (or 20 for orphans of Board members transferred from the old system to the new). For orphans who are in full­time education or vocational training, doing military or civilian service, or unable to support themselves owing to a physical or mental disability, the entitlement is extended until they reach the age of 25 (or 27 for orphans of Board members transferred from the old system to the new). The entitlement to a surviving dependant’s pension under the defined contrib­ ution plan ceases if the Board member draws the pension in the form of a lump sum. Pensions for surviving dependants cease upon their death.
Total remuneration of the Board of Management The basis for reporting the remuneration of Board members is German Accounting Standard No. 17 (DRS 17, revised 2010), according to which the amount shown as remuneration for annual performance 2013 is the provision established for that remuneration, since the performance on which the remuneration is based has been completed by the balance sheet date and the requisite Board resolution is already foreseeable. Under DRS 17, remuneration for multi­year performance 2010–2012 is recognised in the year of payment, i.e. in 2013. The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €24.7m (13.3m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. Total remuneration thus shows an increase of around €11.5m compared with the previous year. The main reason for the increase is that, in accordance with DRS 17, remuneration is recognised for the multi­year components for the first time again since 2009, and this totals €12.8m. The basic remuneration and remuneration in kind/fringe benefits increased by €0.3m compared with the previous year, while the
The total expenditure recognised in 2013 for the Long­Term Incentive Plans (reserve allocations/releases due to the development in value of stock appreciation rights from the 2006–2009 plans) breaks down as follows: von Bomhard €818,075, Arnoldussen €308,570, Blunck €356,314, Daschner €538,881, Jeworrek €653,965, Röder €361,585, Schneider €949,572, Strassl €356,314, Wenning €114,771.
1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for the 2013 annual performance. The amount shown for annual performance remuneration is based on estimates and the relevant provisions posted.
For the 2012 annual performance, a total of €169,276 less was paid out than had been reserved in the financial year 2012. The additional/reduced expenditure breaks down as follows: von Bomhard €42,000, Arnoldussen –€21,347, Blunck –€69,227, Daschner –€54,669, Jeworrek –€43,093, Röder –€47,182, Schneider €23,940, Strassl –€9,337, Wenning €9,639. This results in the following actual bonus payments for 2012: von Bomhard €1,150,800, Arnoldussen €598,500, Blunck €550,620, Daschner €581,490, Jeworrek €807,975, Röder €554,610, Schneider €813,960, Strassl €331,170, Wenning €525,420. The amounts shown for the annual performance 2013 comprise the respective provision for 2013 and the relevant additional/reduced expenditure for 2012.
The following table shows the amounts payable for the variable remuneration: Pension entitlements Personnel expenses of €5.0m (5.0m) were incurred in the financial year to finance the pension entitlements for active members of the Board of Management. Of these, €1.4m was apportionable to defined benefit plans and €3.6m to defined contribution plans. As a consequence of the risk transfer to an external insurer under the defined contribution system, the visible pension costs since 2009 are noticeably higher. The Company accepts this increase in order to avoid higher costs in future and to eliminate long­term pension­ specific risks. The following defined benefits, present values, contribution rates and personnel expenses result for the individual members of the Board of Management: Amounts payable for the variable remuneration of the individual Board members in the event of 100% performance evaluation as per DRS 17 (revised 2010), corridor 0–200%
Total Annual Multi­year amounts Name performance1, 3 performance2, 3 payable Set in for € € €
1 At the time of preparation of this report, no Supervisory Board resolution had yet been passed on the amounts to be paid for 2013. The amount shown for annual performance remuneration is based on estimates and the relevant provisions posted in the table on page 56.
Remuneration structure for senior executives The fixed components for Munich Reinsurance Company senior executives comprise a fixed annual basic remuneration, paid out as a monthly salary, plus customary market fringe benefits and remuneration in kind (most notably a company car and a company pension scheme). The variable components are made up of the short­term components “performance­related bonus” and “Company result bonus”, and the longer­term share­ price­linked component Mid­Term Incentive Plan.
Munich Re Group Annual Report 2013 calculated that can be distributed between staff as a bonus. The higher the manage­ ment level, the higher the share of the Company result bonus. The way this bonus works ensures that the performance of Munich Re as a whole is systematically reflected in the remuneration of all staff and that the bonus amount bears a reasonable relation­ ship to overall corporate performance.
The Mid­Term Incentive Plan, with a duration of three years, is based on the same targets as the multi­year bonus of Munich Reinsurance Company’s Board of Management. In addition, the development of the total shareholder return is taken into account. Besides the senior executives in Munich, selected executives in Munich Reinsurance Company’s international organisation also participate in the Mid­Term Incentive Plan.
The individual variable components are granted – subject to different weightings – at all management levels. For the first management level below the Board of Management, the share of aggregate variable remuneration is more than 50% of total remuneration (fixed remuneration plus all variable components). Proceeding down the management hierarchy, this percentage decreases successively, making up around one­third at the lowest management level. There is a well­balanced combination of short­term and long­term components. At the first management level below the Board of Management, the Mid­Term Incentive Plan makes up around 25% of total remuneration or more than 50% of overall variable remuneration, so that a longer­term incentive system is provided for. No guaranteed variable remuneration components are granted.
The rules in place since the financial year 2009 provide for an annual fixed remun­ eration component of €50,000 for each member of the Supervisory Board, plus a variable result­related component and a component based on long­term corporate perform ance. The Chairman of the Supervisory Board receives two­and­a­half times, and the Deputy Chairman one­and­a­half times, the fixed remuneration and the variable remuneration.
The variable result­related remuneration is based on the basic earnings per share from continuing operations, as shown in the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS): each Supervisory Board member receives €4,000 for each full euro by which earnings per share exceed €12, up to a maximum of €40,000. Based on earnings per share of €18.50, variable result­related remuneration of €24,000 is payable for the financial year 2013. The result­related remuneration component with long­term incentivisation was introduced in accordance with the German Corporate Governance Code. It amounts to €10,000 and is paid out if earnings per share in the remuneration year exceed earnings per share in the third financial year preceding the remuneration year by at least 30%. This long­term remuneration component is payable for the remuneration year 2013.
Result­ related remuneration with Result­ long­term Fixed related incentive remuneration remuneration function Financial For committee Name year Annual work2 Annual Annual Total
G3308 Remuneration of Supervisory Board members for membership of supervisory boards at Munich Reinsurance Company subsidiaries, in accordance with the companies’ respective articles of association1¹
Hans Peter Claußen 2013 24,895.00 – 0 24,895.00 1 Plus turnover tax in each case, in accordance with the relevant provisions of the respective Group companies’ articles of association. 2 Including attendance fees in each case insofar as provided for under the relevant provisions of the articles of association.
In 2013, as in the previous year, the global economy grew only moderately. The econ omies of the USA, Japan and the UK expanded. By contrast, the annual average economic output of the eurozone fell: whilst it moved out of recession in the second quarter, the recovery was weak against the background of the still-smouldering sovereign debt and banking crisis. German GDP grew slightly compared with the previous year. Although economic growth was curbed in the major emerging countries, the growth rates of Asian emerging markets were still high by global comparison.
Monetary policy in the most important economies remained very expansive. For example, the European Central Bank (ECB) lowered its key interest rate twice in the course of the year. Nevertheless, in the first half-year the US Federal Reserve indicated that it would begin a gradual exit from bond buying (“tapering”) in 2013 if the positive economic development held. It finally announced in December that it would reduce its monthly bond buying. Long-term interest rates in the USA and in Germany rose over the course of the year. At year-end, yields on US and German bonds with periods to maturity of ten years were 3.0% and 1.9% respectively, compared with 1.8% and 1.3% at the end of 2012. The rise in interest rates had a negative impact on the market value of fixed-income bonds. Interest rates remained at historically low levels, presenting insurers with considerable challenges. Regular interest income fell again because – even after the increase in market interest rates – yields on new highly rated fixed- interest securities are far lower than the average return on the securities maturing or sold. Life primary insurers, which have to meet interest-rate guarantees, were particularly affected.
— Global economic growth only moderate — Slight increase in long-term interest rates, but low- interest-rate environment persists — Euro gains in value — Global premium income: strong growth in property-casualty business, more modest expansion in life business — Marginal decline in rates in property-casualty reinsurance
The euro rose by 4% from US$ 1.32 at the start of the year to US$ 1.37 at year-end. It gained considerably against the Japanese yen (26%) and the Canadian dollar (12%), and slightly against the British pound sterling (2%). As we write a large part of our business outside the eurozone, the rise in the euro distorts the reported premium income develop ment downwards. It also affects the value of the investments accordingly.
According to provisional estimates, the German insurance industry’s premium income increased appreciably in 2013. Premiums in property-casualty insurance rose as in the previous years. After stagnating last year, premiums in life insurance were also up.
Chiefly on account of the rise in interest rates, the shareholders’ equity of most reinsurers initially sank slightly in 2013 because fixed-interest investments were valued lower under IFRS accounting regulations. In the course of the year, their capital resources improved, partly thanks to the good results. In natural catastrophe business, there was an increase in the supply of capacity from established and new market players, leading to a decline in rates. Whilst the price level for reinsurance had remained stable in the January and April 2013 renewals, it receded slightly in the renewals as at 1 July. This general trend continued in the renewals at 1 January 2014. There were isolated price increases, however, particularly in regions and classes with high loss frequencies.
Dividend 2013 Prev. year Change % Total dividend payout €bn 1.3 1.3 0.9
Gross premium income was down on the previous year owing to currency effects. Adjusted for currency translation effects, our premium income showed a moderate rise despite our strict profitability requirements.
Expenditure for major losses, in particular from natural catastrophes, was below the expected range. This is also reflected in the combined ratio for property-casualty reinsurance, which at 92.1% (91.0%) was slightly better than the value of around 94% we had projected for 2013.
Reinsurance property-casualty % 92.1 91.0 Primary insurance property-casualty % 97.2 98.7 Munich Health2 % 98.3 100.2
Investments €bn 209.5 213.8 –2.0 Net technical provisions €bn 187.7 186.1 0.9 Equity €bn 26.2 27.4 –4.4
Primary insurance life 11% (11%) Primary insurance health 11% (11%) Primary insurance property-casualty 11% (11%)
In the financial year 2013, we posted a higher profit for the year of €3.3bn (3.2bn). The improvement in the result is chiefly attributable to the primary insurance business of ERGO and Munich Health.
Munich Re posted a particularly low tax burden for the year as a whole, chiefly due to the recalculation of tax for prior years and to the utilisation of loss carry-forwards.
Consolidated result 2013 Prev. year Change €m €m % Reinsurance life 413 496 –16.7 Reinsurance property-casualty 2,384 2,559 –6.8 Primary insurance life 134 155 –13.5 Primary insurance health 130 89 46.1 Primary insurance property-casualty 169 –4 – Munich Health 150 –91 – Asset management –38 – –
Detailed information the business performance of our segments can be found on page 68 ff.
— Satisfactory technical result of €370m — Decreased investment result of €826m — Pleasing consolidated result totalling €413m
At €10,829m, gross premium volume in life reinsurance was slightly below the previous year’s level (€11,130m), exclusively because of currency translation effects relating to the strengthened euro. We generated around 88% of premium in foreign currency, of which 42 percentage points were in Canadian dollars and 19 percentage points in US dollars. If exchange rates had remained unchanged, our premium income would have risen by 2.2%.
Key figures 2013 Prev. year Change % Gross premiums written €m 10,829 11,130 –2.7 Share of gross premiums written in reinsurance % 38.9 39.5 Operating result €m 551 721 –23.6 Consolidated result €m 413 496 –16.7
By contrast, we posted particularly gratifying results in Canada and Asia, where our expectations were surpassed owing to good claims experience. High-volume treaties concluded in recent years also again contributed their share to the result.
At €826m, the investment result was below that of the previous year (€913m). The reduction was mainly caused by low disposal gains from the restructuring of our fixedinterest securities. Moreover, regular interest income declined owing to the low interest-rate environment.
In Germany, premium income rose slightly to €353m (346m), which we regard as a success, given the fact that life insurance business in the market has been stagnating for several years. Reinsuring mortality and disability risks and assisting our clients with the fundamentals of underwriting, risk assessment and claims management remain key aspects of our business. The technical result maintained its very satisfactory level.
Our subsidiary Munich Reinsurance Company of Australasia Ltd., which writes life reinsurance business in Australia and New Zealand, has recorded strong growth in recent years. In 2013, premium income increased to €698m (629m), benefiting ma terially from the dynamic development of the primary insurance market. After its satisfactory development in the previous year, the technical result was disappointing owing to the negative performance of disability business. In the area of group policies, the claims situation deteriorated market-wide. Besides this, we saw an increase in the number and size of claims in individual business. We are working with our clients on a remediation of the business. In both cases, we had to make additional provision by increasing the reserves.
On the African continent, our South African subsidiary Munich Reinsurance Company of Africa Ltd. posted a decrease in premium volume to €156m (173m). Here, too, the development was exclusively due to changes in exchange rates. In original currency, premium volume rose. Despite the keen competition, we thus retained our position among the leading reinsurers. In the medium term, we expect economic growth to accelerate and hence demand for insurance to rise. We have geared our strategy accordingly and are focusing on the markets with the highest growth rates. As in prior years, the technical result showed pleasing growth.
— Very good combined ratio of 92.1% — Investment result down to €1,762m — Very high consolidated result of €2,384m
Premium In property-casualty reinsurance, we posted a slight decline in premium income of 0.2% to €17.0bn (17.1bn) in 2013. Approximately 14% of the portfolio is written in euros and 86% in foreign currency, of which 46 percentage points is in US dollars and 15 percentage points in pounds sterling. Compared with the previous year, the development of the euro against other currencies had a negative effect of €665m on our premium income. If exchange rates had remained unchanged, premium volume would have increased by 3.7%.
The increase in premium adjusted for exchange rates is mainly attributable to the expansion of our motor business and the growth of our US agriculture portfolio. Premium volume was also positively influenced by the development of traditional business in the USA. Adverse effects came from portfolio reductions where it proved impossible to achieve adequate prices, terms and conditions.
Key figures 2013 Prev. year Change % Gross premiums written €m 17,013 17,052 –0.2 Share of gross premiums written in reinsurance % 61.1 60.5
Thereof: Major losses Percentage points 10.4 10.8 Expense ratio % 30.4 30.0 Combined ratio % 92.1 91.0 Operating result €m 2,993 3,597 –16.8 Consolidated result €m 2,384 2,559 –6.8
Prices remained almost unchanged in all other markets with the exception of credit insurance, where a certain pressure made itself felt but rates nevertheless remained at an adequate level.
The further year-on-year reduction in interest rates at the time of the renewals was largely compensated for by higher prices.
This division writes business in Germany, the Asia-Pacific region and Africa. In terms of the division’s premium income, approximately 35% is written in Australia/New Zealand and Japan combined, around 30% in Greater China and approximately 10% in Africa/ MENA. Whilst the focus in Australia/New Zealand and Japan is on natural hazards cover, the Greater China portfolio is largely made up of motor business.
The Europe and Latin America Division writes business in Europe (except Germany), the Caribbean and Central and South America. Approximately 75% of the division’s premium income derives from Europe, of which almost half is attributable to the United Kingdom alone. While the focus in the Caribbean and in Central and South America is on property business, particularly in the area of natural hazards covers, European business is strongly weighted in favour of UK motor business.
4030Key figures 2013 Prev. year Change % Gross premiums written €m 3,524 3,508 0.5 4035Key figures 2013 Prev. year Change % Gross premiums written €m 3,677 3,861 –4.8
The division’s premium volume totalled €6,471m (6,275m). The increase is a result of growth in primary insurance, in particular American Modern and the Watkins Syndicate within Lloyd’s, and of traditional reinsurance, especially in the US market. We succeeded in selectively writing profitable business, although there was increased pressure on reinsurance prices in a number of lines. The premium income of our primary insurance companies American Modern and Hartford Steam Boiler Group (HSB Group) amounted to €967m (889m) and €712m (687m) respectively, thus accounting for about 40% of our premium volume in North America. A further €2,300m (2,226m) was contributed by Munich Reinsurance America. The results of our subsidiaries in the USA also developed very pleasingly. In 2013, they were able to pay a dividend of US$ 335m to the Group parent, Munich Reinsurance Company. Our strategy of combining insurance and reinsurance activities again proved successful, and we intend to continue along this path in future.
The division’s combined ratio stood at 94.9%, a slight deterioration on the previous year’s figure of 93.6%. Although we benefited from somewhat improved major-loss experience, the loss reserve releases for prior years were below last year’s level.
Key figures 2013 Prev. year Change % Gross premiums written €m 6,471 6,275 3.1
The division’s overall premium income declined somewhat year on year to €3,341m (3,408m). An expansion of agricultural reinsurance with selected clients in the USA following last year’s major loss contrasted with a decrease in premium volume in aviation and space business owing to our consistent cycle management policy.
Despite the generally pleasing development with regard to major losses in the year under review, the combined ratio for the division deteriorated to 96.7% (92.3%) year on year owing to lower loss reserve releases.
— Significant reduction in total premium income to €6.9bn, especially due to single-premium business
At the beginning of June 2013, ERGO unveiled a completely new generation of life insurance products to the public. The new product has been sold in two variants since 1 July 2013. ERGO Annuity Guarantee, one of the variants, guarantees for terms of 15 years and above that the capital available when the benefit stage is reached will at least be equal to the total gross premiums paid in, and provides for the option of transforming this into guaranteed annuity payments. During the capital accumulation period, there are no guaranteed surrender values. New Reinsurance Company Ltd. provides an intra-Group reinsurance cover, which in the event of adverse capital market developments has a stabilising effect on the surrender values for customers terminating their policies prematurely. In this case, the customers are paid the individual guaranteed value of their policies. The reinsurance cover secures the guaranteed gross premiums for the benefit stage. The second variant, ERGO Annuity Opportunity, is a unit-linked annuity policy that provides no guarantees but offers the same amount of flexibility in the capital accumulation period. The new generation of products is of great signific ance for the development of our life insurance business and should account for a large share of our new business in the medium term. The business figures for 2013 did not yet benefit to a material extent from the sale of the new products.
Key figures 2013 Prev. year Change % Total premium income1 €m 6,851 7,268 –5.7 Gross premiums written €m 5,489 5,798 –5.3 Share of gross premiums written in primary insurance % 32.9 33.9 Operating result €m –18 360 – Consolidated result €m 134 155 –13.5
Result The technical result showed a reduction to –€36m (5m), partly because of ongoing low interest rates. In the past financial year, the investment result totalled €3.3bn (3.6bn). The year-on-year decline was attributable to significantly lower net unrealised gains from unit-linked life insurance and the resulting reduction in the investment result, which did not have any overall effect on the income statement. Due to the slight rise in market interest rates, our interest-rate hedging programme also had an adverse impact on the investment result. In German business, to finance the allocation in financial year 2013 to the additional interest reserve provided for under German commercial law, we sold fixed-interest securities, as a result of which we realised gains and reinvested the proceeds. In addition to the aforementioned reasons, the reduced operating result of –€18m (360m) was also due to the expense for the participation of our policyholders in an anticipated tax refund. The consolidated result in the past financial year fell to €134m (155m).
— Slight decline in premium income of 1.1% to €5.7bn — Increased technical result of €400m — Gratifying investment result of €1.3bn — Good consolidated result totalling €130m
At €5.67bn (5.73bn), premium income in the health insurance segment was only slightly lower (–1.1%) than in the previous year, partly owing to the introduction of the “hardship tariff” as at 1 August 2013. Premiums for 2013 showed year-on-year growth of 3.2% in supplementary health insurance and fell by 2.6% in comprehensive health insurance. New business reflected the fact that the future of private health insurance was the subject of intense debate in the run-up to the German parliamentary elections. This discussion caused uncertainty among potential new customers. New business was further impacted by significant price increases following the changeover to the new unisex rates. As expected, new business in comprehensive health insurance declined appreciably year on year (–15.0%). In supplementary health insurance, the decrease of 15.7% in new business was slightly stronger, partly because seasonal year-end business in 2013 was weaker than in the previous year. In travel insurance, which we account for in the health segment and write in Germany and abroad, we registered a decrease of 1.1% in premium volume.
Key figures 2013 Prev. year Change % Gross premiums written €m 5,671 5,732 –1.1 Share of gross premiums written in primary insurance % 34.0 33.6 Operating result €m 284 240 18.3
— Slight decrease in premium income to €5.5bn — Combined ratio of 97.2% impacted by natural catastrophes — Investment result of €389m higher than in previous year — Rise in consolidated result to €169m
Premium volume in property-casualty insurance declined by 0.8% overall to €5.5bn (5.6bn) year on year. In German business, our premium income rose by 1.3% to €3.31bn (3.27bn). Developments in the individual classes of business differed in 2013. Premium in commercial and industrial business fell by a marginal 0.4% in property and marine insurance on account of remedial measures. By contrast, premium in commercial liability insurance and in industrial liability business was up significantly, partly due to the very good development of new business. Personal lines property business showed premium growth of 1.3%, while motor insurance expanded by 4.0%. However, we posted reduced premium income in legal protection insurance (–1.9%) and personal accident insurance (–1.8%), mainly owing to the fact that we took our personal accident product with premium return off the market at the end of 2012 and are now focusing more strongly on personal accident covers without a savings component and securing quality of life in the event of an accident by means of comprehensive assistance services.
Premium volume in international property-casualty insurance was adversely affected in particular by the sale of our South Korean subsidiary ERGO Daum Direct General Insurance Co. Ltd (ERGO Daum), whose premium income of €105m had been included in the figures for the first half of 2012. Growth was apparent especially in Poland and in legal protection business in the UK. However, pleasing organic growth was partly masked by the influence of negative currency influences. Our international business showed an overall reduction of 3.9% in premium volume to €2.2bn (2.3bn).
The technical result in property-casualty insurance improved to €319m (226m) and the investment result to €389m (376m), mainly owing to higher gains on disposals. This led to a rise in the operating result to €427m (290m). The consolidated result accordingly increased to €169m (–4m).
The combined ratio for 2013 amounted to 97.2% of net earned premiums – an improvement compared with the previous year (98.7%). Paid claims and the change in claims provisions totalling €3,286m (3,429m) and net operating expenses of €1,828m (1,802m) compared with net earned premiums of €5,261m (5,301m).
In German business, the combined ratio came to 96.3% (98.0%), 1.7 percentage points below the previous year. Despite the natural hazard losses from the catastrophic flooding in the second quarter and the severe weather events involving intense rainfall and hailstorms in the third quarter, we thus achieved an improvement on the previous year, which had been impacted by significant frost damage losses from the late cold spell in February and a number of random major losses in summer. Our remedial measures in Germany have begun to take effect, enabling us to compensate for the effects of the natural hazard events in the past financial year.
With the exception of the German health insurers belonging to ERGO, Munich Re’s global healthcare insurance and reinsurance business is combined under the Munich Health brand. We offer our international clients across the world innovative insurance solutions and individual consultancy and services. The disposal of the Windsor Health Group (WHG) agreed upon in late August and the Windsor Health Group operating result do not have a significant impact on Munich Re’s result as a whole. Losses from the sale amount to around €25m. The transfer of ownership became effective at the turn of the year, so WHG’s income and expenditure are still to be recognised in the Munich Health segment for the whole of 2013.
Key figures 2013 Prev. year Change % Gross premiums written €m 6,551 6,703 –2.3 Loss ratio1 % 79.8 81.8 Expense ratio1 % 18.5 18.4 Combined ratio1 % 98.3 100.2 Operating result €m 167 109 53.2 Consolidated result €m 150 –91 –
North America 65% (66%) Northern/Eastern/Central Europe 15% (16%) Southern Europe/Latin America 12% (11%) Middle East/Africa 5% (4%) Asia/Pacific 3% (3%)
The consolidated result amounted to €150m (–91m). The previous year’s result had been impacted by impairment losses of goodwill and other intangible assets of the segment. The operating result increased to €167m (109m), and investments generated a result of €95m (115m), a decrease of 17.4% in comparison to the previous year, caused in particular by losses from the sale of WHG. The technical result increased to €135m (36m).
— High portfolio weight of government bonds with very good credit ratings; fall in market values due to higher interest-rate level
— Net on- and off-balance sheet unrealised gains down, but still at a high level of €15.2bn
Other securities held to maturity – – – – 5 7 – – – – – – – – 5 7 Other securities available for sale
Reinsurance Primary insurance Munich Health Asset management Total Life Property-casualty Life Health Property-casualty €m 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year Land and buildings, including buildings on third-party land 263 245 1,218 1,224 1,358 1,393 755 777 93 95 10 30 65 67 3,762 3,831
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 6,698 5,957 – – – – 1 1 – – 6,699 5,958
The carrying amount of our investments showed a decline since the beginning of the year: the increased interest rates improved our Group’s economic position, but had a negative impact on the market values of fixed-interest securities. Government bonds with high credit ratings in particular lost value compared with the previous year. The development of exchange rates also led to a decline in market values.
Our investment portfolio is dominated by interest-bearing investments. In the period under review, we reduced our portfolio of government bonds and instead invested more in short-term investments.
We made the bulk of our European bond investments in issues of supranational institutions such as the European Financial Stability Facility (EFSF) and the EU. New investments in government bonds from emerging markets are also part of our balanced investment strategy. We primarily reduced our holdings in German and US government bonds.
Off-balance-sheet Fair values unrealised gains and losses Carrying amounts €m 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year 1 Including owner-occupied property.
An overview of the on-balancesheet unrealised gains/losses is available on page 200 1 Presentation essentially shows fixed-interest securities and loans, including deposits and cash at banks, at market value. The approximation is not fully comparable with IFRS figures.
Covered bonds 29% (28%) Corporate bonds 10% (10%) Cash positions/other 5% (4%) Structured products (credit structures) 4% (4%) Bank bonds 3% (3%) Policy and mortgage loans 3% (3%)
Covered bonds make up 29% of our fixed-interest securities. Despite a decline owing chiefly to scheduled redemptions, the emphasis remained on German pfandbriefs, with around 36%.
Government bonds1, covered bonds and corporate bonds by country2 according to fair values3 €bn 31.12.2013 Prev. year Change Government bonds Germany 27.9 31.7 –3.8
Our limited investments in bank bonds totalled 3% of our portfolio of fixed-interest securities. At the reporting date, our proportion of bank bonds from southern European states and Ireland amounted to 7% of our bank bond holdings. Overall, the main focus was on senior bonds, i.e. bonds that are not subordinated or subject to loss partici pation. Subordinated bonds and loss-bearing bonds made up 16% of our bank bond holdings.
Periods to maturity of government bonds, covered bonds and corporate bonds1 according to carrying amounts €bn Carrying amounts Up to one year 10.4 Over one year and up to two years 12.8 Over two years and up to three years 12.1 Over three years and up to four years 11.9 Over four years and up to five years 10.2 Over five years and up to ten years 40.8 Over ten years 51.9 Total 150.1 1 Presentation based on approximation and not fully comparable with IFRS figures.
The market value of our portfolio of structured credit products sank somewhat by €0.4bn to €7.1bn (7.5bn). This asset class involves securitised receivables (assetbacked securities or mortgage-backed securities), e.g. securitisations of real estate finance, consumer credit or student loans. Around 55% of our portfolio of asset- and mortgage-backed securities have a rating of AAA.
Regular income fell slightly against the previous year. Higher dividend earnings only partially offset the lower interest payments from fixed-interest securities. Despite the rise in interest rates in the past financial year, yields on new investments are far lower than the average return on our existing portfolio of fixed-interest investments.
The main reason for the higher write-downs compared with the previous year is the decline in the market values of our swaptions and interest-rate derivatives due to rising interest rates in the past financial year. Even if derivatives are not sold, the changes in their value are reflected in the net balance from write-ups and write-downs. We also needed to make considerably higher write-downs on our inflation derivatives than in the previous year.
In the 2013 financial year, through active asset management we posted net gains on disposal of €1,059m (652m), primarily in our portfolio of fixed-interest securities, especially government bonds, and on equities. By contrast, we posted losses on the disposal of equity derivatives and fixed-interest derivatives. The year-on-year improvement in our result from disposals was due chiefly to higher gains realised in our equity portfolio.
MEAG MUNICH ERGO AssetManagement GmbH (MEAG) is the asset manager of Munich Re. In addition, MEAG MUNICH ERGO Kapitalanlagegesellschaft mbh also offers its expertise to private and institutional clients. The volume of assets under management rose by €1.4bn to €12.9bn. The increase from €9.3bn to €10.2bn in portfolios for institutional investors is particularly gratifying.
— Decrease in equity especially due to lower net unrealised gains on investments
— Further reduction in debt leverage — Group capital over 2.6 times the solvency requirement
5005Debt leverage 31.12.2013 Prev. year Change €m €m % Strategic debt 4,734 5,796 –18.3 Group equity 26,226 27,439 –4.4
Information on contingent liabil ities is provided on page 272 f. in the notes to the consolidated financial statements
Munich Re Group Annual Report 2013 flexib ility or overall capital strength. Furthermore, in addition to dividend payments, we still generally consider share buy-backs an important instrument of active capital management. In November 2013, we announced a buy-back programme for up to €1bn by the 2014 Annual General Meeting. By 6 March 2014, we had repurchased shares with a value of €734m. Including dividend payouts and the share buy-backs from 2006 to 2013, we have been able to return €14.7bn to our shareholders since 2006.
In the 2013 financial year, Munich Reinsurance Company generated net retained profits of €1,300m according to German GAAP accounting. Including these net retained profits, the Company’s revenue reserves amounted to €3,812m (3,629m) as at the balance sheet date. The shareholders’ equity of Munich Reinsurance Company as determined under German GAAP accounting is protected effectively against the risk of loss arising from a random accumulation of losses by a claims equalisation provision totalling €7.7bn. Given this robust capitalisation according to all calculation methods, we intend – subject to the approval of the Annual General Meeting – to pay our shareholders a dividend of €7.25 per share, or a total of €1.3bn, from Munich Reinsurance Company’s net retained profits for the financial year 2013.
As at 31 December 2013, Munich Reinsurance Company’s share capital of €587,725,396.48 was divided into 179,341,212 registered, no-par-value, fully paid shares. The rights and obligations deriving from them follow from the pertinent statutory requirements and the Company’s Articles of Association. The shares are endowed with full voting and dividend rights, with the exception of the 1,919,312 shares held by Munich Re itself at 31 December 2013 (Section 71b of the German Stock Corporation Act – AktG). Each voting share carries one vote at the Annual General Meeting. With respect to the Company, the only parties deemed shareholders in accordance with the German Stock Corporation Act (Section 67) are those entered as such in the Company’s register of shareholders.
Contractual agreements are in place with the members of the Board of Management providing for two- or four-year minimum holding periods for the shares of the Company they have to purchase as part of share-based remuneration programmes.
Information relating to the remuneration report can be found on page 46 ff.
Most recently as at 12 October 2010, Warren E. Buffett and companies in his group notified us in accordance with Section 21 of the German Securities Trading Act (WpHG) of the following direct or indirect shareholdings in Munich Reinsurance Company exceeding 10% of the voting rights: Warren E. Buffett and the aforementioned companies in his group informed us in a letter dated 15 October 2010 that the objective of the investment is to generate trading profits and not to implement strategic objectives.
System of control for employee share scheme where the control rights are not exercised directly by the employees Like other shareholders, employees of Munich Reinsurance Company exercise their control rights in accordance with statutory provisions and the Articles of Association.
The German Stock Corporation Act contains general provisions governing amendments to the Articles of Association (Section 124 para. 2 sentence 2, and Sections 179–181 of the Act). These state that only the Annual General Meeting can make resolutions on changes to the Articles of Association. In order to be carried, such a resolution must receive the votes cast by at least three-quarters of the share capital represented in the vote. The Articles of Association may stipulate a different capital majority (higher or lower) or other requirements, but the Company’s Articles of Association do not provide for any such special features.
Powers of the Board of Management with particular regard to the option of issuing or buying back shares The powers of the members of the Board of Management are defined in Sections 71 and 76–94 of the German Stock Corporation Act. The Board of Management has the following powers to issue and buy back shares: — The Annual General Meeting of 20 April 2011 authorised the Company, pursuant to Section 71 para. 1 (8) of the German Stock Corporation Act, to buy back shares until 19 April 2016 up to a total amount of 10% of the share capital. The shares acquired plus other own shares in the possession of the Company or attributable to the Company in accordance with Section 71a ff. of the German Stock Corporation Act may at no time amount to more than 10% of the share capital. The shares may, in accordance with the provisions of the authorisation, be acquired in various ways: the Company may buy back shares amounting to a maximum of 5% of the share capital using derivatives. The Board of Management is authorised to use shares thus acquired for all legally permissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights. Among other things, the Board of Management is empowered under Section 71 para. 1 (8) of the German Stock Corporation Act to retire the shares without requiring further approval from the Annual General Meeting. By resolution of 7 November 2013, the Board of Management decided to utilise this authorisation to acquire own shares. Around 1.9 million shares had been acquired by 31 December 2013 at a purchase price of €300m.
— The Annual General Meeting of 28 April 2010 authorised the Board of Management to issue, with the consent of the Supervisory Board, convertible bonds or bonds with warrants on one or more occasions up to 27 April 2015 for a maximum nominal
— Under Article 4 para. 1 of the Articles of Association, the Board of Management is authorised, with the consent of the Supervisory Board, to increase the Company’s share capital at any time up to 24 April 2018 by an amount of up to €280m by issuing new shares against cash or non-cash contribution (Authorised Capital Increase 2013). In accordance with the above-mentioned provisions of the Articles of Association, it may exclude subscription rights.
Compensation agreements concluded with members of the Board of Management or employees for the event of a takeover bid There are no compensation agreements with members of the Board of Management or employees for the event of a takeover bid.
The adjusted solvency ratio fell from 277.8% in the previous year to 262.4% in 2013. The fall was due mainly to the decrease in equity.
The cash outflows for financing activities stem mainly from the dividend payment in 2013 and the redemption of a subordinated bond.
Overall in the year under review, cash – which encompasses cash with banks, cheques and cash in hand – fell by €40m (including currency effects) to €2,820m. There were items pledged as security and other restrictions on title amounting to €26m (44m).
— Munich Re as clients’ first port of call for all risk matters — Ongoing, open communication with all capital market participants — Focus of human resources management on staff development — Group-wide environmental management continuously expanded, generating positive impetus for the Group
For Munich Re, dialogue with clients, brokers, shareholders, investors, staff members and the society within which we operate as an enterprise is a crucial requirement for identifying new challenges and changes at an early stage and for developing appro priate solutions.
In reinsurance, we do business with over 4,000 corporate clients from more than 160 countries. Our primary insurers in the ERGO Group serve over 35 million (mainly private) clients in over 30 countries, with the focus on Europe and Asia. The Munich Health business segment has over six million clients in primary insurance and 400 in reinsurance. In Germany, our asset manager MEAG offers its competence not only to around 80,000 private investors, but also to over 60 institutional investors outside the Group, e.g. insurers, utilities, pension funds, church organisations, foundations, local authorities and industrial enterprises.
As reinsurers, we apply our extensive risk knowledge to find individual solutions that meet our clients’ diverse requirements and add value. We know our cedants’ needs, develop innovative risk transfer solutions with them and aim to continue driving forward the expansion of risk competence through strategic cooperations, thus providing our cedants with the full range of underwriting products. Furthermore, clients can access a wide variety of services: as well as our own client platform (connect) and special product publications, the range we offer includes tools to improve business processes, individual consulting services and client seminars on many aspects of underwriting.
ERGO’s brand proposition “to insure is to understand” expresses the primary insurance group’s aim of focusing systematically on customers’ actual requirements, with an approach that sets it apart from the competition. We report annually on the implemen tation of the brand proposition in the ERGO customer report, which was published for the second time in May 2013.
To constantly improve its range of products, ERGO counts on feedback from clients and consumers, such as the members of the ERGO Customer Advisory Board or visitors to ERGO’s Customer Workshop on the internet. Listening to their opinions is an integral part of the process of developing new products. In expanding its provision for the growing number of internet-savvy consumers, ERGO is making use of its many years of experience in direct selling. In 2013, for example, ERGO introduced an online check for policy-switchers in private health insurance, a liability policy that can be customised and concluded online, and an app for reporting claims immediately after an accident.
ERGO also bases the improvement of internal processes on feedback from clients. To align client processes even more consistently with their requirements, ERGO is developing a customer satisfaction index. This is based on extensive surveys and measures the company’s performance at a large number of contact points, thus identifying potential areas for improvement. In April 2014, responsibility for the most important customer processes will be pooled in a new client and sales division.
MEAG’s investment experts adopt a stringent, risk-based approach with the aim of generating excess return – for the same risk – compared with the requirements of their clients within the Group and externally. Munich Re’s insurance units derive their asset management targets from their payment obligations in their core business (asset- liability management) and also specify their risk and return preferences. Specialists at MEAG provide consultancy on structuring portfolios to meet these targets. Depending on the asset class and the investment objectives, MEAG derives investment portfolios on the basis of fundamental indicators, which are then managed according to the “top-down” approach.
The efforts of our staff are crucial to the success of Munich Re. Their professional expertise, commitment and continual readiness to embrace innovation are the factors that drive our business forward. We create the necessary conditions for nurturing and enhancing their personal development and performance in all areas. Developing and keeping this high-level expertise and broad experience for the benefit of the Group is one of our most important objectives.
Rotation of managers and staff members within the Group supports the accumulation of expertise and the transfer of knowledge. In the year under review, job moves to other areas and business fields and to other countries have been specifically introduced into the performance appraisal and staff development processes within the reinsurance group. Depending on business requirements, these changes take place on the basis of flexible models – as exchanges, for extended periods and also on a project basis. This is intended to enhance both professional expertise and intercultural competences.
ERGO’s “Future of Sales” quality and efficiency initiative launched in Germany in 2012 also began to impact staffing levels and will result in the reduction of around 1,100 jobs by the end of 2014. In 2013, following intensive collaboration with the representative bodies, it was possible to come to an acceptable solution from a social and corporate perspective for all staff whose jobs were being cut or who were being moved to a different location.
In 2013, 41.9% of all new managers in our German reinsurance business were women
Further information on our shares can be found in the section
Rest of Europe 33.4% (30.9%) North America 11.9% (13.9%) Asia and Australasia 1.5% (1.5%) Africa, Near and Middle East 1.1% (1.3%) Latin America 0.3% (0.3%)
Our investor relations work continues to meet with a positive response. In several crosssector analyses of the quality of investor dialogue, Munich Re once more achieved leading positions in 2013, with our business partners particularly appreciating the consistency and transparency of our reporting. All the presentations we use in our meetings with analysts and investors and in our conferences and roadshows are published on the internet, and are sent to interested shareholders on request. Many of these events are transmitted live via webstreaming. Enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team. Additionally, the service pages of our shareholder portal on the internet provide our registered shareholders with a wide range of information and communication options.
Around 4,500 shareholders and shareholder representatives participated in the 126th Annual General Meeting on 25 April 2013. Some 34% of the voting share capital was represented in the votes. All the motions were adopted with a clear majority in each case. With online participation in the Annual General Meeting and (electronic) postal voting, Munich Reinsurance Company again offered its shareholders all the facilities for casting their votes on agenda items.
Additional information on the stake in Munich Reinsurance Company held by Warren E.
Buffett and the companies in his group is available on page 96
North America 36.6% Germany 26.3% Rest of Europe 23.1% UK 12.4% Other countries 1.6%
1 Percentage of share capital. Status: 31 December 2013. Source: Munich Re share register
Therefore, we are focusing our reduction efforts on the two above-mentioned areas by investing in energy-efficient technologies and minimising travel by using digital communication. Measures that have proved effective in reducing our emissions are converting the ERGO company car fleet to fuel-efficient vehicles, installing solar panels in Princeton, and giving up buildings in Munich that are not energy efficient.
We offset unavoidable CO2 emissions by buying carbon credits. Selections are made on the basis of best-practice standards and positive social influence through preferred projects. Our successes so far on the road to Group-wide carbon-neutrality by 2015: — Munich Re’s head office in Munich has been carbon-neutral since 2009. — The major locations of ERGO have been carbon-neutral since 2011. — Reinsurance and ERGO have been carbon-neutral since 2012.
We will continue to apply our environmental objectives consistently in 2014 by giving advice to and liaising closely with our individual locations.
We also undertake social commitments everywhere we do business. In order to establish a sensible framework for our international civic commitment, we have established a Group-wide corporate citizenship concept with specific sponsorship criteria. We have a clear focus on business-related topics such as the environment, prevention of natural catastrophes, demographic change, health, and the promotion of science, education and cultural activities in the places we do business. A recent example of this is a new collaboration with the Lenbachhaus municipal art gallery in Munich, in which representatives of the two partners work together to develop various exhibition, educational, publication and event formats that can also be used for Munich Re staff and client events.
Risk governance Munich Re’s risk governance fosters the development and maintenance of an effective risk and control culture, which encompasses all significant risk categories. It is supported by committees at Group and business-segment level.
Group level Ensuring that risk management and risk governance systems are in place and continuously enhanced at Group level is one of the most important tasks of the Group Committee, which convenes quarterly together with the CRO and specialists from the business segments as the Group Risk Committee to address fundamental risk issues arising throughout the Group. The Group Committee also meets quarterly together with the CRO and managers from the business segments with responsibility for investments as the Group Investment Committee – the central management committee for important Group-wide issues relating to investments and specific investment risks.
Risk management for primary insurance is mainly decentralised to ERGO IRM, and supported by local risk management units. The ERGO Risk Committee, comprising members of the Board of Management, the CRO and the CRO of Munich Re, was set up to be the decision-making body.
— Supplementary criteria limit losses that can arise out of individual risk types or accumulations, such as natural hazards, terrorism and pandemics, and also limit market and credit risks that could endanger Munich Re’s ongoing viability were they to materialise.
Implementation of strategy and the risk management cycle The risk appetite defined by the Board of Management is reflected in our business planning and integrated into the management of our operations. If capacity shortages or conflicts with the limit system or regulations arise, defined escalation and decisionmaking processes must be followed. These have been designed to ensure that the interests of the business are reconciled with risk-management considerations. If necessary, risks are ceded or hedged by means of reinsurance, derivatives or other forms of risk relief.
Our implementation of risk management at operational level embraces the identifi cation, measurement, analysis and assessment of risks, and the resultant risk reporting, limitation (restriction to a level we have defined as appropriate) and monitoring. All significant risks are covered.
We are constantly refining our risk measurement tools, which are tailored to each segment. Our lead risk measure is based on economic principles. We regularly compare the results produced by our risk model with those of supervisory authorities, rating agencies and commercial modelling companies at a number of levels, including Group, segment and legal entity level or by risk type. We also regularly perform benchmarkings of our risk-model results and participate in industry surveys to constantly challenge and refine our risk measurement tools.
Risk analysis and assessment are carried out at the highest level in IRM, in the form of a consolidated Group view, taking into account limitations on capital fungibility. They are based on the analyses prepared by the risk management units of our reinsurance, ERGO, Munich Health and asset management operations. Besides this, IRM is responsible for
The risk management system is subject to internal auditing by Group Audit, which carries out annual checks on various functions in accordance with its audit plan.
For each of Munich Re’s business segments, the ICS delivers a risk map at process level, which systematically links the significant risks and controls for processes. By making our risk situation transparent in this way, we can focus on and react to weaknesses or changes in internal and external requirements. This means that we are able to identify operational risks at an early stage, locate control shortcomings immediately and take effective remedial action.
However, notwithstanding the careful design and diligent use of our ICS, which has now developed into a high-quality system, it can provide only adequate – but not total – certainty that all operational risks have been covered. The controls put in place, the processes coordinated Group-wide and the supporting IT solutions cannot guarantee the complete avoidance of errors or prevention of individual cases of fraud. We are nevertheless certain that the controls and documentation requirements in place justify the maximum possible confidence on the part of our stakeholders.
The identification, management and control of risks arising out of the accounting process is indispensable for the production of reliable annual financial statements at both consolidated and individual-company level. It is essential for all items in the accounts to be shown correctly and valued appropriately and for the information provided in the notes and the management report to be complete and correct.
An important feature of the accounting process is timely compliance with new legal requirements in Munich Re’s reporting. By means of an accounting manual and regular circulation of information on changes required, Munich Re ensures that uniform rules are applied throughout the Group for the treatment, valuation and disclosure of all items in the balance sheet, income statement and other components of the financial statements. Any amendments are subject to a mandatory procedure as regards timing, responsibilities and circulation of information.
The accounting process is to a large degree dependent on IT systems, which must be protected against unauthorised access and are subject to ongoing controls to guarantee the effectiveness and stability of the information and communication flows. A central IT solution drawing on general ledgers largely standardised throughout the Group is used to produce the consolidated financial statements. It is based on harmonised basic data, uniform processes and posting rules, and a standard interface for delivery of data to the Group or subgroup. Authorisation procedures regulate access to accounting systems. Our internal audit function regularly audits data management in the accounting systems to ensure that it is being performed in a proper and orderly manner.
Internal risk reporting provides the Board of Management with regular information on the risk situation, as regards both the individual risk categories (ongoing) and the entire Group (quarterly). Early-warning mechanisms thus ensure that negative trends are identified in sufficient time for countermeasures to be taken. The Audit Committee of the Supervisory Board and the Federal Financial Supervisory Authority (BaFin) also receive the quarterly internal risk report.
Our general definition of risk is possible future developments or events that could result in a negative deviation from the Group’s prognoses or targets. According to our class ification, significant risks are risks that could have a long-term adverse effect on Munich Re’s assets, financial situation or profitability. We have applied this definition consistently to the individual business units and legal entities, taking account of their individual risk-bearing capacity. There are significant risks in the following risk categories: Underwriting risk: Property-casualty insurance The property-casualty risk category encompasses the underwriting risks in the property, motor, third-party liability, personal accident, marine, aviation and space, and credit classes of insurance, together with special classes also allocated to propertycasualty. Underwriting risk is defined as the risk of insured losses being higher than our expectations. The premium and reserve risks are significant components of the underwriting risk. The premium risk is the risk of future claims payments relating to insured losses that have not yet occurred being higher than expected. The reserve risk is the risk of technical provisions established to cover losses that have already been incurred being insufficient.
Due to the diversity and extensive ramifications of Munich Re’s business, it is not possible to produce a set of rules for acceptance that would fully cover relevant risks. The expertise of our underwriters on the ground is therefore of prime importance, particularly in reinsurance. We recognise this by providing advanced training and IT systems for risk assessment and pricing, publishing internal information sheets and underwriting recommendations, and setting up working groups to create and transmit underwriting knowledge.
We calculate the reserves for losses and claims settlement costs in accordance with actuarial practice based on substantiated assumptions, methods and assessments. The assumptions are regularly reviewed and updated. Application of Group-wide reserving rules guarantees a substantially reliable and consistent procedure. In addition, internal audits are carried out Group-wide to verify compliance with these rules and the appropriateness of the reserves.
Further information on propertycasualty business can be found in the notes to the consolidated financial statements on page 259 ff.
Underwriting risk: life and health insurance The underwriting risk is defined here as the risk of insured benefits payable in life or health insurance business being higher than expected. Of particular importance are the biometric and lapse risks. We differentiate between risks that have a short-term or long-term effect on our portfolio.
The information provided on underwriting guidelines and limits for property-casualty insurance also applies to life and health reinsurance. In primary insurance, regular reviews of the actuarial assumptions by actuaries and the requisite amendment of rating rules ensure that risks and processes are effectively controlled. If there is a lasting change in the actuarial assumptions applied in health primary insurance, it is generally possible to adjust the premiums for long-term contracts.
Our investments must comply with Group-wide minimum standards as defined in our General Investment Guidelines. We also take account of risk restrictions on investments defined in our risk strategy.
Credit risk We define credit risk as the financial loss that Munich Re could incur as a result of a change in the financial situation of a counterparty, such as an issuer of securities or other debtor with liabilities to our Group.
In addition to credit risks arising out of investments in securities and payment transactions with clients, we actively assume credit risk through the writing of insurance and reinsurance business, for example in credit and financial reinsurance.
In the area of retrocession and external reinsurance in the primary insurance segment, we control the default risk through the Retro Security Committee. The experts on the committee review the quality of our main retrocessionaires and reinsurance counterparties independently and on the basis of various criteria (e.g. minimum ratings, market data and capital requirements) and allocate appropriate limits for the counterparties based on underwriting guidelines laid down by the risk management function.
Operational risk Munich Re defines operational risk as the risk of losses resulting from inadequate or failed internal processes, incidents caused by the actions of personnel or system malfunctions, or external events. This includes criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations, and disagreements with business partners.
Information on derivative financial instruments can be found on page 201 ff.
Information on our ICS can be found on page 112 f.
We use scenario analyses to quantify operational risks. The analyses are produced or updated annually at workshops attended by experienced staff from all business segments and affected companies. The results are fed into the modelling of the economic risk capital for operational risks and are validated using various sources of information, such as the ICS (internal control system) and internal and external loss data.
liquidity risk We manage liquidity risk through our holistic risk strategy, with the Board of Management defining limits on which minimum liquidity requirements for our operations are based. These risk limits are reviewed annually and compliance with the minimum requirements is continuously monitored.
Our objective in managing liquidity risk is to ensure that we are in a position to meet our payment obligations at all times. We also optimise the availability of liquidity in the Group by means of internal funding. Through stringent requirements regarding the availability of liquidity, which also comply with supervisory rules, we ensure that every unit is able to meet its payment obligations.
The action we take to monitor and limit reputational risk ranges from the general identification and recording of risks for the ICS to establishment of whistleblower and ad-hoc reporting procedures. Actual cases that could involve reputation issues are evaluated in the business segments either by a Reputational Risk Committee (RRC) or through a comparable procedure in which a coordinating unit ensures that appropriate experts are consulted. A unit’s Compliance Officer can always be consulted on matters relating to the assessment of reputational risks. In the Group Compliance Committee (GCC), reputational risks are also considered at Group level in order to ensure uniform analysis and handling throughout the Group. Furthermore, sensitive issues that could lead to reputational risks are handled for all segments by our Group Corporate Responsibility Committee (GCRC).
We use our risk management to assess our risk situation on the basis of qualitative and quantitative factors. Throughout the entire period under review, Munich Re’s risk situation was manageable and under control. Our carefully implemented, modern risk management processes combined with our solid level of capitalisation at all times ensured the solvency and viability of the Group expected by our clients and shareholders. In addition to the underwriting and capital market risks inherent in our business model, there are inevitably a large number of other risks to which Munich Re – like every other undertaking – is exposed. The incidence of these risks is random and their occurrence probability and impact are generally difficult to estimate. We therefore closely monitor our environment and our own Group to identify even these risks in good time and to take suitable measures to avert loss or damage.
Munich Re manages its business on the basis of a consolidated Group view, using its internal risk model to determine the capital needed to ensure the Group’s ability to meet its commitments even after extreme loss events.
Our risk model indicates the profit and loss distribution of the available financial resources over a one-year time horizon. It is based on specially modelled distributions for the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risks”. We regularly review these distribution assumptions, comparing them, for example, with loss events that have actually occurred and adjusting them if necessary.
Every risk category is depicted in both the reinsurance and the primary insurance business segments. In the Munich Health segment, the life and health risk categories and operational risks are shown, but not market and credit risk, which we cover in the reinsurance and insurance segments in line with our internal risk control.
Munich Re Group Annual Report 2013 by means of tail dependencies that the various risks are not independent of each other. This gives rise to a smaller diversification effect than if independence is assumed.
A key figure calculated using the internal model is our economic risk capital (ERC). By economic risk capital, we mean the amount of capital that Munich Re needs to have available, with a given risk appetite, to cover unexpected losses in the following year. To determine Munich Re’s economic risk capital, we use the economic profit and loss distribution across all risk segments. The economic risk capital corresponds to 1.75 times the value at risk of this distribution over a one-year time horizon with a confidence level of 99.5%. The value at risk with a confidence level of 99.5% equates to the economic loss for Munich Re which, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. It represents the future risk tolerance under Solvency II. Our Group’s approach of setting its capital requirement at 1.75 times this risk tolerance figure is thus conservative and provides its clients with a high degree of security.
Segment diversification Group 31.12.2013 Prev. year 31.12.2013 Prev. year Change €bn €bn €bn €bn €bn % Property-casualty –0.5 –0.5 9.0 9.7 –0.7 –7.2 Life and health –1.2 –1.6 5.8 7.2 –1.4 –19.4
— The economic risk capital for the property-casualty category fell by €0.7bn due to a decrease in the large and accumulation loss risk. This reduction in the amount of risk capital shown in euros resulted from the depreciation of the US dollar, the Australian dollar and the Japanese yen. It was partially offset by a rise in the basic loss risk.
— The economic risk capital for market risks fell by €2.4bn, due mainly to the rise in interest rates and the adjustment to the evaluation of customer behaviour in life and health primary insurance that resulted in a reduction in the mismatch position and a fall in the interest-rate risk in the primary insurance segment. This was counteracted by the expansion of the equities exposure in the reinsurance segment.
— The economic risk capital for credit risks decreased by €0.4bn, due mainly to the above-mentioned adjustment to the evaluation of customer behaviour.
— The diversification effect between the risk categories “property-casualty”, “life and health”, “market”, “credit” and “operational risk” decreased by €1.3bn, due primarily to a fall of €4.9bn to €34.1bn in the sum of the economic risk capital requirements for the individual risk categories, which in turn also reduces the absolute value of diversification.
Munich Re Group Annual Report 2013 year (reserve risk) and the risk of under-rating (premium risk). To achieve this, we use analytical methods that are based on standard reserving procedures, but take into account the one-year time horizon. In the case of the basic losses, the annual readjustment of the models resulted in an increase in the economic risk capital requirement, due primarily to greater consideration of the interdependencies between treaty years.
Storm europe Aggregate VaR (return period: 200 years) €bn (before tax), retained
Life and health In life and health business, the risk modelling takes account of countervailing developments with both short- and long-term effects on the risk drivers that influence the value of our business.
In addition to the simple risk of random fluctuations resulting in higher claims expend iture in a particular year, the developments with a short-term impact that we model notably include the risk of above-average claims that could arise on the occurrence of rare but costly events such as pandemics.
Equity risk The market value of our investments in equities, including participating interests, was €10.1bn (€8.4bn) as at 31 December 2013. As at that date, on a market-value basis the ratio of equities to total investments was 4.6% (3.7%) before taking derivatives into
Reinsurance Primary insurance Segment diversification 31.12.2013 Prev. year 31.12.2013 Prev. year 31.12.2013 Prev. year €bn €bn €bn €bn €bn €bn
General interest-rate risk 2.7 3.2 4.9 9.0 –2.5 –3.9 Specific interest-rate risk 1.7 2.1 3.5 5.2 –0.6 –1.2
Interest-rate risks In reinsurance, the interest-rate risk on fixed-interest investments in units of modified duration (interest-rate sensitivity) was 4.4, whereas the modified duration of the liabilities side was 3.1. The sensitivity of available financial resources to a parallel increase of one basis point in all interest-rate curves (DV01) amounted to –€4.1m. Were such a parallel shift in the interest-rate curves to occur, the available financial resources would change by that amount.
The decrease in the general interest-rate risk resulted from the improved market environment and the changes in the modelling of customer behaviour. For example, the update produced a shorter payout profile for annuity policies, which reduced sensitivity to interest rates. The generally higher interest rates and adjustment to the evaluation of customer behaviour described above also led to a decrease in the specific interest-rate risk.
Currency risk The currency risk decreased in relation to the end of the previous year due to lower foreign-currency mismatch in the reinsurance portfolio.
Information on the ratings of the securities can be found in the notes to the consolidated financial statements on page 199 ff.
The unrealised gains and losses not accounted for in the financial statements include adjustments to items in property-casualty and Munich Health that have not been measured at market value. They relate primarily to land and buildings, and to loans. We perform various valuation adjustments for property-casualty and life and health. In property-casualty, we project future claims payments using actuarial methods. We discount estimated cash flows in property-casualty and for Munich Health, and add a risk margin derived in accordance with strict economic principles. In the case of business for which we show a Market-Consistent Embedded Value (MCEV), we regard the embedded value as capital available to cushion risks and take into account the portion not already included in IFRS equity. Capitalised goodwill and other intangible assets on the other hand are included in the Group’s IFRS equity, but we deduct them when calculating economic equity, as they might not retain their value in crisis situations. We treat deferred tax assets recognised for loss carry-forwards under IFRS in the same way if they are not covered by an excess of deferred tax liabilities over deferred tax assets at the company concerned or in the US tax group.
Hybrid capital comprises subordinated liabilities and the “funds financing new business” of German life primary insurance companies. Attributable neither to shareholders nor to policyholders, they are available for the preliminary financing of new business by business in force.
We report on our regulatory solvency requirement on page 98 f.
Despite the increase in interest rates in 2013, bond yields from low-credit-risk countries remain at a relative historical low. The low-interest-rate environment continues to present life insurance companies in the eurozone in particular with major challenges. There is also the risk that highly indebted nations will seek to solve their problems at the cost of savers. The fluctuations on the capital markets give rise to considerable volatility in our investments and liabilities at the valuation dates. We counter these risks with various risk management measures.
In monitoring the country risks, we do not simply rely on the usual ratings, but perform independent analyses of the political, economic and fiscal situation in key countries in which investments might potentially be made. Our experts also evaluate and draw conclusions from the movements in the market prices of the bonds or derivatives issued by the country concerned. On this basis, and taking account of the investment requirements of the fields of business in the respective currency areas and countries, proposals for limits or action to be taken are submitted to the Group Investment Committee. These limits are mandatory throughout the Group for investments and the insurance of political risks, and any exceptions must be approved by the Group Committee.
Pandemic Another example of an overarching accumulation is a serious pandemic, which would expose Munich Re – like other companies in the insurance industry – to risks resulting from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk with a detailed analysis of our overall exposure (scenario analysis), and definition of appropriate limits.
Climate change represents one of the greatest long-term risks of change for the insurance industry. In our Corporate Climate Centre, we analyse and assess this risk and are developing a holistic strategic approach. The findings are made available to all business areas of Munich Re.
Whilst we are in a position to adequately assess the known risks in our portfolio on the basis of current climate research, scientific research into climate change is complex. The political and regulatory environment in which we operate is developing fast and we must remain vigilant with regard to the identification and evaluation of new and changing risks. We adopt a multidisciplinary approach, using and combining the pertinent experience and expertise of our scientists, specialist underwriters, lawyers, economists and actuaries as appropriate for the risk situation. If new findings in climate research or actual claims development necessitate adjustments in risk assessment, we are able to make these changes promptly because the contractual periods of most of our natural hazards covers are only one year.
We identify trends and faint signals in many ways, including systematic trend research, using Munich Re’s knowledge management. Regular structured discussions are held in our “emerging risks think-tank” and by our group of experts – the global “emerging risk community” – which investigate the possible impact of emerging risks on Munich Re. They look at interconnections and interdependencies between different risks and other consequences linked directly or indirectly to emerging risks. Cooperation with external partners, such as the CRO Forum’s Emerging Risks Initiative, complements our internal early-warning system.
As a consequence of increasing global dependencies and the rapid spread of technological innovations, events which test the limits of traditional scenario-based risk management are occurring with greater frequency. Both the occurrence of an event and its potential consequences are increasingly difficult to foresee – past examples of this are the earthquake in Japan and the floods in Thailand in 2011. Not only did both natural catastrophes have a devastating impact on the population, infrastructure and economy in the affected regions, but they also hit worldwide supply chains, with an indirect effect that industrial production was interrupted in far-away countries. Such chains of events will take on greater importance in future. We therefore adopt a system- based approach to analyse dependencies in complex risks, for which Munich Re has developed its Complex Accumulation Risk Explorer software (CARE). Using this method, risks and their interaction can be made more transparent and at least partially quantified. With CARE, we can improve the identification and structuring of complex accumulation risks for our own risk management and provide support for our clients, thus enabling us to meet the rising demand for reinsurance of these types of risks.
Legal, supervisory, balance sheet and tax risks legal risks In December 2009, Munich Re’s Spain and Portugal branch lodged an appeal against the Spanish antitrust authority (Comisión Nacional de la Competencia – CNC) with respect to an administrative order imposing a fine of €15.9m for alleged collusion restricting competition. The appeal was upheld. The CNC then appealed against the court’s decision within the prescribed period. The EU Commission has now intervened in the proceedings as an “amicus curiae”.
Former minority shareholders of ERGO Versicherungsgruppe AG are seeking to gain increased squeeze-out cash compensation by way of shareholder compensation complaint proceedings. The material risk is limited by the number of shares eligible for compensation (approx. 237,000) and the upper limit on the scale within which the corporate value of ERGO Versicherungsgruppe AG can be set as at the date of valuation.
A number of cases are pending before courts with respect to various companies in the Ideenkapital Group, which developed closed-end funds that it marketed in particular to private investors via banks. Its portfolio includes media, property, life insurance and shipping funds. The claimants are fund investors, who for the main part are asserting significant defects in prospectuses and products. It is not possible to exclude the possibility of other claims being filed and that reputational risk will result.
Supervisory risks In the American Modern Insurance Group (American Modern), it was discovered that agents appointed by American Modern for its Financial Institutions Division had been quoting and charging policyholders rates that were partly under – but predominately over – the rates approved by the regulators. American Modern self-reported the rate variances to the responsible regulators, and is working with them to draw up a “corrective action plan”.
Tax risks As a reaction to the financial markets and sovereign debt crisis, a trend towards increased corporate tax burdens is apparent across Europe. In Germany, discussion is focused on the introduction of a financial transactions tax and the restriction of tax privileges for investment funds. After the already implemented abolition of tax exemption for free-float dividends, it is not unlikely that in future there will be taxation of gains on disposals of free-float shareholdings. Which of these ideas will actually be realised is not yet clear. Additional annual tax burdens in the lower three-digit million range cannot be ruled out.
Regulatory developments After many years of discussions, the European Council, European Parliament and European Commission have decided that Solvency II will come into effect on 1 January 2016. Member States must ensure that the Solvency II Directive has been implemented no later than 31 March 2015. Therefore, we should be able to apply for authorisation of our internal model as from April 2015. EIOPA has published Preparatory Guidelines for Solvency II requirement specifications for the transitional period until Solvency II is implemented.
Consultation continues in the European Parliament and the European Council on the proposals by the European Commission to revise the Insurance Mediation Directive (IMD2), the Markets in Financial Instruments Directive (MiFID2), and the Regulation on key information documents for investment products (PRIPs Regulation). Controversy remains, especially on the issues of transparency of remuneration, and prohibitions on commission. The Scandinavian countries, the Netherlands and the United Kingdom are all seeking to establish the predominance of their own regulatory environment across the EU. However, the German government favours minimum harmonisation that leaves room for national distribution structures.
Work is still in progress at a global level on additional supervisory requirements for systemically important financial institutions (SIFIs). Systemic importance is determined not by the fundamental significance of a sector for the economy, but by the impact the insolvency of a company could have on global financial markets and the real economy. The insurance industry believes that the core business of primary insurers and reinsurers does not give rise to systemic risk. In fact, during the financial crisis insurers contributed towards increased stability. Nonetheless, the Financial Stability Board (FSB) has published a list of nine globally operating primary insurance companies that it classifies as systemically important – the global systemically important insurers (G-SIIs). A decision on the possible systemic importance of reinsurers has been postponed by one year, and is expected in July 2014. It is possible that the global debate will be followed by a national one. In addition, certain legal consequences could have an indirect effect on companies that are not classified as systemically important. It is, for example, to be assumed that certain aspects of a recovery and resolution plan will ultimately be prescribed for all larger insurance companies. Our supervisory experts and many supervisory authorities already regard such plans as constituting an integral part of good risk management today.
The ongoing discussions regarding the German healthcare system may result in further changes to the statutory parameters, notably the “citizens’ insurance scheme”. If, unlike now, all citizens were to be compulsory members of the German public health insurance scheme, it would spell the end of at least new business for private health insurers in comprehensive health insurance. We have been monitoring this risk for many years. Similar proposals have been put forward for “citizens’ long-term care insurance”.
The business model pursued by Munich Re combines primary insurance and reinsurance under one roof. We are convinced of the future potential of traditional reinsurance. With the primary insurance activities we operate out of the reinsurance segment and with our business fields ERGO and Munich Health, we have expanded our range of profitable growth opportunities. We assume risks from many different areas of private and economic life, and provide financial protection and risk management. In the section “Prospects”, we offer an overview of how our business is likely to develop under realistic parameters. We endeavour to address global trends with a long-term impact as extensively as possible. However, surprising and unforeseen developments can never be ruled out completely. To protect ourselves against risks, we have established a sophisticated risk management system, described in detail in our risk report. At the same time, we are also well prepared to seize unexpected opportunities to the benefit of our Group.
Other trends and upheavals with an impact on our clients’ demand for insurance and on supply include technological progress, demographic shifts and changes in the legal environment, in particular regulatory intervention. Given our good capitalisation and high degree of expertise, Munich Re could exploit this demand in all of its business fields. This will also benefit our clients, who will profit from a rapid adjustment of our product solutions to the circumstances of the newly emerging or changing markets.
— Systematic cultivation and widening of expertise allows us to offer new solutions to our clients in key future areas such as renewable energies and weather risks
The business field of reinsurance thus offers many development opportunities, despite the uncertainties in the macroeconomic environment. Primary insurers will, for instance, increasingly require solutions for stabilising their financial position and sustainably optimising their capitalisation, given the more stringent regulatory requirements. Munich Re can provide significant added value as a long-term strategic partner with a strong capital base and a holistic offering ranging from overarching consultancy to the complete spectrum of reinsurance and capital market solutions.
A major impact on our business also derives from trends in the development of severe natural catastrophes. We expect climate change to lead to a long-term increase in weather-related natural catastrophes and the resultant losses, with different effects depending on the region and type of exposure. Where necessary, we are adjusting our risk models and risk management accordingly. In addition, we are making significant investments in our Exposure Roadmap, a tool to improve risk assessment by evaluating loss susceptibility. Measures to contain climate change provide Munich Re with substantial business opportunities, as the use of new technologies, for example in the field of renewable energies, is facilitated by new kinds of risk transfer solutions.
But irrespective of this, there are long-term opportunities for expansion in reinsurance’s core business, since the property values in many regions exposed to natural hazards are increasing steeply and the demand for insurance is likely to grow at least as strongly as the supply of capacity from traditional reinsurers and capital market instruments. Munich Re is excellently positioned with its competence in the analysis of major loss events and possible product solutions based on this.
Greater demand for insurance due to rising values in regions with natural hazards exposure
In the present economic environment, life insurance presents challenges and opport unities, with rising demand for old-age provision due to greater life expect ancy on the one hand, and volatile capital markets with low interest rates on the other. As a reinsurer, Munich Re is a competent partner for life primary insurance companies thanks to its tailored offering of asset protection solutions. We also see growth potential in the coverage of longevity risk, although we are adopting a very prudent and selective approach here, given the difficulties involved in robust trend estimates. Besides this, our reinsurers have closely supported ERGO in structuring its new product family, with the products ERGO Annuity Guarantee and ERGO Annuity Opportunity launched in 2013.
In primary insurance, ERGO is consistently pursuing the strategy it adopted with its brand proposition “To insure is to understand”. Its strong focus on customer requirements is a key differentiating factor in the market and is opening up additional growth opportunities for us.
In cooperation with its sales partners, ERGO applies a uniform sales advice approach based on analysing a customer’s personal circumstances. By using this instrument broadly in all of its sales organisations since 2013, ERGO ensures a uniformly high client consultancy standard. ERGO also systematically utilises policyholder feedback to improve its operating divisions.
Consumers are increasingly purchasing insurance cover via traditional and online channels in parallel. In order to cater to this growing target group, ERGO is expanding its direct sales organisation and offering products via a variety of channels in line with demand. In 2013, the first health and property insurance products became available for purchase online. ERGO is largely building on the competence of ERGO Direkt and taking advantage of intra-group knowledge-sharing. The increasing use of online and digital channels is also being taken into account in ERGO’s research and development activities. Hence, ERGO is investing heavily in the development of an e-service offering, aimed at providing customers with tailored access to the various distribution channels.
The capital market phase of persistently low interest rates, paired with a demographically induced strain on state pension schemes, has boosted consumers’ demand for private provision through alternative forms of cover. With the introduction of its unitlinked annuity insurance covers – ERGO Annuity Guarantee and ERGO Annuity Opportunity – in the summer of 2013, ERGO has been offering two variants of a product that is unique in the market to date. The new product line takes due account of the clients’ central needs, namely flexibility, security and return. The dynamic investment concept significantly improves the return opportunities for our clients, especially in a recovering capital market environment, which also offers growth prospects for us.
A global health insurer and reinsurer has a variety of opportunities for growth, depending on the level of development in the international health markets. With its global set-up and combination of primary insurance and reinsurance know-how, Munich Health is in a position to meet many different client needs.
The developing and emerging countries are facing the challenge of swiftly establishing healthcare systems that provide large sections of the population with access to adequate, affordable healthcare. Private-sector insurance products, which may be closely intermeshed with state schemes, can play a valuable part in supplying the necessary funds in this situation. Munich Health has come up with successful ideas for expanding internationally, and these are continually being improved. In the Middle East, for instance, Munich Health has succeeded in extending its presence from the United Arab Emirates to Saudi Arabia and Qatar by designing intelligent concepts for leveraging shared infrastructure and processes.
Our predictions for the forthcoming development of our Group are based on planning figures, forecasts and expectations. Consequently, the following outlook merely reflects our imperfect assumptions and subjective views. It follows that we do not accept any responsibility or liability in the event that they are not realised in part or in full.
With a consolidated result of more than €3.3bn, our original target of close to €3bn was clearly surpassed, the main reasons being lower-than-anticipated expenditure for major losses in property-casualty reinsurance and claims reserve releases for prior accident years. In addition, we posted a very low tax burden for the year as a whole, chiefly due to the recalculation of tax for prior years and the utilisation of loss carry- forwards. Currency translation effects had a negative impact overall in 2013.
Our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets is difficult to achieve in the current low-interest-rate environment. We are very satisfied with the RORAC of 12.2% for 2013, as well as with the return of 12.5% on total IFRS capital (return on equity, ROE).
— Original target of close to €3bn for 2013 clearly surpassed with a consolidated result of more than €3.3bn
— Dividend proposal for 2013: €7.25 per share — Expected return on investment of around 3.3% for 2014 — Consolidated result of €3bn envisaged for 2014
Comparison of Munich Re (Group) targets for 2013 with results achieved
The consolidated result of €2.8bn for 2013 was clearly above the target corridor of €2.3–2.5bn.
The combined ratio – 98.3% – bettered our target of around 100%, mainly owing to significantly improved claims experience, especially in the case of the Windsor Health Group (WHG).
Munich Health’s consolidated result totalled €150m. Given the difficult situation at WHG, we had originally anticipated a lower result for 2013 and had not ruled out a loss for Munich Health. Following successful restructuring measures, WHG’s result improved and we were able to sell the group at terms and conditions that were appreciably above our planning assumptions.
Target 2014 Gross premiums written €bn Around 50 Consolidated result €bn 3 Combined ratio property-casualty reinsurance % Around 94 Combined ratio property-casualty primary insurance % Around 95 Return on investment % Around 3.3 Return on risk-adjusted capital (RORAC) % 15
Information on the special features of IFRS accounting can be found on page 94
Munich Re Group Annual Report 2013 the characteristics of our liabilities. In particular, based on our position at the beginning of the year, a moderately rising interest-rate level will initially tend to lead to higher results – and falling interest rates to lower results – than those forecast in these pro spects. Changes in the market value and net gains or losses on the disposal of derivatives used by us as hedging instruments and for fine-tuning investments can substantially impact the result. Changes in exchange rates influence our premium income and results in different directions, depending on which foreign currencies are affected. There may be significant swings if exchange-rate fluctuations are strong, although economically speaking – relative to the volume of our business and our investments – we hold few open currency items on our books.
Reinsurance remains an attractive business field, with a wide variety of earnings opportunities for us. Although insurance density in the western industrialised countries and some Asian nations is already high, these markets have an additional need for insurance cover – for instance, because exposure to weather-related natural hazards is growing as the climate changes. In regions with very rapid economic development, the demand for insurance protection remains significant for the large centres of high- quality industrial manufacturing and the rising prosperity of their population. As a result, the primary insurance and reinsurance sectors’ ever increasing supply of capacity is matched by largely untapped demand potential in many classes of business.
We therefore see further good development opportunities in life reinsurance. Stimuli will derive especially from the dynamic expansion of the Asian life insurance markets and from the ongoing privatisation trends in provision for old age, long-term care and disability. We structure our products so that they are tailored to our clients’ needs while conforming to our risk strategy.
Munich Re Group Annual Report 2013 same time, reinsurers have been able to provide ample capacity, since their capital base has also continued to improve thanks to the good results posted in 2013. There has thus been surplus capacity on the supply side. Last but not least, insurance-linked securities are increasingly being favoured by institutional investors such as pension funds in their search for a reasonable return. This capital is mainly being channelled into non-proportional catastrophe business such as covers for hurricane losses in the USA, whilst reinsurers that previously focused on this segment are seeking to diversify into other segments. The prices for reinsurance cover in non-proportional catastrophe business accordingly came under pressure during the renewals in 2013. Munich Re’s portfolio is not as strongly affected by this development, because proportional treaty business accounts for the major part – around two-thirds – of premium volume from traditional property business. However, competition in all lines of business has increased at least temporarily, whilst weak growth in many markets that have traditionally been highly insured is not being balanced by rising demand from the growth regions.
In the renewals at 1 January 2014, we were therefore able to hold our own in a very competitive market environment. In January, treaties with a volume of €8.7bn – somewhat more than half of our treaty business in property-casualty reinsurance – were up for renewal. Our premium volume rose by €235m or 2.7%. This increase is due above all to individual tailor-made risk-transfer solutions for portfolio clients in Asia and Australia. We did not renew business that failed to meet our profitability requirements.
Overall, the prices in our portfolio fell by around 1.5%, especially in natural catastrophe business, with stronger decreases in North America than in Europe. Price levels in casualty business and in credit and bond reinsurance were marginally down overall. In marine and aviation reinsurance, prices fell more than in the other lines of business on average. The fact that the price erosion for Munich Re was relatively low compared with the rest of the market underscores our consistently profit-oriented underwriting policy.
The renewals at 1 April 2014 (mainly Japan) and 1 July 2014 (parts of the US market, Australia and Latin America) will involve a premium volume of around €3.2bn of reinsurance treaty business, with a greater proportion of natural catastrophe business than the renewals in January. Munich Re expects the environment to remain competitive, should there be no major loss events.
For 2014, we anticipate that gross premiums written in property-casualty reinsurance will total around €17.5bn, i.e. slightly higher than last year. We are still aiming for a combined ratio of around 94% of net earned premiums, which would correspond to the ratio for 2013, had there not been fewer random major losses than expected in that
Munich Re Group Annual Report 2013 period. The fluctuating incidence of major losses in individual years will be a factor of uncertainty in 2014 as well. We have based our estimates on major losses totalling around €2bn, or 12% of net earned premiums.
Gross premiums in reinsurance as a whole should be around €28bn overall in 2014, i.e. about the same level as last year, although currency translation effects could potentially have a considerable impact. We project that the consolidated result for 2014 in reinsurance will be in the range of €2.3–2.5bn, some €0.4bn below the result for 2013, which was particularly good, partly for tax-related reasons.
In future, the ERGO Insurance Group will gear itself even more strongly to clients’ needs. With effect from 1 April 2014, ERGO is grouping all customer-oriented back-office, benefits and claims-service operations, including the management of applications and contracts, in the new Customer and Sales Services Division. Life and health insurance in Germany will also be managed under one Board member’s area of responsibility from that date.
In life primary insurance, our total premium income is likely to be somewhat below last year’s level at just under €7bn, with gross premiums written ranging between €5bn and €5.5bn. Given the persistently low interest rates worldwide and a climate that is thus not conducive to private provision for old age, the environment remains challenging. Development will be substantially influenced by volatile, heavily interest-rate- dependent single-premium business. With the product generation we launched in the German market in summer 2013, we see good opportunities to position ourselves promisingly in this difficult market.
In property-casualty primary insurance, gross premiums written are likely to amount to a little over €5.5bn. For German business, we are anticipating a mild increase to slightly under €3.5bn. At the same time, we are attaching great importance to adequate prices. Particularly in the highly competitive German motor market, we are consistently implementing measures to improve the earnings situation. In international business, we project that gross premium volume will move sideways at a level of €2.2bn. The combined ratio in property-casualty business should be down by around two percentage points and amount to a good level of around 95%, with domestic business in particular contributing to the improvement.
For the primary insurance segment, we project a consolidated result for 2014 in the range of €400–500m, with €350–450m for the ERGO Group. The difference between the consolidated result targets for the primary insurance segment and ERGO is mainly attributable to intra-Group business between primary insurance and reinsurance. The mean of the two result ranges is marginally below the consolidated result for 2013.
We remain convinced that, owing to medical advances and improved life expectancy, there is a wide range of growth opportunities available to Munich Health in the international healthcare markets. We intend to utilise these opportunities even better in future by adjusting our strategic orientation. In reinsurance, we expect growth to result from our clients’ increasing numbers of insureds and a rise in demand for non- traditional reinsurance solutions. Based on the outcome of the main renewals in January, we are anticipating a moderate strengthening of profitability. Following the sale of WHG, we project stable development in primary insurance business, with the profitability of our major subsidiaries in Spain and Belgium remaining high. Altogether, we expect a profit of around €100m for 2014, a lower figure than last year, which benefited from positive special factors.
The duration of the investment portfolio is a key lever of our asset-liability management. We gear the duration of our investments closely to the duration of our liabilities. As a result, both sides of the economic risk-based balance sheet – important for managing our business – respond similarly to changes in interest rates, whilst there may be significant fluctuations in the consolidated balance sheet under IFRS. We marginally cut the duration in the reinsurance segment in the 2013 financial year. In principle, we intend to keep the duration constant in 2014. In life primary insurance, we aim to prolong the average investment period somewhat in the current financial year. Besides the duration, we also take the currencies and inflation sensitivity of our liabilities into account in the development of our investment strategy. For 2014, we plan to moderately reduce our portfolio of inflation-linked bonds. Over the course of the year, we will make the fine-tuning of our investments dependent on our current market assessments, whilst rigorously adhering to our fundamental strategy of gearing assets to the structure of our liabilities.
In 2013, we increased our investments and equity investment commitments in infrastructure, renewable energies and new technologies (RENT) to around €1.5bn. We are planning to further expand this investment in 2014, provided that the parameters are reliable and we can generate an appropriate return. We are aiming to achieve this by continuing to strongly diversify our infrastructure investments both regionally and by segment. This enables us to achieve a spread of the technological and political risks and thus of this portfolio’s main risk drivers. We will be additionally focusing on bonds and loans for infrastructure projects in 2014. We plan to slightly expand our real estate portfolio over the next few years, subject to market developments.
As regards the economic value added in terms of economic earnings, we anticipate a pleasing albeit lower figure than last year, in line with the IFRS results anticipated for the Group and the business segments. This forecast is based on the assumption of unchanged capital markets and modelling parameters, and a normal major-loss incidence. Adjusted to eliminate special factors in the past year, economic earnings would thus be at around the same level as in 2013.
Consolidated balance sheet 146 Consolidated income statement 148 statement of recognised income and expense 149 group statement of changes in equity 150 Consolidated cash flow statement 152 notes to the consolidated financial statements Application of international Financial Reporting standards (iFRss) 153 Declaration of Conformity with the german Corporate governance Code in accordance with section 161 of the german stock Corporation Act (Aktg) 153 Recognition and measurement 153 Consolidation 162
Foreign currency translation 178 segment reporting segment assets 180 segment equity and liabilities 180 segment income statement 182 non-current assets by country 184 investments in non-current assets per segment 184 gross premiums written 185 notes to the consolidated balance sheet – Assets 02 other intangible assets 189 03 Land and buildings, including buildings on third-party land 191 04 hierarchy for the fair value measurement of investments 192 05 investments in affiliated companies and associates 198 07 other securities held to maturity 199 08 other securities available for sale 200 09 other securities at fair value through profit or loss 201 10 Deposits retained on assumed reinsurance 205 11 other investments 205 12 Ceded share of technical provisions 206 13 other receivables 206
14 Deferred acquisition costs 208 15 Deferred tax 210 16 other assets 211 17 non-current assets and disposal groups held for sale and sold during the reporting period 213 notes to the consolidated balance sheet – equity and liabilities 19 Fair value hierarchy of liabilities 217 20 subordinated liabilities 219 21 unearned premiums 220 22 Provision for future policy benefits 222 23 Provision for outstanding claims 223 24 other technical provisions 227 25 gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 228 26 other accrued liabilities 229 27 bonds and notes issued 234 28 Deposits retained on ceded business 235 29 other liabilities 235 notes to the consolidated income statement 31 income from technical interest 238 32 expenses for claims and benefits 239 33 operating expenses 241 34 investment result 243 35 other operating result 247 36 other non-operating result, impairment losses of goodwill and net finance costs 248 37 taxes on income 249
Disclosures on risks from insurance contracts and financial instruments 38 Risks from life and health insurance business 252 39 Risks from property-casualty insurance business 259 40 Credit risks from ceded reinsurance business 264 41 Market risks from financing instruments – sensitivity analysis 265 other information 43 Related parties 267 44 Personnel expenses 267 45 Long-term incentive Plan 267 46 Mid-term incentive Plan 270 47 Remuneration report 271 48 number of staff 272 49 Auditor’s fees 272 50 Contingent liabilities, other financial commitments 272 51 Restrictions regarding transfer of capital 273 53 events after the balance sheet date 275 54 earnings per share 275 55 Proposal for appropriation of profit 275
Notes 31.12.2013 Prev. year Change €m €m €m €m €m % A. Intangible assets i. goodwill (1) 3,292 3,376 –84 –2.5 ii. other intangible assets (2) 1,380 1,564 –184 –11.8
F. Cash at banks, cheques and cash in hand 2,820 2,860 –40 –1.4
Consolidated financial statements Consolidated balance sheet 1 Previous year’s figures adjusted owing to iAs 8; see “Changes in accounting policies and other adjustments”.
» Consolidated balance sheet as at 31 December 2013 – Assets (XLs, 43 Kb)
Notes 31.12.2013 Prev. year Change €m €m €m €m % A. Equity (18) i. issued capital and capital reserve 7,426 7,421 5 0.1 iii. other reserves 2,369 5,650 –3,281 –58.1 iV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,313 3,188 125 3.9
C. Gross technical provisions i. unearned premiums (21) 7,994 8,134 –140 –1.7 ii. Provision for future policy benefits (22) 111,427 109,769 1,658 1.5 iii. Provision for outstanding claims (23) 53,061 53,751 –690 –1.3 iV. other technical provisions (24) 13,519 13,960 –441 –3.2
» Consolidated balance sheet as at 31 December 2013 – equity and liability (XLs, 44 Kb)
» Consolidated income statement for the financial year 2013 (XLs, 50 Kb)
Gains (losses) recognised in equity –714 –67 Recognised in the consolidated income statement – –
Other changes 2 16 I. Items where income and expenses recognised directly in equity are reallocated to the consolidated income statement –3,290 2,324 Remeasurements of defined benefit plans 184 –382 Other changes – – II. Items where income and expenses recognised directly in equity are not reallocated to the consolidated income statement 184 –382 Income and expense recognised directly in equity (I + II) –3,106 1,942 Total recognised income and expense 236 5,146 Thereof: Attributable to Munich Reinsurance Company equity holders 228 5,115 Attributable to non-controlling interests 8 31
group statement of changes in equity for the financial year 2013
income and expense recognised directly in equity – – –339 – 2,343 –69 –8 – 15 1,942
Currency translation – – – – – –710 – – –4 –714 unrealised gains and losses on investments – – – – –2,599 – – – –13 –2,612 Change resulting from valuation at equity – – 6 – 21 – 8 – – 35 Change resulting from cash flow hedges – – – – – – –1 – – –1 Remeasurements of defined benefit plans – – 188 – – – – – –4 184 other changes – – 2 – – – – – – 2 total recognised income and expense – – 196 – –2,578 –710 7 3,313 8 236 Change in shareholdings in subsidiaries – – 2 – – – – – –4 –2 Change in consolidated group – – – – – – – – – – Dividend – – – – – – – –1,255 –3 –1,258 Purchase/sale of own shares –4 9 24 –218 – – – – – –189 Retirement of own shares – – – – – – – – – –
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity Issued Consolidated capital Capital reserve Retained earnings Other reserves result Retained earnings before Unrealised Reserve from Valuation result deduction of Own shares gains and currency from cash flow €m own shares held losses translation hedges Status at 31.12.2011 588 6,831 11,755 –170 3,603 –223 4 696 247 23,331 Allocation to retained earnings – – –414 – – – – 414 – –
Allocation to retained earnings – – 1,933 – – – – –1,933 – –
Munich Re’s consolidated financial statements have been prepared on the basis of Section 315a para. 1 of the German Commercial Code (HGB) in conjunction with Article 4 of Regulation (EC) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with Articles 2, 3 and 6 of the aforementioned Regulation and with the rules designated in Section 315a para. 1 of the German Commercial Code.
In accordance with the rules of IFRS 4, underwriting items are recognised and measured on the basis of US GAAP (United States Generally Accepted Accounting Principles) at first-time adoption of IFRS 4 on 1 January 2005.
Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG) In November 2013, the Board of Management and Supervisory Board of Munich Reinsurance Company published an updated Declaration of Conformity with the German Corporate Governance Code as per Section 161 of the German Stock Corporation Act and made this declaration permanently available to shareholders on the internet.
IFRS 13 (05/2011), Fair Value Measurement, provides guidance on measuring items at fair value if another standard prescribes fair value measurement or fair value disclosure in the notes to the financial statements. The standard thus does not determine what items need to be measured at fair value. IFRS 13 thus revises the definition of fair value: it is now defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard includes detailed information on how to determine the fair value for different types of assets and liabilities. In addition, the standard requires further disclosures in the notes – for instance, the fair value hierarchy thus far only required for financial instruments under IFRS 7 has now been extended to include all items measured at fair value. On the basis of IFRS 13, we have verified whether the way Munich Re measures fair value complies with the new provisions. This review found that adjustments in measurement were largely unnecessary.
As a result of the amendments to IAS 19 (rev. 06/2011), Employee Benefits, the option for deferring the recognition of actuarial gains and losses, in particular the “corridor approach”, has been eliminated. These gains and losses must now be recognised in equity with no effect on profit or loss. Furthermore, the past service cost for retroactive amendments in a defined benefit plan is to be immediately recognised in the income statement. The return on plan assets is now to be determined on the basis of the rate used to discount the present value of defined benefit obligations. The administrative costs and taxes payable by the plan are to be deducted from the return. The requirements regarding the asset ceiling have been integrated and further specified. Moreover, additional disclosures in the notes are required, e.g. analysing pension obligations in terms of their risks and sensitivities for the actuarial assumptions. The amendments will not have any material effects on Munich Re, since we have recognised actuarial gains and losses directly in equity since 2006. We have applied the amendments prospectively, as a retrospective application for prior periods did not appear appropriate, also from a cost-benefit point of view. The past service cost for a plan curtailment of €12m was recognised in the first quarter as income in the consolidated income statement. Based on an estimate, the return on plan assets recognised in the consol idated income statement is €18m lower in the first quarter than it would have been under the previous method. Accordingly, the difference compared with the actual income is €18m higher and recognised as a revaluation in equity with no effect on profit or loss. In December 2012, the Accounting Standards Committee of Germany (DRSC) published “Implementation Guidance 1 (IFRS) Specific Issues Relating to Accounting for Partial Retirement Arrangements in Accordance with IFRSs” with regard to the revised IAS 19. For reasons of materiality and from a cost-benefit point of view, we have also applied this implementation guidance prospectively. This resulted in a reduction in “other provisions” of €5m, which we recognised as income in the consolidated income statement in the first quarter.
IFRIC Interpretation 20 (10/2011), Stripping Costs in the Production Phase of a Surface Mine, clarifies when production stripping should lead to the recognition of an asset and how that asset should be measured, both initially and in subsequent periods. This interpretation has no practical relevance for Munich Re.
Our method of calculating technical interest has been modified further with effect from the first quarter. The portion of investment income corresponding to the deposit interest expense is now included as a component in the calculation of the technical interest, and thus in the technical result also in all reinsurance segments and in the Munich Health segment. This change provides for a more accurate presentation of the technical result. As a consequence of the change, the income from technical interest in the financial year 2013 is €1m higher than it would have been under the previous method. Given that these amounts are insignificant, the refinement has, in accordance with IAS 8.8, only been applied to future periods.
The following modifications were applied retrospectively and the previous year’s figures adjusted with the aim of providing more relevant information and improving the presentation and comparability of the financial statements: a) Our disclosure of costs directly connected with equity capital measures has been modified with effect from the first quarter. Previously, externally generated costs directly connected with such measures were recognised in the capital reserve after taking tax effects into account. These costs are now shown in retained earnings. The informative function of the consolidated financial statements is thus enhanced, as the issued capital and capital reserve of Munich Reinsurance Company are directly evident in the consolidated financial statements. As a result of the modification, the capital reserve at 31 December 2013 is €31m higher than it would have been with the previous disclosure method, while retained earnings at 31 December 2013 are €31m lower.
d) The regular review of our valuation of associates at equity found that the carrying amount to be posted in the consolidated financial statements required correcting. One consolidated entry has been amended.
The changes a) and b) have been made in accordance with IAS 8.14 and IAS 8.22. The consolidated balance sheet for the financial year 2012 is affected by the adjustments as follows: Consolidated balance sheet
Changes 31.12.2012 due to as originally adjustments recognised in 2012 31.12.2012 €m a) b) c) d) Assets A. II. Other intangible assets 1,518 – 46 – 1,564 B. II. Investments in affiliated companies and associates 1,467 – – 10 1,477 Thereof: Associates accounted for using the equity method 1,257 – – 10 1,267 Equity and liabilities A. I. Issued capital and capital reserve 7,390 31 – – – 7,421 A. II. Retained earnings 10,946 –31 – 39 –16 10,938 A. IV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,195 – –8 1 3,188 C. IV. Other technical provisions 13,935 – – 25 13,960 E. Other accrued liabilities 4,425 –107 – – 4,318 F. III. Current tax liabilities 3,931 107 – – 4,038 G. Deferred tax liabilities 8,784 – 15 – 8,799
Unless otherwise stated, all standards or changes in standards that have not yet entered into force will be applied by Munich Re for the first time as from the mandatory effective date for entities domiciled in the European Union.
Changes 2012 as due to originally adjustments recognised in 2012 2012 €m b) c) d) 3. Expenses for claims and benefits Gross 41,837 – – 5 41,842 6. Investment result Investment income 14,024 – – 6 14,030
Thereof: Attributable to Munich Re AG equity holders 3,195 – –8 1 3,188
IFRS 11 (05/2011), Joint Arrangements, defines joint operations and joint ventures and specifies how they are to be recognised in the balance sheet. The changes compared with IAS 31, Interest in Joint Ventures, mainly concern the elimination of the option of proportionate consolidation for joint ventures, the amended definition of joint control, and the extended scope of application of joint operations. These may now include arrangements structured through a separate vehicle. The elimination of the option of proportionate consolidation will have no impact on Munich Re, as we do not avail ourselves of this option and already apply the equity method. The two other amendments are not expected to have any major effects on Munich Re.
IFRS 12 (05/2011), Disclosure of Interests in Other Entities, combines the disclosures regarding facts and circumstances governed by IFRS 10, IFRS 11 and IAS 28. The objective of the standard is to provide information on the type and risk of interests in other entities and their implication for the consolidated financial statements. As a consequence, the information provided needs to be more comprehensive than before. In particular, IFRS 12 requires disclosures relating to unconsolidated structured entities, subsidiaries with significant non-controlling interests, discretionary judgments and assumptions in evaluating the nature of interests in other entities, as well as detailed information on each significant joint arrangement and associate. Munich Re will mainly be affected by the extended disclosure requirements relating to non-consolidated structured entities, interests in joint arrangements, discretionary judgements and assumptions.
IAS 28 (rev. 05/2011), Investments in Associates and Joint Ventures, specifically includes amendments following from the publication of IFRS 11 and IFRS 12. Among other things, the standard integrates the balance sheet recognition of joint ventures and circumstances previously governed by SIC 13, Jointly Controlled Entities – Non- Monetary Contributions by Venturers. Furthermore, investments in associates or joint ventures held by open-ended investment funds or for unit-linked insurance, for example, are no longer excluded from the scope of application of the standard. Rather, there is now an option to measure these at fair value with impact on profit or loss. The amendments do not have any major implications for Munich Re.
The IFRS Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) (10/2012) introduces a definition of the term “investment entities” and specifies that such entities are generally excepted from the requirement to consolidate their subsidiaries in future. Instead, they are required to measure them at fair value through profit or loss. The exception from the consolidation requirement does not apply to parents of investment entities that are not themselves investment entities. There are also additional disclosure requirements for investment entities. The amendments are of no relevance for Munich Re.
The amendments to IAS 32 (rev. 12/2011), Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities, clarify some issues in relation to the admissibility of offsetting financial assets and financial liabilities. We are currently proceeding on the assumption that these changes will have no practical significance for Munich Re.
Besides this, in November 2012 the IASB published an exposure draft providing for a further change in the measurement rules relating to financial assets. This is designed to make it possible to continue measuring certain debt instruments at fair value without impact on profit or loss, depending on the contractual cash flows and an additionally defined business model that contains an intention to sell.
The amendments published in December 2013 under the project “Annual Improvements to IFRSs 2010-2012 Cycle” refer to: IFRS 2, Share-based Payment; IFRS 3, Business Combinations; IFRS 8, Operating Segments; IFRS 13, Fair Value Measurement; IAS 16, Property, Plant and Equipment; IAS 24, Related Party Disclosures; and IAS 38, Intangible Assets. The amendments mainly concern clarifications of individual provisions that have turned out to be unclear in practice; they are unlikely to be relevant for Munich Re. The amendments will be mandatory for financial years beginning on or after 1 July 2014.
Consolidated group In accordance with IAS 27, the consolidated financial statements include Munich Re insurance Company (the parent) and all the entities in which Munich Reinsurance Company owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries). Structured entities, e.g. special funds, are consolidated in Munich Re’s financial statements in accordance with SIC 12 if, from an economic point of view, they are controlled by Munich Re.
Other Germany countries Total 1 In addition, 62 German and 3 non-German special funds were included in the consolidated group.
Net assets obtained €m 2013 Prev. year Goodwill/gain from bargain purchase –2 19 Other intangible assets 9 190
Revenue included in the consolidated income statement since the acquisition date 2 Result included in the consolidated income statement since the acquisition date – Contributions to the consolidated revenues as if the acquisition date for the business combination had been 1 January 20133 2 1 The fair value of the receivables acquired as part of the transactions corresponds to the carrying amount. No defaults were expected at the acquisition date.
Munich Re Group Annual Report 2013 the subsidiaries or special purpose entities after their first consolidation are included in Group equity. Amounts relating to intra-Group transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as not being material.
Self-developed and other software, acquired sales networks, client bases and brand names are carried at cost. Self-developed and other software is amortised on a straight-line basis at a rate of 20–33% over its useful life – three to five years – or in exceptional circumstances at a rate of 10% over a period of up to ten years. The useful lives and depreciation rates of the acquired sales networks and client bases are 2–17 years and 6–50% respectively, and those of the brand names 1–30 years and 3–100%; the items in question are generally amortised on a straight-line basis. Impairments or impairment losses reversed are recognised if required. Recognised impairments and impairment losses reversed are distributed in the consolidated income statement between investment expenses, expenses for claims and benefits and operating expenses. If it is not possible to allocate impairments and impairment losses reversed to the functional areas, they are shown under other nonoperating expenses or income.
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, depending on the
Fixed-interest or non-fixed-interest securities available for sale that are not designated as at fair value through profit or loss or recognised under loans are accounted for at fair value, with resulting changes in value recognised in equity with no effect on profit or loss. If no quoted prices in an active market are available, fair values are based on recognised valuation methods in line with the present value principle. Unrealised gains or losses are calculated taking into account interest accrued and, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation (provision for deferred premium refunds), are recognised directly in equity under “other reserves”.
Munich Re Group Annual Report 2013 for hedge accounting, and the positive fair values of insurance-linked derivatives and of derivative components separated from the underlying insurance contract. Securities designated as at fair value through profit or loss comprise structured securities. This designation may only be made at the time of acquisition; reallocation to this category in later periods is not possible.
Other investments comprise deposits with banks and tangible assets in renewable energies, physical gold, physical gas and forestry investments. Deposits with banks are measured at cost in accordance with the effective interest method. Tangible assets in renewable energies are generally accounted for at amortised cost. The items in question are amortised on a straight-line basis at a rate of 5% over a useful life of 20 years at most. In addition, these items are tested for impairment at each balance sheet date and write-downs made if required. We measure physical gold at the acquisition cost; if the recoverable amount is lower than the carrying amount, a write-down for impairment is made. If there is a subsequent recovery in value, we reverse the impairment loss up to the amount of the original acquisition cost. Physical gas and forestry investments are measured at fair value less estimated costs to sell.
Securities that we lend by way of securities lending continue to be recognised in our balance sheet, as the main risks and rewards remain with Munich Re; thus securities that we have borrowed are not recognised in the balance sheet. Interest income from these transactions is recognised in the investment result.
Determining fair values IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All investments and other items that are recognised at fair value, and such investments and other items that are not recognised at fair value but for which a fair value is disclosed in the notes, are allocated to one of the valuation hierarchy levels of IFRS 13. This valuation hierarchy provides for three levels.
The allocation reflects which of the fair values derive from transactions in the market and where valuation is based on models because market transactions are lacking. In the case of Level 1, valuation is based on unadjusted quoted prices in active markets for identical financial assets which Munich Re can refer to at the balance sheet date. A market is deemed active if transactions take place with sufficient frequency and in sufficient quantity for price information to be available on an ongoing basis. Since a quoted price in an active market is the most reliable indicator of fair value, this should always be used if available. The financial instruments we have allocated to this level mainly comprise equities and parts of investment funds (except property funds) for which either a stock market price is available or prices are provided by a price quoter on the basis of actual market transactions. We have also allocated derivatives and exchange-traded subordinated bonds to Level 1.
For assets allocated to Level 3, we use valuation techniques not based on inputs observable in the market. This is only permissible insofar as no observable market data are available. The inputs used reflect Munich Re’s assumptions regarding the factors which market players would consider in their pricing. We use the best available information for this, including internal company data. The financial instruments allocated to this level of the fair value hierarchy largely comprise land and buildings, real-estate funds, investments in private equity, certain credit structures, and investments in affiliated companies and associates measured at fair value. We have also allocated insurance-linked derivatives and derivative components that are separated from the host insurance contract to Level 3.
Impairment At each balance sheet date, we assess whether there is any substantial objective evidence of impairment in a financial asset or group of financial assets. Impairments in value are recognised as an expense in the income statement. IAS 39.59 contains a list of such factors providing evidence of impairment of financial assets. In addition, IAS 39.61 states that for equity investments, a significant or prolonged decline in the fair value of the investment below its acquisition cost is objective evidence of impairment. These rules are given more concrete form by means of internal guidelines. For equities quoted on the stock exchange, we assume a significant decline in fair value if the market value at the review date is at least 20% below the average purchase price or has been lower than this amount for at least six months. In the case of fixed-interest securities and loans, the main basis for establishing impairment is an indication of substantial financial difficulty on the part of the issuer, the current market situation or media reports on the issuer.
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; see Equity and liabilities C – Gross technical provisions. Appropriate allowance is made for the credit risk.
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 consolidated company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries. Changes in tax rates and tax legislation that have already been adopted by the government at the balance sheet date are taken into account. Deferred tax assets are recognised if a realisation is probable.
Other assets are generally carried at amortised cost. The owner-occupied property recognised under other assets is accounted for as outlined under Assets B Investments – Land and buildings. Plant and equipment is amortised mainly on a straight-line basis, the underlying useful lives ranging between 1 and 50 years. Where required, impairment losses are recognised or reversed for the Group’s owner-occupied property. These impairment losses or impairment losses reversed are distributed between the functional areas.
Under retained earnings, we show the profits which consolidated companies have earned and retained since becoming part of Munich Re, and income and expenses resulting from changes in the consolidated group. In addition, the adjustment amount resulting from changes in accounting policies for earlier periods not included in the consolidated financial statements is recognised in the opening balance of the retained earnings for the earliest prior period reported. Retained earnings are reduced by the externally generated costs directly connected with equity capital measures, after taking tax effects in account.
Other reserves contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and from investments in non-consolidated affiliated companies and in associates that we do not value at equity. These reserves also include unrealised gains and losses from the valuation of associates at equity, differences resulting from the currency translation of foreign subsidiaries’ figures, and the valuation result from the hedging of cash flows. In addition, reversals of impairment losses on equity investments available for sale are recognised in this equity item, without impact on profit or loss.
Subordinated liabilities are liabilities which, in the event of liquidation or insolvency, are only satisfied after the claims of other creditors. They are measured at amortised cost in accordance with the effective interest method.
The provision for future policy benefits in long-term underwriting business is posted for the actuarially calculated value of obligations arising from policyholders’ guaranteed entitlements. As well as life insurance, this concerns portions of health and personal accident insurance, insofar as the business is conducted like life insurance. Measurement is usually based on the prospective method, by determining the difference between the present values of future benefits and future premiums. The actuarial assumptions used for their calculation include, in particular, assumptions relating to mortality, disablement and morbidity, as well as assumptions regarding interest-rate development, lapses and costs. These are estimated on a realistic basis at the time the insurance contracts are concluded and they include adequate provision for adverse deviation to make allowance for the risks of change, error and random fluct uations.
The actuarial assumptions are adjusted if this is shown to be necessary by a liability adequacy test.
The measurement of the provisions for future policy benefits depends on the type of contract, being based either on FAS 60 (life primary insurance without performancerelated participation in surplus, health primary insurance and the bulk of reinsurance treaties), on FAS 97 (life primary insurance on the universal life model, unit-linked life insurance and life reinsurance for assumed policies based on FAS 97) or on FAS 120 (life primary insurance with performance-related participation in surplus).
For life insurance companies, health insurance companies and pension funds subject to supervision by the German Federal Financial Supervisory Authority (BaFin), the supervisory rules in accordance with the German Insurance Supervision Act (VAG), and with the respective statutory orders have to be observed.
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 – are inadequate to cover the expected future benefits, we adjust the relevant technical provisions with recognition in profit or loss and disclose this under impairment losses/unscheduled changes in the notes to the consolidated balance sheet; see Notes to the consolidated balance sheet – Assets (2) Other intangible assets, Assets (14) Deferred acquisition costs, and Equity and liabilities (22) Provision for future policy benefits. 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.
This item encompasses the provision for future policy benefits in life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance). The value of the provision for future policy benefits essentially corresponds to the market value of the relevant investments shown under Assets C – Gross technical provisions. Besides this, as with the provision for future policy benefits in accordance with FAS 97, they may include additional premium components; cf. the notes on Assets C – Investments for the benefit of life insurance policyholders who bear the investment risk. Changes in this provision are fully recognised in the technical result. Insofar as these changes derive from unrealised gains and losses from alterations in the fair values of the related investments, they are matched by opposite changes of the same amount in the investment result. Recognising these provisions at fair value, with impact on profit or loss, avoids valuation mismatches that would otherwise occur due to different measurement of the corresponding investments.
This fully covers the companies’ obligations. Under defined benefit plans, the staff member is promised a particular level of retirement benefit either by the companies or by a pension fund. The companies’ contributions needed to finance this are not fixed in advance. If pension obligations are covered by assets held by a legally separate entity such as 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 assets exceeds the related outsourced pension commitments, this reimbursement right is recognised under “other receivables”.
This item comprises bonds and notes issued, deposits retained on ceded business, current tax liabilities, and other liabilities. Financial liabilities are generally recognised at amortised cost. Derivatives (derivative financial instruments, insurance derivatives and derivative components separated from the host insurance contract) are recognised at fair value. Details of how the fair value is determined are provided under Assets B – Investments.
Under IAS 12, deferred tax liabilities must be recognised if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); cf. Assets H – Deferred tax assets.
The object of our asset-liability management, on which we report on page 94, is to economically minimise excess or insufficient cover in foreign currencies within the Group. Insofar as this is done across Group companies with different functional currencies, it produces economically non-existent fluctuations in the consolidated result. Where exchange gains or losses occur in the translation of foreign-currency transactions into the national currencies of the consolidated companies, they are accounted for under “other non-operating income” and “other non-operating expenses” respectively.
In accordance with the “management approach”, the segmentation of our business operations is based on the way in which Munich Re is managed internally.
We have consequently identified seven segments to be reported: — Life reinsurance (global life reinsurance business) — Property-casualty reinsurance (global property-casualty reinsurance business) — Life primary insurance (global life primary insurance business) — Health primary insurance (German health primary insurance business and global travel insurance business)
— Munich Health (global health reinsurance business and health primary insurance business outside Germany)
Munich Re uses different performance indicators and measures. The main performance metrics at Group level are economic earnings and the return on risk-adjusted capital (RORAC). Besides this, IFRS result contributions are the basis of planning and strategy in all segments. Therefore the uniform assessment basis used for measuring the segment result is the operating result adjusted to eliminate non-operating components. The operating result is split into a technical result and a non-technical result, with an interest component allocated to the underwriting business in the form of technical interest (cf. Notes to the consolidated income statement – (31) Interest on technical provisions). The segments reported under IFRS 8 are now shown after elimination of all intra-Group transactions (mainly dividend payments, sales, reinsurance transactions, receivables and corresponding interest income). Our segment reporting no longer has a consolidation column.
Intra-Group loans are completely eliminated in the balance sheet through consolidation. By contrast, the expenditure for the borrowers and income for the lenders is shown unconsolidated under “Other operating result, impairment losses of goodwill and net finance costs” for the segments concerned. All intra-Group shareholdings are consolidated, and all earnings and expenditure of the subsidiaries are shown in their segments.
B. Gross technical provisions I. Unearned premiums 28 37 5,587 5,776 30 15 99 99 1,766 1,755 484 452 – – 7,994 8,134 II. Provision for future policy benefits 13,633 13,352 27 32 69,182 69,508 27,175 25,544 434 425 976 908 – – 111,427 109,769 III. Provision for outstanding claims 5,948 5,652 37,847 39,097 1,758 1,648 941 917 5,730 5,483 837 954 – – 53,061 53,751
Thereof: Interest charges and similar expenses 21 24 36 31 16 9 16 15 53 59 19 18 1 1 162 157 Write-downs of other operating assets 2 4 6 13 10 10 6 6 19 33 12 4 – – 55 70 9. Deduction of income from technical interest –683 –658 –1,183 –1,323 –3,240 –3,289 –1,410 –1,372 –209 –224 –39 –52 – – –6,764 –6,918 12. Other non-operating result, net finance costs and impairment losses of goodwill –111 –126 –452 –344 –31 –123 –76 –101 –276 –343 –2 –222 –11 –8 –959 –1,267
Thereof: Attributable to Munich Reinsurance Company equity holders 413 496 2,377 2,559 135 156 130 89 147 –18 149 –94 –38 – 3,313 3,188 Attributable to non-controlling interests – – 7 – –1 –1 – – 22 14 1 3 – – 29 16
Africa, Near and Middle East 1 The premiums are generally allocated according to the location of the risks insured.
Reinsurance Goodwill from the acquisition of Munich Re America Other €m 2013 Prev. year 2013 Prev. year Gross carrying amount at 31 Dec. previous year 1,046 1,062 454 435 Accumulated impairment losses at 31 Dec. previous year – – 51 27 Carrying amount at 31 Dec. previous year 1,046 1,062 403 408 Currency translation differences –45 –16 –16 –5
Significant assumptions for determining the recoverable amount in impairment testing Impairment tests for cash-generating units allocated a significant portion of the goodwill were carried out on the basis of the following assumptions: Allocation of goodwill to cash-generating units
Our general assumption was that there will Our general assumption was that there will be moderate upward movement on the equity be moderate upward movement on the markets and a stable interest-rate level. equity markets and a stable interest-rate level Growth rates after the detailed 1.5% 1.5% planning phase Discount rates 9.8% 11.2%
Carrying amount at 31 Dec. financial year 385 493 102 130 259 230 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year 924 818 256 220 697 659 Gross carrying amount at 31 Dec. financial year 1,309 1,311 358 350 956 889
The impairment losses are distributed between the following different Group segments: In reinsurance, €3m (–) is apportionable to life and €11m (–) to property-casualty; in primary insurance, €43m (13m) is apportionable to life, and €1m (–) to property- casualty. The Munich Health segment saw impairment losses of €3m (50m).
Intangible assets from the acquisition of insurance portfolios were written down by €43m due to changes in assumptions regarding the long-term interest-rate level based on the long-term regular return on investments. The impairment loss is recognised in the life primary insurance segment. Besides this, intangible assets from investments in renewable energy sources were written down by €10m. The impairment is due to anticipated changes which have now occurred in the regulation of solar power in Spain and was recognised in the life reinsurance segment (€2m) and the property-casualty reinsurance segment (€8m).
Miscellaneous Total Self-developed Other €m 2013 Prev. year 2013 Prev. year 2013 Prev. year Gross carrying amount at 31 Dec. previous year – 5 83 82 3,917 3,754 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year – 5 28 29 2,353 2,115 Carrying amount at 31 Dec. previous year – – 55 53 1,564 1,639 Currency translation differences – – –1 1 –22 –2 Additions
Carrying amount at 31 Dec. financial year – – 54 55 1,380 1,564 Accumulated amortisation and accumulated impairment losses at 31 Dec. financial year – – 34 28 2,456 2,353 Gross carrying amount at 31 Dec. financial year – – 88 83 3,836 3,917 8006 C
Munich Re Group Annual Report 2013 3 Land and buildings, including buildings on third-party land
Impairment losses reversed are chiefly attributable to appreciations in value following the revitalisation of real estate.
The impairment losses were mainly due to the fact that the life cycle of property had been exceeded.
The fair value of investment property at the balance sheet date amounted to €5,525m (5,350m). Valuations for the directly held portfolio are performed by valuers within the Group, and those for the indirectly held portfolio by external valuers. Valuations are made in accordance with the rules of IFRS 13. Property is allocated to Level 3 of the fair value hierarchy; see Assets B – Investments. Determining the sustainability of cash inflows and outflows, taking into account the market conditions at the property location, is material for the valuation. The fair value is determined individually per item by discounting the future cash flow to the valuation date. Depending on the type of property and its individual opportunity/risk profile, discount rates of 3.00% to 5.50% are used for residential buildings, 4.00% to 8.00% for office buildings, and 4.00% to 8.25% for retail.
Insurance-linked derivatives (excluding variable annuities) are allocated to Level 3 of the fair value hierarchy. The valuation of the derivative components of catastrophe bonds is based on the values supplied by brokers for the underlying bonds, which is why it is not possible to quantify the inputs used that were not based on observable market data. If no observable inputs are available for customised insurance derivatives, valuation is made using the present-value method on the basis of current interest-rate curves and historical event data. Due to the low volume, the effects of alter native inputs and assumptions are immaterial.
At Munich Re, the valuation of variable annuities is performed on a fully market- consistent basis. The parameters requiring consideration in this valuation are bio- metric and lapse rates, volatilities, interest-rate curves and currency spot rates. The lapse rates used are modelled dynamically and range between 0.5% and 20%, depending on the specific insurance product and current situation of the capital markets. The assumptions with regard to mortality are based on published mortality tables, which are adjusted with a view to the target markets and the actuaries’ expect ations. The dependency between different capital market parameters is modelled by correlation matrices. Since parameters not observable on the market were also used in valuation, we allocate these products to Level 3 of the fair value hierarchy.
At 31 December 2013, around 12% (83%) of the investments measured at fair value were allocated to Level 1 of the fair value hierarchy, 84% (14%) to Level 2 and 4% (3%) to Level 3.
Moreover, we have reallocated portions of the other mortgage-backed securities (MBSs) in our portfolio from Level 3 to Level 2. These portfolios are now valued solely on the basis of observable market inputs. At the same time, we reallocated commercial mortgage-backed securities (CMBSs) from Level 2 to Level 3, since we did not use inputs observable in the market for valuing them, given the markets’ lack of liquidity.
Other investments – 31 – 31 Investments for the benefit of life insurance policyholders who bear the investment risk 6,135 564 – 6,699
Investments not measured at fair value2 Loans 25 60,456 619 61,100 Other securities held to maturity – 5 – 5
Prev. year €m Level 1 Level 2 Level 3 Total Investments measured at fair value Investments in affiliated companies measured at fair value – – 194 194 Investments in associates measured at fair value – – 16 16 Other securities available for sale
Munich Re Group Annual Report 2013 8015 A + B Reconciliation for investments allocated to Level 3
Transfer out of Level 3 19 31 – – Changes in the market value of derivatives – – – – Carrying amount at 31 Dec. financial year 176 194 9 16 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year –4 –8 –6 –2
Other securities available for sale Fixed-interest Non-fixed-interest €m 2013 Prev. year 2013 Prev. year Carrying amount at 31 Dec. previous year 2,118 626 1,978 1,202 Gains and losses –3 12 45 27
Gains (losses) recognised in the income statement 27 –3 –18 –30 Gains (losses) recognised in equity –30 15 63 57
Transfer out of Level 3 93 256 1 – Changes in the market value of derivatives –1 – –1 1 Carrying amount at 31 Dec. financial year 2,777 2,118 2,107 1,978 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 33 3 –21 –28
The fair value of investments in associates accounted for using the equity method amounted to €1,721m (1,621m) at the balance sheet date. In the financial year, shares of losses of associates amounting to €2m (4m) were not recognised in the balance sheet. Altogether, the losses not recognised in the balance sheet totalled €4m (30m).
The aggregated assets of all associates amount to €9,537m (9,945m), liabilities to €5,581m (6,146m), results for the year to €372m (187m), and revenue to €4,130m (3,877m). For associates not accounted for using the equity method, assets amount to €142m (149m), liabilities to €110m (116m), results for the year to – (€3m), and revenue to €134m (127m).
Write-downs amounting to €101m (52m) result mainly from anticipated changes which have now occurred in the regulation of solar power in Spain.
Held for trading, and Designated as at fair value hedging derivates through profit or loss €m 2013 Prev. year 2013 Prev. year 2013 Prev. year Carrying amount at 31 Dec. previous year 33 8 – – 4,339 2,066 Gains and losses 38 –12 – – 58 57
Transfer out of Level 3 – – – – 113 287 Change in the market value of derivatives 1 – – – –1 1 Carrying amount at 31 Dec. financial year 77 33 – – 5,146 4,339 Gains (losses) recognised in the income statement that are attributable to investments shown at the end of the financial year 36 –12 – – 38 –47
Breakdown of investments in affiliated companies and associates €m 31.12.2013 Prev. year Investments in affiliated companies
The fair value of the loans, based on recognised valuation methods in line with the present value principle and taking observable market parameters into account, see (4) Hierarchy for the fair value measurement of investments, totalled €61,316m (63,248m) at the reporting date.
Carrying amounts €m 31.12.2013 Prev. year Mortgage loans 4,482 4,439 Loans and advance payments on insurance policies 593 605 Other loans 50,170 49,374