Large and very large losses (net) €m 3,293 1,201 1,054 1,844 3,407 *Before elimination of intra-Group transactions across segments.
If you are an institutional investor or analyst, please contact our investor relations team: Sascha Bibert
Valuation reserves not recognised in balance sheet** €bn 2.6 3.2 1.8 1.1 16.4 ***Adjusted owing to first-time application of ias 1 (rev. 2003). ***Including amounts attributable to minority interests and policyholders. ***Previous years’ figures adjusted owing to change in measurement basis.
Munich Re’s market capitalisation at 31 December €bn 26.3 20.8 22.1 20.4 54.0 *Taking into account the capital increase in November 2003.
Operating result before taxes on income 4,130 3,025 1,284 –391 –675
Thereof: – Attributable to Munich Re equity holders 2,671 1,339 492 164 676 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Combined ratio non-life reinsurance % 110.5 98.9 96.7 122.4 135.1 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Result before amortisation and impairment losses of goodwill 4,137 3,369 1,971 –20 –445
Thereof: – Attributable to Munich Re equity holders 2,671 1,833 –434 288 250 – Attributable to minority interests 72 54 –34 –74 145 **Adjusted owing to first-time application of ias 1 (rev. 2003) **Finance costs shown under “other expenses”.
Our subsidiary meag manages our assets and offers investment products for private clients and institutional investors.
North America: Atlanta, Boston, Chicago, Columbus, Dallas, Hartford, Kansas City, Los Angeles, New York, Philadelphia, Princeton, San Francisco, Seattle, Montreal, Toronto, Vancouver, Waltham
Europe: Munich, Agrate Brianza, Amsterdam, Athens, Barcelona, Berlin, Bratislava, Bristol, Brussels, Budapest, Cologne, Copenhagen, Dublin, Düsseldorf, Frankfurt/Main, Fürth, Hamburg, Hilden, Kaliningrad, Lausanne, Lisbon, London, Luxembourg, Madrid, Milan, Moscow, Munsbach, Neuilly-sur-Seine, Nuremburg, Oslo, Ostfildern, Prague, Riga, Saragossa, Sopot, Stockholm, St. Petersburg, Strassen, Tallinn, Thessaloniki, Verona, Vilnius, Warsaw, Vienna
Munich Re Foundation established On the occasion of its 125th anniversary, Munich Re sets up a foundation under the motto “From Knowledge to Action”. The first project to be financed by the foundation is a un Chair at the Institute for Environment and Human Security dedicated to international research in the field of disaster prevention. Page 108 chance : risiko at Haus der Kunst in Munich In its anniversary year, Munich Re presents an exhibition from 1 July to 1 November on the subjects of security and insecurity, knowledge and ignorance, opportunity and risk.
25th anniversary of the Dr. Horst K. Jannott Scholarship The scholarship, which was named after its founder and former Chairman of the Munich Re Board of Management, Dr. Horst K. Jannott, enables ambitious prospective managers to spend two months at the prestigious Georgia State University in Atlanta.
Karlsruher Insurance Group sold Munich Re sells Karlsruher Insurance Group to Württembergische Leben, thus giving its own primary insurance business an even clearer focus. Pages 83, 95
Catastrophe bonds covering western European windstorms successfully placed To further diversify its risk management, Munich Re uses a bond totalling €110m that provides protection against severe windstorm events in western Europe. Page 20, 82
Concluding reserve strengthening at American Re For outstanding losses from 1997 until mid-2002, American Re increases its reserves by us$ 1.4bn, thus drawing a line under the reserve strengthening measures of recent years. Page 79
New members on the Board of Management The Supervisory Board appoints Dr. Thomas Blunck and Dr. Wolfgang Strassl as members of the Board of Management. Dr. Blunck is responsible for the divisions Special and Financial Risks and it, Dr. Strassl for Life and Health as well as Human Resources. Page 8 f.
ergo Trust and meag under one roof Since 1 January 2006, the real estate activities of meag and ergo Trust have been brought together under the uniform worldwide management of meag in Munich. Page 92
Private health insurance for Abu Dhabi Munich Re signs a cooperation agreement with the General Authority for Health Services Abu Dhabi that mandates it to set up the specialised health insurer daman.
ergo sells stake in bhw To further reduce its interest in the financial sector, ergo sells its stake in bhw to Postbank. At the same time, it enters into a marketing cooperation for insurance and fund products with Postbank ag. Page 86
In our investments, we have further reduced concentration risks and shareholdings outside our core business, which accords with our strategy of promoting diversification of risks on the assets side of our balance sheet as well. We achieved €2.1bn in realised capital gains, notably from the sale of stakes in man and the Karlsruher Insurance Group, the cutting back of our holdings in Allianz and Commerzbank, and the exchange of our hvb shares into UniCredit stock, followed by the reduction of our UniCredit stake to under 5%. So our diversification strategy also had a positive effect on the result for the year.
The 2005 hurricane season demonstrated that there has been a further increase in exposure. This development requires a re-evaluation of some aspects of the risks and thus an adjustment of the models we work with in order to assess risks from a scientific and actuarial perspective and to calculate the right price. I consider these adjustments to be normal and necessary. For only if our underwriting is based on the latest knowledge can we properly judge the profitability of the business offered to us and take the right decisions. We have to be “best in class” in this field – only then do we have the competitive edge we require.
Through these and similar initiatives, we aim to generate profit-oriented growth. But it is still the case that, for us, growth is not an end in itself. I have repeatedly stressed that the profitability of our business clearly has priority, and you can count on it staying that way.
In the current year we remain firmly focused on our course of sustained profitability. Our target for 2006 is a return on risk-adjusted capital of 15%, which translates into a projected consolidated profit of between €2.6bn and €2.8bn, an objective that should continue to make your Munich Re shares an interesting investment.
Members of the Board of Management What to you are the key factors that allow Munich Re to turn risk into value?
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) * 1956, lawyer, with Munich Re since 1985
Dr. rer. pol. Thomas Blunck (from 1 October 2005) * 1965, graduate in business management, with Munich Re since 1999
Group Investments, Corporate Finance; m&a; Legal and Regulatory Affairs, Compliance; General Services; Organisational Design and Development
“We must keep a close eye on the international capital markets. Successful asset management in the Munich Re Group will allow us to strengthen our capital base further.”
“Risk is our business, and excellent risk management is the key to success. It is therefore imperative to translate our scientific and technical expertise directly into state-of-the-art risk management.”
Christian Kluge * 1941, chartered marine insurer, with Munich Re since 1964
Dr. oec. publ. Wolfgang Strassl (from 1 October 2005) (Board member in charge of industrial relations, within the meaning of Section 33 of the German Co-Determination Act) *1956, graduate in economics, with Munich Re since 1988
“First create value for our clients, and then have an appropriate share in the resulting success – and do both better than others.”
“Transparency regarding our business through integrated it systems, first-class risk management and entrepreneurial spirit with the necessary sense of responsibility and proportion. That is the foundation of our long-term strategy of adding value.”
“Consensus with our business partners with regard to risk, exposure and adequate pricing. But also consensus that the price will not change if the risk and exposure remain the same.”
Munich Re Group Annual Report 2005 Report of the Supervisory Board
Management’s personnel report and the restructuring of its remuneration. The Supervisory Board kept a close eye on the state of the investigations being conducted by New York State Attorney General Spitzer in the USA and other authorities regarding broker transactions and finite reinsurance contracts, and on their possible consequences for Munich Re. We also obtained regular information on the status of Gloria, Munich Re’s major it project.
The Board of Management informed us, also between the meetings, about various current business transactions, including the effects of HypoVereinsbank’s special writedown, the proposed merger between HypoVereinsbank and UniCredit, the reserve strengthening at American Re, the effects of Hurricanes Katrina, Rita and Wilma, and the sale of the Karlsruher Insurance Group, as well as about the scope and the impact of the natural catastrophe figures for 2005.
Work of the committees The four committees of the Supervisory Board (Personnel Committee, Standing Committee, Audit Committee and Conference Committee) are each composed of shareholder and employee representatives. The membership of the Supervisory Board committees is shown in the overview on page 52.
The Audit Committee held a total of five meetings in 2005. It closely discussed the annual financial statements for the Company and the Group in the presence of the external auditor and carefully examined the quarterly financial statements. The Audit Committee welcomed the fact that in the year under review the Board of Management set up a Disclosure Committee, which was already able to participate in the annual accounting operations for 2004. The Audit Committee made preparations for the appointment of the external auditor, which has to be decided on by the full Supervisory Board, obtained the auditor’s declaration of independence, commissioned the auditor, fixed focal points for the audit work and acquired from the auditor an overview of the type and scope of its non-audit-related services performed for Munich Re. Also at an extraordinary meeting, the Audit Committee considered American Re’s loss reserves and the consequences of their substantial increase. Beyond this, it discussed the Group’s risk situation and the development of embedded values in life reinsurance business and in life and health business in 2004. The Audit Committee also obtained information on the ongoing investigations in the USA and other countries regarding broker business and non-traditional reinsurance and received the Internal Auditing Division’s annual report for 2004.
Unit Head in the Special and Financial Risks Division, which he has now taken charge of on the Board of Management, along with the Information Technology Division.
Also with effect from 1 October 2005, the Supervisory Board appointed Dr. Wolfgang Strassl a member of the Board of Management and, as from 1 January 2006, Board member in charge of industrial relations. Dr. Strassl has been with Munich Re since 1988 and was most recently Divisional Unit Head in the Life and Health Division, for which he is now responsible on the Board of Management, in addition to the Human Resources Division.
Dr. Hans-Jürgen Schinzler Chairman meeting on 13 March 2006 about its examinations and discussions with the auditor.
Corporate governance and declaration of compliance Munich Re’s Supervisory Board is fully committed to good corporate governance. At the 2005 Annual General Meeting, it therefore proposed an amendment to the Articles of Association to restructure the Supervisory Board’s remuneration: the fixed remuneration has been increased so that overall remuneration is now less dependent on Company performance; the introduction of a result-oriented instead of dividend-oriented variable remuneration component ensures that the calculation basis is not directly influenced by the Supervisory Board. In the Board of Management’s absence, we once again examined the efficiency of the Supervisory Board’s work and monitored the implementation of the measures proposed. More information on this subject can be obtained in the section “Corporate governance” starting on page 110.
On 8 November 2005, the Board of Management and the Supervisory Board published a declaration of compliance in accordance with Section 161 of the German Stock Companies Act, which can be read both on the Company’s website and page 112 of this report.
Composition of the Board of Management With effect from 1 October 2005, we appointed Dr. Thomas Blunck to the Board of Management. Dr. Blunk, who has been with Munich Re since 1999, was latterly Divisional
Munich Re’s declared objective is to turn risk into value – a paradoxical idea for many who shy away from the large individual and catastrophe risks we carry. The key lies in first identifying and understanding the nature of a risk and then analysing it in terms of quality and quantity. This allows us to establish regularities and mathematical relationships, with which we as insurers demystify risks and carry many that others consider unacceptable. After all, the greater the number of different risks in the portfolio (provided they are wisely spread), the less the likelihood of our overall business result being seriously impacted by single risks. We refer to this as “diversifying risk” along the value chain. Through this professional approach, we turn risk into opportunity and create sustained value – for the individual, for society, for our clients and naturally for us as an enterprise, by which we also mean our employees and shareholders.
A few examples of what we did in the past business year are presented in this section. They each originate with a risk and illustrate that, with the right know-how, every risk can be turned into a chance for action and value creation – paving the way for opportunities.
Inspecting an area of New Orleans badly hit by the floods: from left to right, natural hazards experts Mark Bove (American Re) and Ernst Rauch (Munich Re), and senior claims engineer Klaus Wenselowski (Munich Re)
Second, in recent years, researchers have also been concentrating their attention on the natural climate oscillation in the North Atlantic, which involves alternating phases of exceptionally warm and exceptionally cool sea surface temperatures, each lasting several decades. As a consequence, the frequency and intensity of hurricanes are higher in the warm phases.
Opportunity and value_ Getting a grip on the risk – at every step.
Underwriting natural catastrophe risks is one of the most arduous and complicated activities in insurance. Munich Re tackles these risks from various angles in order to take advantage of the opportunities this business offers.
The primary task is to model the respective hazards and the potential losses correctly. The two last years revealed that the natural hazard models insurance companies use to forecast potential losses had not yet attained a sufficient degree of precision. Thanks to the experience our experts have gathered in over 30 years of geo risks research, we are less reliant on vendor models and can respond more quickly to changes in conditions. This includes acquiring a more accurate picture of the loss situation in order to respond immediately in our underwriting by means of enhanced modelling methods. Improvements in risk models were put into effect during the 1 January treaty renewals.
We join forces with our clients in pressing for measures that will enable the insurance industry to continue assuming its economic responsibility. Such measures include enhancing risk transparency through liability information, avoiding construction on highly exposed shore locations, improving existing building regulations, and establishing new ones. Where that is not enough, we have to take measures of our own, independent of the primary insurers if need be. In order to reduce our overall commitment, we introduce any sublimits, event limits and cession
Evaluation of nat cat by Munich Re Group Geo Risks Research
Case 2_Risk appetite also requires discipline. External risk transfer is an important strand of risk management.
“Risk is our business”, as we say at Munich Re. For 126 years, we have been proving our competence in testing, modelling, managing and diversifying risk. We aspire to be the most profitable of the major reinsurers and a reliable partner for our clients. One of the key factors in meeting this objective is a balanced portfolio. In striving to achieve this, we can decide on “more risk” or – in the case of excessive exposures to major perils like earthquakes and windstorms – we can opt for “less risk”. We use integrated risk management to attain a balance of risks in accordance with the risk appetite set for Munich Re by the Board of Management. In order to mitigate fluctuations in results, to guard against liquidity shortages, and to protect our financial resources, our integrated risk management keeps a close watch on all significant risks and weighs up the costs and benefits of external risk transfer – with a view to securing our Group’s profitability and retaining the confidence of our investors and clients.
Precise analysis and careful weighing of options leads experts Rupert Flatscher (right) and Hans-Joachim Thoenes to the solution that creates value for Munich Re.
Are there any other differences and advantages? HJT_ Retrocession treaties normally have a term of 12 months. By contrast, our cat bond covers four storm seasons. There are also differences in the underlying concepts. Retrocession treaties are based on the actual losses. A cat bond, however, pays out irrespective of the loss amount if a “parametric trigger” is exceeded, i.e. if a windstorm in Europe meets predefined meteorological criteria. The retrocession market generally covers very large loss events occurring every ten to 30 years, whereas cat bonds tend to cover mega-events with a return period of 100 years and more. So the two instruments have very different effects on our portfolio. Cost efficiency is the sole decision-making criterion.
What is the specific benefit of our recently placed cat bond? HJT_ Capacity for Windstorm Europe is in great demand among our cedants. The cat bond helps us and our clients. RF_ It enables us to tap the capital market as an additional risk carrier. But it is also attractive for investors, as the risk has virtually no correlation with other risks normally traded in the capital markets.
The value_ Arranging suitable retrocession cover means protecting Munich Re against extremely high losses.
It is the job of reinsurers, from both a macroeconomic and client point of view, to bear risks and finance losses, for example major losses following natural catastrophes. In order to be able to provide capacity for such risks, we require capital, which our shareholders will only provide – as for any other quoted company – if we remain profitable.
Retrocession is one of the levers we use in risk management to keep our business on track. Its sole purpose is to protect our capital and our annual result from major losses. We do not use it to increase our capacity.
Our retrocession cover is triggered if we are hit by an extremely high loss exceeding the risk appetite defined by the Board of Management, such as the terrorist attack on the World Trade Center in 2001 or Hurricane Katrina in 2005, the largest insured loss event of all time. In years in which no such extreme losses occur, the retrocessionaires retain the premiums we have paid as their profit. Retrocession cover is only purchased if prices, terms and conditions meet our requirements.
Where are we going? HJT_ The capital market for natural catastrophe risks has become more mature. We have therefore taken the strategic decision to position ourselves more strongly in this area. In future, we will transfer risks and possibly purchase them, too.
The risk_ Unlimited covers are not only a theoretical threat. Dr. Alfons Maier gives a first-hand account: 26 August 2004_ Reports of a serious accident on the a4 autobahn are being shown on the evening news. It appears that, after colliding with a car, a tanker truck has broken through crash barriers on the Wiehl Valley Bridge and plunged some 25 metres. The force of the impact caused the 33,000 litres of fuel on board to burst into flames, and the driver was killed instantly. The full extent of the damage is not yet clear.
Case 3_Swift claims management reduces costs. Motor liability may involve a whole bridge.
property damage. Media reports on the accident are dramatic. Temperatures of up to 1,200°c have had a devastating impact on the more than 700-metre-long bridge. It is feared that one of the piers is irreparably damaged. The bridge may even be a total loss if for structural reasons the pier cannot be replaced. It would have to be dismantled section by section. The whole operation, including rebuilding, could possibly take around four years. As the a4 is one of the main motorways serving Cologne, consequential costs would be immense. In the worst possible case, the loss could run to a three-digitmillion figure.
Senior claims engineer Dr. Alfons Maier (white helmet) and bridge construction specialist David McGhie examine how repair work on the Wiehl Valley Bridge is progressing.
Support and assistance with major losses like the Wiehl Valley Bridge are part and parcel of our service. Clients value our professional competence as well as our ability to act swiftly on site and to consult with everyone concerned in order to settle the claim as favourably as possible.
1 September 2004_ I am a senior claims engineer and member of the Munich Re team investigating and analysing this major loss. We have been liaising with the thirdparty liability insurer for the last 48 hours, comparing notes and offering our support with any initial measures that have to be taken. What we urgently need now is a more accurate estimate of the loss. In order to get a better picture, I call in David McGhie, an external bridge construction specialist who has carried out other investigations for us and works closely with the primary insurer’s engineering expert.
2 September 2004_ Together with representatives of the North Rhine-Westphalian Highways Agency and the primary insurer, David and I visit the site to inspect the damage. The scene is catastrophic: broken crash barriers, huge scorch marks on the bridge and in the area surrounding the accident, and tons of contaminated earth. We analyse scorch marks, look for signs of cracking or spalling concrete and try to get some indication of stability, for example by searching for distortions. Our impression is that, despite the extent of the damage to the bridge, it can be repaired. Even the pier directly affected is not so badly damaged that it needs to be demolished. Working closely with the primary insurer and the engineering expert, we plan our next steps.
7 September 2004_ All of the parties involved (the thirdparty liability insurer, the engineering expert, the Highways Agency and the reinsurer) meet in Cologne to discuss the claim. To our great relief, it is now certain that the bridge will not need to be demolished. However, further expert opinions are required. As the bridge was already scheduled for maintenance, the expenditure for this will of course have to be offset against the repair costs. Negotiations are not going to be easy.
Together with the primary insurer’s engineering experts, we succeed in convincing the Highways Agency and its representatives that the damage can be repaired by arguing that the busy motorway bridge near Cologne need not be closed to traffic for several years, which would be a major advantage for the public.
Professional claims management grows in importance, the higher the loss threatens to be. The costs for settling the major loss on the Wiehl Valley Bridge have been reduced to a fraction of the originally estimated loss.
Where patients require permanent medical treatment, health insurers also feel the effects, as costs are enormous.
Dr. med. Volker Senger, head of dkv’s medical consultancy, examining a patient.
Opportunity and value_ Avoiding the unnecessary, optimising the necessary: How both sides benefit.
What can insurers do to improve the situation for patients and health insurers? Wherever possible our aim is to help those affected to recover and swiftly return to work so that they can lead an independent life. But our objective is also to reduce costs for health insurers. In other words, firstclass medical treatment and lower expenditure. A contradiction?
ArztPartner almeda offers disease management programmes for the chronically ill – in cases of cardiac insufficiency, cardiovascular diseases, diabetes and asthma, for example. Cardiac insufficiency is a condition that recurrently gives rise to life-threatening situations and the prospect of repeated hospitalisation. The solution can only be to closely monitor the patient’s lifestyle and to change it in the long term. So ArztPartner almeda provides patients with telemetric apparatus that automatically transmit important data such as weight, blood pressure and pulse rate to the care team. They react at once if they observe critical signs, such as a sudden gain in weight that indicates water retention in the body and may lead to dangerous complications.
rehacare goes beyond the provision of medical treatment for accident victims, helping with nursing care and adjustment of living arrangements for the disabled and with vocational rehabilitation after serious accidents.
An individual rehabilitation plan is devised, taking into account the patient’s history, abilities and interests. Services range from workplace analysis to support for job applications or help in becoming self-employed. rehacare has a nationwide network of specialists to achieve the best possible rehabilitation and effective professional integration.
Hospitalisation costs are cut by 30%, as both the number and duration of stays in hospital are significantly reduced. This saving far outweighs the 20% higher medication costs for optimised outpatient care. Source: ArztPartner almeda
Things are happening in the health market. It is growing – driven by demographic trends, advances in medical science and the improved economic situation of many people. Global expenditure on healthcare rose from just under us$ 3 trillion in 2000 to over us$ 4 trillion in 2005 and is forecast to be close on us$ 7 trillion by 2015. The insurers of the future, or rather all those involved in the health segment, face the challenge of participating in this growth and repositioning themselves accordingly
Risks in today’s world are interconnected in many ways. They can no longer be categorised in the value chain as they traditionally were in the past. In health insurance, organisational boundaries are shifting and, in addition to pure risk-bearing, the provision of service and management support is rapidly increasing in importance both in primary insurance and in reinsurance. Take the example of the Munich Re Group’s MedNet companies: as managed care service organisations (msos), they form a bridge of competence between our primary insurance clients, their insureds, and medical providers. The objective of the companies is to organise high-quality care at affordable prices, while giving priority to service for the patient. Our msos assume core functions in the value chain, such as risk assessment and managed-care services, and combine their expertise and market volume to optimally exploit the cost-benefit relationship. And because we provide this successful service from within our own organisation, we also win reinsurance business.
There are attractive opportunities for shaping and financing healthcare particularly in evolving health insurance markets where the market players are insufficiently interlinked. To tap the potential for growth in the healthcare market, companies must be capable of ascertaining the various stages of development and of quickly devising and implementing flexible and competitive solutions.
In setting up daman, project manager Dr. Michael Bitzer (second from left) needs to take a breather now and then, as well as talking to the Health Minister, Mubarak Al Mazroui, and holding constructive meetings with his team.
The opportunity_ The General Authority for Health Services in Abu Dhabi and Munich Re have signed a cooperation agreement to establish the health insurer daman.
We were awarded the contract in September, the agreement was signed in December, and the countdown began. The project was launched with a core team of 13 staff, all of them experienced colleagues from the Munich Re Group’s international operations. We get support from our colleagues in Munich whenever we need it. The company is expected to employ 350 staff by the end of 2006, and 450 a year later. So this year we will be recruiting one new employee a day on average. On 13 November, the team moved into the 16th floor of an office tower in Hamdan Street, one of the main business thoroughfares in the centre of Abu Dhabi, which we had provisionally furnished courtesy of ikea. Eventually, we will occupy five floors. The space is quite tight, with more than 30 team members on the only floor currently available for use. Every day, we tackle more new developments here than others handle in a month. We are highly motivated by this exciting environment – otherwise we would never manage to keep up the effort to achieve our ambitious milestones: by 1 April a sales and distribution unit, a card production unit capable of issuing cards to over 40,000 insureds per month, an underwriting department and an operational it department equipped with all the processes and systems required; and by 1 May a call centre with a capacity of 8,000–10,000 calls per month, a medical claims centre able to handle over 100,000 claims per month by the end of 2006, and finance, human resources and medical network departments. Fortunately, we can use software solutions and tools that we have developed ourselves and tested over many years together with numerous international networks of experienced health insurance professionals. We also have access to Group-wide price agreements. Our project controller is keeping a close eye on timetables and costs. It is very important to us not only that everything should work on day one, but also that the systems we have set up are reliable and expandable, as the health insurer is expected to be stable and profitable in five years without further need for state subsidies. For this reason, we are relying on our integrated and proven project risk management right from the start.
In half an hour, we have a meeting with people from the General Authority for Health Services. We work with them closely and they provide us with important local contacts. They impress us with their high degree of professionalism. Afterwards, as on most days, we will go to our “canteen” – the snack bar opposite the office.
Munich Re Group will be responsible for managing, will not only provide basic cover (initially state-subsidised) but from the outset will also offer supplementary private insurance products, for which Munich Re will be the exclusive reinsurer. The experience gathered in this project will increase our expertise and ideally prepare us for further developments in the Gulf region, where daman can serve as a successful model.
Munich Re shares We take advantage of the opportunities that risk offers. And our investors recognise this. Our shares are among the strongest in the industry.
Knowledge helps. Or does it? Through research we can recognise causes and avert their consequential damage: in medicine and in technology, for example. But the more we know, the clearer it becomes that knowledge alone is not enough. Knowledge requires action. Too often we ignore, play down or suppress what we know. Take smoking for instance. Every smoker knows from the warning on the packet that smoking kills. But does that keep people from smoking?
Autumn rally brings large price gain Our strategy of profit before growth also paid off for Munich Re shareholders in 2005. The share price increased by 26.5% year on year, clearly outperforming the shares of other reinsurers.
Munich Re shares began 2005 listlessly. Up to the end of September, their price moved sideways within a narrow range, lagging far behind the dax. However, in the middle of the hurricane season, our shares began a rally which took the price from around €90 to nearly €120. In the fourth quarter, Munich Re stock performed considerably better than the dax and also the msci insurance index. The capital markets recognised the potential of Munich Re’s stock resulting from the severe hurricane season, our effective handling of the American Re reserving issue, and the prospects of record earnings. Altogether, our share price recorded a year-on-year increase of 26.5%. Thus in 2005 our shareholders also benefited from our strategy of profit before growth.
Great interest among analysts More than 40 analysts constantly monitor Munich Re shares. At the end of 2005, the majority rated our stock positively (54% of analysts compared with 62% the year before). Only 2% of the analysts gave the shares a negative assessment, compared with 7% at the end of 2004.
On the basis of a price of €114.38 per share on 30 December 2005, the value of the portfolio amounts to €349,316.52, equivalent to an increase of 371.2%. According to the internal rate-of-return method, this works out at an average annual return of 9.3%, compared with an average annual return of 9.2% for the dax over the same period.
Performance of a specimen deposit as from 1 July 1988 in €‘000
In former years, Munich Re’s dividend remained more or less constant, independent of results. Since 2004, in conjunction with our active capital management, we have been pursuing a more flexible dividend policy, where the amount distributed essentially depends on our result for the year and our capital requirements, although our aim is to pay out at least 25% of the annual result to our shareholders.
Share profile Munich Re shares are no-par-value registered shares. Each share carries one vote. First launched on the stock exchange in Munich on 21 March 1888, they are today traded on all the German stock exchanges. The average daily turnover of Munich Re shares was €173.7m, putting us in eighth place among the dax stocks at the end of 2005. In terms of market capitalisation, we ranked 10th, with nearly €26.3bn.
Around 147,000 shareholders had Munich Re shares in their portfolios at the end of 2005. The attractiveness of our shares for international investors has grown further. The bulk of the shares sold by HypoVereinsbank went abroad. Including the stake held by the UniCredit Group via HypoVereinsbank, over 60% of our shares were held by foreign investors at year-end 2005, compared with approximately 50% at year-end 2004. Our commitment in the area of sustainability also has an impact on the investment side: some 2% of our stock is held by socially responsible investors (sris), who invest their capital in accordance with ecological, social or other sustainability criteria.
Munich Re organised more than 20 roadshows during 2005 to present the Group, primarily in Europe and the USA. We also held over 100 individual meetings with investors and analysts at our offices. Additionally, as in previous years, Munich Re participated in numerous investor conferences around the world. But our activities are not only geared to institutional investors: private investors can contact Munich Re directly at any time as well. They obtain prompt answers to their enquires via our shareholder hotline or e-mail postbox. We meet high standards as regards the speed of our financial reporting, with fast-close conditions applying to our annual report since 2004.
Weighting of Munich Re shares in various indices Status: 31 December 2005 in %
dj euro stoxx 50 1.3 msci Euro 0.8 ftse eurotop 100 0.6 dj Sustainability World 0.3 dj euro stoxx Insurance 8.8
Issuer Munich Re Finance b.v. ergo International ag American Re Corporation
Volume €3.0bn £300m €345m €345m us$ 500m **First possible redemption date is 21 June 2013. **First possible redemption date is 21 June 2018.
Its twin publication with the subtitle “Life. A venture. In pictures.” opens up a whole new vista on the world of risk. It is a magazine full of pictures, risks and opportunities ... and it contains a clear message: life is a matter of risk.
What business potential does the global health insurance market offer? What specific know-how do we have in the Munich Re Group for this business segment and what strategic conclusions can we draw? Does a cross-segment approach by primary insurers and reinsurers, with their different competences, offer added value for the Group? What options do we derive for realising our strategy? These are questions we have answered. The potential premium with adequate earnings prospects that can open up for the Munich Re Group in the global health insurance market over the next ten years is in the billion euro range.
We aim to promote such coordination by setting up a cross-segment International Health Board, which will be responsible for our insurance and reinsurance activities in the global health market.
The establishment of separate Board committees for Group and reinsurance operations is also reflected in our downstream organisational structures. Our focus Groupwide is on the development and realisation of corporate strategy, value-based management and integrated risk management.
Members of the top management of the primary insurance and reinsurance group
Mission statement – What we are and what we aspire to
Turning risk into value by actively diversifying risk, by growing profitably, by steering and controlling our activities with excellence, by capitalising on our financial strength on a sustained basis.
Our mission presupposes: – A clear course for sustained profitable growth and value creation for our investors – Actions consistently geared to the individual needs of our clients – A strong capital base, integrated risk management and the concentration of our resources on commercial success
– The strengths of our staff, who develop the best possible solutions with their knowledge of the insurance and capital markets and their capacity for innovation
– Our entrepreneurial responsibility with a commitment to transparency, sustainability and an obligation to society as a whole
Life is a matter of risk We tend to give risks the widest possible berth. Yet every risk harbours an opportunity. This applies from the day we are born. Youth, love, relationships, all these continue the risk of life. At the same time, we are caught up in social and economic developments, with all the opportunities and risks they entail.
The Munich Re Group is one of the world’s leading risk carriers. Our business covers the whole value-added chain in insurance and reinsurance, and we are also active in the field of asset management.
Whereas the reinsurance companies in our Group operate globally, the primary insurance companies concentrate mainly on Germany and those European markets with strong growth. We conduct our business from our respective headquarters and also via a large number of branches, subsidiaries and affiliated companies in such countries as the USA, China, India, Australia, South Africa, Korea, Canada, the UK, France, Spain, Italy, Poland and Switzerland. Control and profit transfer agreements are in place with many subsidiaries, especially those in the ergo Insurance Group. In addition, we have consistently pursued our policy of involving ergo more closely in significant Group processes, in line with a resolution taken by Munich Re in the previous year, and have further refined this involvement in important areas. In 2005, we implemented a uniform Group-wide planning and controlling process and drafted a Group directive governing the distribution of responsibilities and competencies between Group management and ergo for key decisions in such areas as strategy, investments, risk management and accounting. There is now ”unified control“ within the meaning of the German Stock Companies Act. To maintain clearly defined strategic management of the equal-ranking business segments of primary insurance and reinsurance and to provide for a clear assignment of responsibility, the structure of Munich Re’s Board of Management was altered with effect from 1 January 2006. Besides the Parent Board of Management, which will continue to represent Munich Reinsurance Company externally, the Board of Management has divided its responsibilities between two new Board committees: the Group Committee and the Reinsurance Committee.
This management report summarises the activities of our Group according to the business fields of reinsurance, primary insurance, asset management and their respective segments, rather than on the basis of the Group’s legal structure or individual companies. This segmentation is determined by the way we manage our business internally.
Reinsurance group Of the gross premiums totalling €22.3bn written in 2005, around 65.1% came from property-casualty and 34.9% from life and health business.
According to our own estimates, Munich Re’s global market share in terms of premium in 2005 amounted to around one seventh. By this we mean the global reinsurance market, since reinsurance has by nature always been an international business. It should be noted in this context, however, that the global premium income of the reinsurance markets is difficult to quantify because data is often not available or insufficient. The market statistics of individual countries are of limited comparability as they are based on different parameters. What is more, premium volume alone is not an adequate indicator of reinsurance companies’ importance in particular markets.
Our reinsurance business is organised in seven operative divisions, six of which service our property-casualty business and special lines, and one of which deals with life and health reinsurance. Responsibility for the respective client accounts always lies in one pair of hands. The operative divisions are also responsible for our business units abroad, including our subsidiaries.
Europe 2 and Latin America services clients from northern, western and southern Europe, as well as from Latin America.
Asia, Australasia, Africa conducts property-casualty business with clients in these three continents and the Pacific Islands.
The division North America is responsible for our subsidiary American Re-Insurance Company, for Munich Reinsurance Company of Canada and for Temple Insurance Company.
Corporate Underwriting/Global Clients (cugc) handles our accounts with major international insurance groups (hence ”Global Clients“) and writes business worldwide in special classes such as agriculture and workers’ compensation. Its most important markets are Germany, the UK and the USA. In addition to this, it performs the important functions combined in our Group Corporate Centre: its staff clarify fundamental, cross-divisional issues of underwriting policy, are responsible for quality assurance, integrate actuarial methods in our business processes, and set standards for claims management. Further information on guidelines for underwriting and rating can be found on page 50 f.
Munich, Athens, Moscow, Warsaw Beijing, Hong Kong, Kolkata, Kuala Lumpur, Mumbai, Seoul, Shanghai, Singapore, Taipei, Tokyo
Special and Financial Risks (sfr) is responsible for the special classes of credit, aviation and space, enterprise risks and contingency risks, and for alternative markets business. Besides this, it develops and implements division-specific innovation projects and coordinates the overarching work of the innovation teams in the non-life divisions. Via Munich American Capital Markets (macm), we structure and offer the transfer of insurance risks to the capital market. In addition, sfr also attends to our own reinsurance (retrocession).
Primary insurance group The second main pillar of the Munich Re Group is primary insurance business. Our operations in this sector concentrate on Europe and above all Germany. Some 29.8% of the business totalling €17.6bn in 2005 derived from propertycasualty and 70.2% from life and health insurance.
Health dkv Belgium s.a., Brüssel dkv Seguros y Reaseguros s.a., Saragossa picc Health Insurance Company Limited, Beijing (associate)
Subsidiaries in the Czech Republic, Denmark, France, Italy, Spain, Sweden and the UK, and participating interests in Austria, Hungary and the Slovak Republic
Our primary insurers comprise the ergo Insurance Group, Europäische Reiseversicherung and the assistance services provider Mercur Assistance. We sold our majority holding in the Karlsruher Insurance Group with effect from the fourth quarter of 2005.
The ergo Insurance Group was created in 1997 by merging the long-established German companies victoria, Hamburg -Mannheimer, dkv and d.a.s. In 2002, they were joined by KarstadtQuelle Versicherungen. Segment responsibility within ergo is centralised at holding level, but without weakening the strong identity of the individual brands and their sales forces.
The main emphasis of the ergo Group’s business is on personal lines insurances, especially insurances of the person, i.e. life, health, and personal accident insurance. Another important segment of ergo’s business is insurance for small and medium-sized firms and also, on a selective basis, industrial business. Moreover, ergo is one of the leading providers in the market for company pensions. In health insurance and legal expenses insurance, it holds a leading position in Europe through dkv and d.a.s. respectively. ergo’s marketing strategy is built on the interplay of different distribution channels: apart from its own strong sales organisations, its exclusive banking partnership with the hvb Group in Germany plays an important role. ergo also has a joint venture with KarstadtQuelle ag for the sale of insurance products.
Asset management meag munich ergo AssetManagement GmbH is one of the major asset managers in the European financial sector. It combines Munich Re’s and ergo’s investment activities and the management of their real estate. Virtually the entire asset management of the Munich Re Group is concentrated in meag, which had a total of around €154bn under management for the Group’s insurance and reinsurance companies at the end of 2005.
meag mainly manages our Group’s own investments. It is responsible for direct investment in securities and real estate, and for the assets held in segregated managed funds (special funds). Beyond this, it offers its expertise and know-how both to institutional investors and to private clients.
The subsidiary meag munich ergo Kapitalanlagegesellschaft mbH is one of the major investment fund companies in Germany, managing around €38bn in special and retail funds for Group companies and for clients outside the Munich Re Group.
Munich Re’s value-based management philosophy The Munich Re Group’s objective is to analyse risk from every conceivable angle and to handle it successfully, thereby creating lasting value for its shareholders, clients and staff.
– Responsibilities are clearly assigned and levers for adding value made transparent, enabling management and staff to contribute more effectively to increasing corporate value.
We compare the adjusted result with the requisite cost of equity. The basis for determining the cost of equity is the necessary operating equity, which is basically derived from the risk-based capital according to our internal model. If a business unit holds equity capital in excess of the riskbased capital in order to comply with market, rating or supervisory requirements, a return needs to be earned on this capital as well.
Therefore, whilst we aim to keep our combined ratio as low as possible, it does not constitute our sole target. Rather, the prime factor we consider is economic value added, which cannot be properly reflected by the combined ratio. We pursue this target internally through our value-based management (vbm) (see page 46). In life primary and reinsurance business and in health primary business, we measure performance on the basis of embedded values. When considering performance at the level of the whole Group, however, we have geared our targets to return on capital.
Further development of the return target for 2006 We have set ourselves ambitious targets again for 2006 to follow up the successful performance of the past business year. In so doing, we have further improved the methodology employed. The return target we have used to date – the return on average ifrs equity (roe) – is an important but insufficient indicator of an insurance company’s added value. The reasons are: – Some of the underlying parameters are influenced by accounting rules that do not adequately reflect economic realities. For example, a large portion of an insurance company’s assets are classified as ”investments available for sale“ and measured at market value, whereas the liabilities in the balance sheet barely react to market fluctuations. This means that rising or falling capital market prices usually have a direct impact on ifrs equity, thus indirectly increasing or decreasing an roe result target in a way that makes little sense economically. In particular, interest-rate-induced increases in the prices of fixed-interest securities are not accompanied by any sustained additional earnings opportunities, since the prices of the securities systematically return to the face value on maturity.
– Furthermore, roe does not reflect the risk assumed in a given business activity. All other things being equal, a high risk usually entails the expectation of a higher profit, which is bought at a cost of additional volatility. An roe target that does not include any measure of risk might encourage management to focus too much on the earnings side and disregard the risk side. Hence the riskreturn relationship, which is decisive for increasing corporate value, is not considered.
An insurance company – and especially a reinsurance company – whose exposure to risks is typically high, should consequently choose a target which takes into account the degree of risk assumed and minimises distortions from accounting. In accordance with this principle, risk – measured by risk-based capital – plays a central role in our internal value-based management. To maximise Munich Re’s value for our shareholders, we actively work on diversifying our risks, and on optimising our financing structure and the quality of our results.
A logical step on the way to achieving this is to integrate the risk perspective more closely into the external communication of our targets.
The most important advantages of the risk-adjusted return target – particularly in comparison with our target to date – are the risk-based capital’s independence from the abovementioned ifrs effects on equity, and the disclosure of the annual result per unit of risk-based capital (important for measuring added value).
On the basis of our risk positioning and capitalisation at the beginning of the year, this corresponds to a consolidated profit of between €2.6bn and €2.8bn.
On the investment side, we anticipate a result equivalent to 4.5% of the average market value of the investments. Lastly, our target is based on a largely stable currency environment. Changes in tax treatment are only considered to the extent that they are already known today.
equity, less the cost of holding capital. A key performance indicator in this case are eev earnings. We aim to achieve eev earnings of between 8% and 9% both in primary insurance and in reinsurance business in relation to the value of the overall business in force at the beginning of the year. The life and health insurance business managed and measured on an embedded-value basis will also contribute to the ifrs consolidated profit and thus to reaching the rorac target, even though ifrs consolidated profits follow the narrower individual business-year perspective.
Our targets – Ambitious but attainable In selecting suitable targets, contrasting aspects have to be considered and weighed up. On the one hand, undue complexity has to be avoided, in order to ensure transparency for investors, staff and the public. On the other hand, the challenge lies in reflecting economic realities as closely as possible avoiding oversimplification, and enshrining added value as the Group’s overriding guiding principle. As the above description shows, the background is complex, especially as the parallel use of different performance indicators is unavoidable. That is why we have devoted considerable space to this topic. We are convinced that we are on the right track with the key performance indicators of rorac and European Embedded Value as our guiding principle. Taking into account all the relevant factors, we consider that our methodologically improved targets are economically meaningful – ambitious but nevertheless attainable.
In reinsurance, cugc is not only responsible for business with our global clients but also develops guidelines for the underwriting of our reinsurance business. Corporate Underwriting defines standards for the underwriting, pricing and claims management of the reinsurance group. In this way, we ensure that the quality of our business is constantly high throughout our reinsurance operations and that we respond swiftly to changes and new developments. Since Corporate Underwriting is closely linked to our operative business, we can generate needs-oriented
Munich Re Group Annual Report 2005 Management report_Munich Re Group / Governing bodies of the Munich Re Group products and services for our clients there as well. For terrorism, we basically strive for exclusions or liability limits under our treaties. In particular, we do not provide coverage of terrorism in the case of risks and perils for which insurance protection can be obtained from a combined private-state solution or pools. In those cases where we offer cover against a separate premium, we do so subject to very restrictive underwriting criteria that ensure the liability accepted is transparent, strictly limited and thus controllable. For epidemics, we have exclusions or restrictive treaty conditions in place for particularly exposed regions. For major industrial risks, we have largely been able to maintain the conditions and liability limits we optimised in prior years. These measures consequently continue to make a sustained positive contribution to the risk profile of our portfolio.
Dr. jur. Nikolaus von Bomhard (Chairman of the Board of Management) Group Development (formerly Strategic Planning) Press Internal Auditing Executive Offices, Group Top Executives
Dr. jur. Heiner Hasford Group Investments, Corporate Finance, m&a (from 1 January 2006 without Reinsurance Investments) Legal and Regulatory Affairs, Compliance (since 1 January 2006) General Services Organisational Design and Development
Stefan Heyd (until 31 December 2005) Corporate Underwriting/Global Clients (from 1 October 2005 together with Dr. Jeworrek)
Hans-Georg Appel Prof. Dr. Henning Kagermann Dr. Hans-Jürgen Schinzler Wolfgang Stögbauer
Munich Re Group Annual Report 2005 Management report_Other seats held by Board members 1 Status: 31 December 2005/1 January 2006 (in the case of members who have left the Board of Management, the information shows the status at the date of their departure).
Christian Kluge Karlsruher Versicherung ag (Chairman) – Mercur Assistance ag Holding (Chairman)
Dr. jur. Jörg Schneider meag munich ergo American Re Corporation, Wilmington, Delaware*
Karl Wittmann – Jordan Ins. Co. p. l. c., Amman Saudi National Insurance Company e.c., Jeddah
Ulrich Hartmann Deutsche Bank ag Henkel kgaa Deutsche Lufthansa ag Arcelor s. a., Luxembourg e.on ag ( Chairman) Hochtief ag ikb Deutsche Industriebank ag (Vorsitz)
Prof. Dr. jur. Dr.-Ing. E. h. Heinrich v. Pierer Deutsche Bank ag – Hochtief ag Siemens ag ( Chairman) ThyssenKrupp ag Volkswagen ag
Dr. e. h. Dipl.-Ing. Bernd Pischetsrieder Dresdner Bank ag Tetra-Laval Group, Pully metro ag Scania ab, Södertälje* (Chairman) Audi ag* ( Chairman) seat s. a., Barcelona*
Dr. phil. Ron Sommer Celanese ag Motorola Inc., Schaumburg Sistema, Moscow
Fundamental changes are also resulting from unprecedented demographic trends. People are living longer – good news, but also an enormous strain on social security systems. In Europe in the year 2030, every two people in paid work will have to finance one person who is not. This means Europeans can only maintain their standard of living and high-quality healthcare in the medium term if they make additional private provision – a great opportunity for insurers. Many countries are in the process of realigning their social security systems to these demographic requirements, and so for the time being insurers will have to cope with uncertain legal and political parameters. Flexibility and fast response times in product design are becoming increasingly important competitive factors. At the same time, primary insurers are having to adjust to the growing new target group of older people with their specific needs.
One of the most important issues for private health insurance in Germany at present is the future of statutory health insurance and the implications of possible reforms for the private sector. In the course of 2006, a reform concept is to be devised, and a bill for reforming long-term care insurance is scheduled to be submitted by summer 2006.
In addition, the insurance industry’s regulatory environment is being affected by profound changes. The introduction of Solvency ii in Europe and new accounting standards have implications for insurers’ capital requirements and income statements. The new circumstances will have considerable implications for primary insurers’ business models. They will also influence the demand for reinsurance cover and trigger changes in its supply. A group like Munich Re, among the leaders in integrated risk management, can utilise the changing industry dynamics to its advantage and exploit the business opportunities they present – in both reinsurance and primary insurance.
Economy The global economy continued to expand in 2005, although with slightly lower growth rates, mainly owing to the much higher oil prices. By contrast, the negative effects of the Atlantic hurricanes in the second half of the year were limited. The USA and China remained the principal engines of the global economy.
In the USA, the pace of economic growth cooled somewhat. This was due not only to drastically higher energy prices but also to the continued interest-rate increases of the us Federal Reserve, which further reduced the expansive effect of monetary policy. The us economy was again buoyed by private consumption and corporate investment. Altogether, gdp grew by 3.5% in real terms compared with the previous year.
Supported by private consumer demand, the economy in Japan gained momentum compared with the previous year, the slackened growth in the third quarter proving to be temporary. gdp increased by 2.8% in real terms for the year as a whole.
Especially the first half-year was characterised by weak domestic demand, mainly due to persistently low consumption. The high oil price was a detrimental factor, aggravated by the depreciation of the euro, and the main growth stimulus came from exports. For 2005 as a whole, real growth stood at 1.3%. In other words, compared with the USA, momentum in the eurozone was again weak.
In the United Kingdom, economic momentum slowed significantly compared with the previous year. Not least owing to weak domestic demand, the growth rate achieved in real terms fell to only 1.8%.
Development of the us$/€ exchange rate from January to December 2005
The us dollar gained considerable ground against the euro and the Japanese yen in 2005. The euro closed at us$/€ 1.18 – a year-on-year loss in value of around 13.2%.
The closing exchange rate for the yen stood at ¥/us$ 118.03, representing depreciation against the dollar of around 13.2%.
Demographic changes and increasing demand for private provision had a positive impact on the development of life reinsurance. Especially the ageing of society worldwide and the resulting pressure on social security systems are causing the market for private life insurance to grow more strongly than the overall economy. Besides this, the global and long-term trend towards liberalising state-run healthcare systems, whose financial situation is tight in a number of countries, was beneficial to health reinsurance.
In line with the weak economic development in Germany, the nominal increase in gross premiums written by the German insurance industry in 2005 fell to just over 2% (3.0%) according to preliminary estimates. Premiums in private health insurance climbed significantly (projected 3.7%). Nevertheless, this increase was lower than in the previous year, particularly because of uncertainties about future healthcare reforms. Life insurance recorded premium growth estimated at 6%. The German Retirement Income Act led to a boom in life insurance at the end of 2004 in anticipation of the change in the law. Premium income in property and accident insurance fell marginally by around 0.5%, essentially owing to the already high market penetration and increasing price competition.
Initial estimates indicate that premium volume in life insurance grew by a strong 14% in France. Based on the figures for the first three quarters, health and accident insurance also recorded solid growth, whereas the increase in premium income in property-casualty business is likely to be only very moderate overall. As preliminary estimates suggest, the Spanish life insurance market grew by 8.2%, with non-life insurance expanding at a rate of 7.3%. Growth in health insurance was above average, at 9.4%. In Switzerland, non-life premium income expanded at an estimated 2.7%. The increase in single life insurance was significantly lower, at about 1.3%, whereas group life business (occupational retirement provision) showed an estimated decline of 8.4% compared with the previous year. Premium volume in Poland’s life insurance market recorded very marked growth of 19.1% in the first three quarters, while the rise in non-life insurance was more modest at 4.1%.
The Japanese insurance industry profited from a further improvement in its domestic capital markets, which should be particularly beneficial to life insurers.
At the initiative of the eu Commission, work has been going on in Europe for some time under the rubric of ”Solvency ii“ to restructure insurance supervisory law as a whole. One of the core ideas is to consider individual risk exposure as far as possible in future (risk-based approach). Internal company risk models will play an important part in this, provided they meet certain quality criteria. The eu Commission plans to submit a draft Solvency ii directive by mid-2007.
The 2004 amendment to the German Insurance Control Act (vag), which entered into force on 21 December 2004, changes the rules governing direct supervision of reinsurance companies. At the centre of this legislation is the introduction of an authorisation procedure and the creation of solvency regulations. In future, reinsurers in Germany require authorisation to commence or extend business operations. As the result of a transitional provision, established reinsurers like Munich Re are automatically granted this authorisation, but are still obliged to submit a business plan in order to determine the authorisation’s scope. The second main component of the new regulations is the introduction of statutory solvency requirements. They stipulate that in future a specified minimum capitalisation will be obligatory for reinsurance companies as well, and are essentially based on the solvency provisions for primary insurers. Munich Re already meets these statutory solvency requirements. Thus we do not have to avail ourselves of the transitional period granted by the law, which allow the requirements to be complied with gradually by 1 March 2007. Further information on Group solvency can be found on page 101.
There have been no significant changes to the investment regulations, where reinsurers continue to be subject merely to the general investment principles of security, profitability, liquidity, mix and spread.
The eu reinsurance directive will make supervision more efficient by introducing the principle of ”home country control“. The supervisory authority of the reinsurer’s home country will be responsible for all questions relating to financial supervision. For Munich Re’s European branches, this will in future be the German Federal Financial Supervisory Authority (BaFin) and not, as previously, the supervisory authority in the country where the branch in question is located. This creates the same situation for reinsurers in Europe as has existed for primary insurance companies for more than a decade. The member states have to implement the EU reinsurance directive by the end of 2007 (or by the end of 2008 for certain rules).
In two judgements of 26 July 2005, the German Federal Constitutional Court pronounced on rules for endowment insurance with policyholder bonuses and on portfolio transfers between insurance companies. The court considered it necessary to amend the existing statutory regulations to protect consumers. The main point is that life insurance policyholders’ participation in surplus should include valuation reserves (hidden reserves). At present, at least 90% of valuation reserves are allocated to policyholders – but not until they are realised in accordance with the German Commercial Code. The Federal Constitutional Court demands a regulation according to which policyholder bonuses are partially taken into account when life insurance policies are surrendered, without hidden reserves having to be realised. The court provided for legal certainty with regard to the past: the previous arrangements continue to apply. However, by the end of 2007 the legislature is called upon to set more concrete rules for portfolio transfers and for determining profit shares in life insurance. On 12 October 2005, the Federal Court of Justice also requested greater transparency and consumer protection in its judgements requiring the removal of ineffective clauses in endowment insurance policies. The Federal Court of
insurance scheme“, debated in the preceding election campaign; it advocates ”portability“ of individual ageing reserves when a policyholder changes insurers.
Munich Re Group Annual Report 2005 Management report_Overview and important key figures
Overall, in the past year, the Munich Re Group’s business performed very well. We achieved a return on equity of 12.3% (9.5%) after tax, thus surpassing our return target (the previous year’s figure has been adjusted owing to a change in the method of calculation; see page 47). The sound and profitable basic business in primary insurance and reinsurance helped to compensate for the record losses from natural catastrophes. Our investment result also contributed significantly to our success.
In 2005, reinsurance was affected by a hurricane season hitherto unprecedented in terms of loss amount (see page 70). Particularly Hurricane Katrina, for which our expenditure was over €2.0bn, hit us hard. Our retrocession agreements allowed us to reduce the burdens from Katrina by approximately €400m. In the year under review, we also incurred high expenditure in strengthening the claims reserves of our us subsidiary American Re by us$ 1.4bn net (see page 69 f).
Primary insurance significantly exceeded its result targets. Our strategy of writing both reinsurance and primary insurance is effective. Towards the end of the year under review, we sold our holding in the Karlsruher Insurance Group. It would not have made sense to integrate it into the much larger ergo, given the companies’ incompatible
For the reporting on individual fields of business, the following principle applies: volumes and results that derive from business within a segment are eliminated, whereas figures that derive from business with companies from other segments (e.g. intra-Group reinsurance cessions from primary insurers to reinsurers) are included in the data. Where the information relates to national accounting law, this is mentioned specifically.
The operating result was influenced in particular by the following factors: – In reinsurance, our expenditure for the hurricanes totalled €2.3bn after retrocessions and before tax. Some 17.7 (4.5) percentage points of the overall combined ratio of 110.5% (98.9%) were attributable to losses from natural catastrophes.
– In primary insurance, the pleasingly low claims expenditure was once again a major success factor. The combined ratio, including legal expenses insurance, was only 93.1% (93.0%), much better than the 95% we had aimed for. The cost-reduction programme led to a significant improvement in the result.
– Realised capital gains greatly increased the investment result in reinsurance and primary insurance alike. We cut back our investments in German financial stocks by selling shares in Allianz, Commerzbank and bhw. We also disposed of our stake in man. We exchanged our hvb shares into UniCredit shares, realising capital gains to the tune of €988m. Compared with the previous year, the return on investment rose to 5.9% (4.5%).
Life and health 13.9% Property-casualty 42.6% Life and health 30.8% Property-casualty 12.7%
Life and health 14.6% Property-casualty 41.8% Life and health 31.0% Property-casualty 12.6%
Life and health 18.2% Property-casualty 35.9% Life and health 32.3% Property-casualty 13.6%
The following diagram shows the percentage of premium from foreign business. In reinsurance we operate on a global basis, whereas in primary insurance our activities are focused on the German market.
Premium income in reinsurance was down as a consequence of our consistently profit-oriented underwriting policy and the scheduled termination of individual reinsurance treaties. However, the decrease came to only 0.2% compared with the previous year (9.7%). In particular in the property-casualty segment, we suffered substantial losses in premium volume in North America, as a number of treaties did not meet our strict underwriting guidelines. In Asia by contrast, premium income rose noticeably. The life and health segment also experienced a rise. In 2005, currency translation effects had a much smaller influence on the development of premium than in the previous year.
In primary insurance, there was a slight increase of 0.3% (–0.6%) in premium income overall. Growth was primarily driven by health insurance, the notable expansion in premium volume attributable to premium adjustments and additional sales of supplementary insurance policies. As expected, the change in fiscal parameters caused premium in life insurance to lag behind the high levels achieved in previous years. The fact that the Karlsruher Insurance Group was deconsolidated as at 1 October 2005 accentuated the decline in premium volume. In line with the market, growth in property-casualty insurance was marginal, due in particular to declining prices in motor insurance.
Consolidation –1.7 –1.8 –2.0 –2.0 –1.8 governing bodies and cartel authorities have provided the formal approvals still outstanding when the agreements were signed, so that the sale will be completed in the current business year. ada-has will continue to be our partner for it issues.
Gross premiums written: Thereof natural catastrophes Percentage points 17.7 4.5 1.6 3.3 1.5
Consolidated result in life and health €m 976 432 * 262 1,548 1,151 *Adjusted owing to first-time application of ias 1 (rev. 2003).
Overview and important key figures The past year impressively demonstrated the quality of our basic business, even though it was affected by certain burdens on the result. We had to strengthen the claims reserves of our us subsidiary American Re for past accident years by us$ 1.4bn net. Owing to the relief effect of €906m from the release of the ibnr provisions, however, the reserve strengthening reduced the Munich Re Group’s operating result by €388m. The result was also impacted by the unusually strong Atlantic hurricanes. These two factors alone accounted for 2.6 and 15.4 percentage points of the combined ratio of 110.5% (98.9%), a figure far in excess of our planning for reinsurance. However, these burdens were largely offset by our excellent performance in the life and health segment and our very good investment result.
Marketing As reinsurers, we write our business predominantly in direct collaboration with the primary insurers, but also via brokers. This includes business offered to us by industrial clients through their captives or risk retention groups (alternative market business), which we accept via MunichAmerican RiskPartners (marp).
At €2,629m, the share of natural catastrophe losses in our total expenditure for major losses (€3,293m) was especially high in the business year ended. The exceptional number and severity of the hurricanes in the Gulf of Mexico made 2005 a record year for us in terms of insured natural catastrophe losses. This development, which began to manifest itself in 2004, confirmed our strategy of systematically refining our risk management in the Group.
Result The two reinsurance segments property-casualty and life and health accounted for €0.4bn (1.2bn) and €1.0bn (0.4bn) of the consolidated result respectively. Our overall result for reinsurance was thus 16.3% below that of the previous year.
The operating result of the property-casualty segment reflects the reserve increase at American Re and the considerably higher burden from natural catastrophes compared with business year 2004. Nevertheless, these two
effects were largely offset by the solid result in basic business and high income from investments. In contrast to the operating result, the consolidated result in the propertycasualty segment was additionally affected by tax expenditure incurred at Group level as a consequence of the reserve strengthening at American Re.
Premium Premium volume in 2005 fell by 0.2% to €22.3bn (22.4bn). With the euro down against most other important currencies, we recorded premium growth due to changes in exchange rates – in contrast to the previous year. Without these currency translation effects, our premium income would have been 0.9% lower. Approximately €15bn or 69% of premiums was written in foreign currency, of which 53%
The main reasons for the decline in premium income were the continuation of our strictly risk-adequate underwriting policy and the scheduled termination of individual reinsurance treaties. Where prices or conditions were not commensurate with the risks, we refrained from renewing treaties or writing new business.
At €7.8bn (7.5bn), gross premiums written in life and health reinsurance were slightly below the previous year’s level. The substantially increased operating result of €1,104m (698m) and the consolidated result of €976m (432m) reflect the success of our consistently profit-oriented strategy.
Life Although we have begun to gradually reduce the volume of a large life reinsurance treaty in Germany and growth opportunities in a variety of important markets were limited, gross premiums in the life segment rose significantly by €372m (658m), equivalent to growth of 6.1%.
The life reinsurance market in the United Kingdom was characterised in 2005 by increasing competition and price pressure, especially in the high-volume business segments of term insurance and critical illness insurance. Nevertheless, gross premium volume was nearly constant compared with the previous year at €1.04bn (1.05bn), with a very satisfactory earnings position. Expansion of the promising field of disability coverage is important for further business development. We anticipate appreciable growth in business volume in this area for the coming year. We also expect further positive impulses from the transfer of responsibility for our business in the United Kingdom from the uk supervisory authority to the German supervisory sphere at the beginning of 2005, a regulation that was made possible by the harmonisation of regulatory requirements within the EU. For us, this principally means greater efficiency in the reporting of our business and better capital allocation.
In Canada, our subsidiary Munich Reinsurance Company Canada Branch (Life) wrote gross premiums of €1.5bn
Thanks to the nearly unchanged combined ratio of 97.4% (98.9%) and the very good investment result, we surpassed the excellent result of the previous year.
In the USA, which with 35% of total premiums is our most important health insurance market, premium income was 3% up on the previous year. The USA is also our most profitable individual market. New laws such as the Medicare Modernization Act will give rise to additional growth areas for primary insurers and reinsurers. If healthcare for people suffering from chronic diseases is partially privatised as planned, the demand for insurance will climb. We are building up skills in this area and gearing up our organisation to take advantage of anticipated business opportunities.
Expensive treatments can lead to strong fluctuations in the expenditure incurred by an individual insurer. Reinsurance solutions for costly medical procedures are therefore in ever greater demand among private health insurers and statutory health insurers alike. Because there is a growing risk awareness for new hazards such as pandemics (e.g. avian flu), the potential interest in customised reinsurance covers is rising as well. Premium volume and result in Germany both increased in the past year, with premium income totalling €258m (249m). We anticipate that the German market, which is very important for us, will continue to develop favourably.
After 2004, with its tropical cyclones in the Atlantic and Pacific, had gone down in the history of natural catastrophes as the most expensive year ever in terms of insured losses, the insurance industry sustained even greater losses in 2005. The year of extreme natural hazards was preluded by Winter Storm Erwin, which affected northern Europe in early January with losses, before tax, totalling €56m. The tropical cyclone season in the Atlantic Ocean began uncommonly early in 2005, with Hurricanes Dennis and Emily striking in mid-July. The Munich Re Group’s losses from these two natural catastrophes before tax amounted to €21m.
Katrina, the third major hurricane of the year, left a trail of devastation in its path from the southern tip of Florida across the Gulf of Mexico, especially where it made landfall on the us Gulf Coast. With wind speeds of up to 280 km/h and peak gusts of up to 350 km/h, Katrina was one of the severest storms ever to hit the Gulf of Mexico and one of the worst natural disasters in United States history. Although hundreds of thousands of people from the area around New Orleans fled the storm, over a thousand per-
Impact of the reserve strengthening on American Re and the Munich Re Group*
Profit impact for Munich Re Group before tax 388 Taxes on income 362
ished. After the levees failed, parts of New Orleans lay under more than seven metres of water. Only gradually did the full extent of the considerable flood losses along a broad coastal strip emerge. Unrestricted access to New Orleans has only been possible since the beginning of December, which meant substantial delays in surveying business interruption and building losses. The subsequent storms Rita and Wilma also had a retroactive impact on the loss amount from Katrina because they led to a further increase in demand and prices for materials and wages in the construction and craft sectors, thus inflating the cost of Katrina claims. The losses are covered under commercial and industrial policies and largely protected by reinsurance. According to our updated estimate as at the end of December 2005, Hurricane Katrina – with insured market losses of over us$ 45bn – is the largest ever insured loss event. Economic losses amounted to approximately us$ 125bn. Since we limit liability for natural hazard events and purchase retrocession covers as part of our risk management, the burdens for the Munich Re Group were reduced.
The us coast in the Gulf of Mexico was again hit by a severe hurricane when Rita made landfall in September. It caused severe flood damage and fresh levee breaches in New Orleans. Rita had a loss potential similar to Katrina’s but caused far less devastation. The losses we incurred totalled approximately €270m net before tax.
Hurricanes Stan and Wilma occurred in October. The heavy rain accompanying Stan led to severe flooding, landslides and mudslides in southern and eastern Mexico and large areas of Central America. As a Category 1 hurricane, Stan was significantly weaker than its predecessors, yet it claimed the lives of 2,000 people – the heaviest human toll of the 2005 hurricane season. Given the low insurance penetration along its track, however, the insured losses caused were few. The Munich Re Group’s burden from Hurricane Stan came to just under €6m net before tax. From a meteorological point of view, Hurricane Wilma was temporarily the strongest hurricane ever recorded. It caused
With premium income of €1.1bn (1.2bn) or 68% of total premiums, Germany is the division’s most important market. Our withdrawal from business with unattractive prices had a negative impact on premium income, and new business in Germany could only partially make up for the lost volume.
We consider the reinsurance conditions for the treaty business in our portfolio to be adequate, and were able to improve the prices, terms and conditions in some areas.
In the acceding eu member states, insurance penetration continued to rise in 2005, and we profited from the growth of the markets. Business development in the individual countries and regions of eastern Europe continued to vary greatly. We again recorded the highest premium income in Poland, Russia and the Czech Republic, and we see further good growth opportunities in eastern Europe. The result situation was positive throughout the region.
Our premium income from Greece and Turkey developed pleasingly and rose to €131m (111m). Our result remained stable at a good level.
In France and Belgium, we essentially maintained our premium volume despite extensive portfolio remedial measures, especially in the French motor liability portfolio. Premium income totalled €237m (239m). Performance in property and marine business was again pleasing, whereas motor liability insurance registered a further deterioration in the run-off results of treaties written many years ago. The main reason for this decline was the inflationary trend among long-term care costs in France. We therefore strengthened our claims reserves again. The premium volume of our subsidiary in Italy, which operates in property-casualty, health and life business, declined by 5.0% to €603m (635m), above all due to a reduction in life premium. Although there was also a slight decline in property-casualty business, we affirmed our market leadership. After posting a loss in 2004 owing to negative oneoff effects, Münchener Rück Italia again achieved a profit in 2005. Overall, the Italian reinsurance market is currently stagnating. Mergers in primary insurance could cause market volume to shrink in future, especially in propertycasualty insurance.
Since we see hardly any growth opportunities in traditional reinsurance in the Netherlands, we have further expanded our business in the non-traditional sector. Premium income nevertheless decreased by 14.4% to €137m (160m). The result, however, developed positively. We managed to maintain our strong market position.
In the Nordic countries, premium volume fell from €222m to €118m, mainly because a large-volume motor liability treaty was not renewed. In addition, some of our clients increased their retentions. Winter Storm Erwin burdened our result with approximately €40m after retrocessions and before tax. Rising prices for natural hazard covers and a number of promising openings for innovative insurance solutions lead us to expect moderate premium growth and above-average profit potential.
At €381m (408m), premiums in Spain were down somewhat, since we reduced several treaty shares as planned. We continue to hold a leading market position here.
Despite the skyscraper blaze in Madrid and several medium-sized fire losses, the result was positive. In Portugal, with premium totalling €48m (54m), we achieved adequate margins and a positive result. We were not affected by major losses from the forest fires in the summer of 2005. We expect that premium volume in Portugal will fall in 2006, since we decisively forged ahead with the conversion of the earthquake covers into non-proportional reinsurance.
In Southeast Asia we concluded the remediation of our portfolio in 2005. Our premium income grew marginally, and we generated a satisfactory result. We see a further stabilisation of the political conditions in Southeast Asia and expect additional growth impulses for the region, in particular against the background of closer cooperation between the asean nations and China. We positioned ourselves at an early stage in Takaful insurance and anticipate that premium and results will develop positively. In India, we envisage reinsurance demand reaching about €1bn in ceded premiums in the medium term. Owing to local restrictions, only about a third of market volume is currently accessible to foreign providers. In addition, a major share of the business is strongly underpriced and therefore not interesting to us. Our present premium income still remains low, but given the prospect of the reinsurance market opening up, we expect a significant increase over the next few years. Munich Re is still seeking an adjustment of the legal parameters so that it can obtain a licence to operate an Indian property-casualty branch. The monsoon rains in July had a negative impact on the result for 2005. Since we have steadily optimised our portfolio quality in recent years and have written new policies more selectively, the burden on our portfolio remained limited, despite the severity of the event.
Our subsidiary in Africa, Munich Reinsurance Company of Africa (mroa), remains the leader in the main market of South Africa and in the other 44 African countries south of the Sahara.
In 2005, the losses from the hurricanes in the USA hit a new record, with primary insurers and reinsurers consequently incurring higher-than-expected losses. In the wake of this, prices and the demand for high-security reinsurance covers rose. As one of the most strongly capitalised us reinsurers, American Re is one of the main beneficiaries of this trend.
The result was burdened by the reserve strengthening of us$1.6bn, after corporate retrocessions, at American Re and the losses from the 2005 hurricane season. The combined ratio for the division increased from 119.3% to 134.0%. The relief effect from the ibnr reserve is included in this figure (see page 69).
Temple Insurance Company and Munich Reinsurance Company of Canada (mroc) together make up the Munich Reinsurance Canada Non-Life Group, which plays a leading role in the Canadian market. For the first time, the results of the two units in the year under review are shown combined.
The underwriting field comprises a defined number of international cedants, the Lloyd’s insurance market and us business written in Munich. We devise comprehensive reinsurance concepts, write major industrial risks and, where possible, participate in mass business. The special segments agriculture, workers’ compensation and customised portfolio solutions round off our range of activities.
The high-volume treaties in the portfolio can trigger significant fluctuations in the portfolio’s size. In the period under review, the scheduled termination of a large proportional treaty alone led to a reduction in premium in the range of €418m compared with 2004. Premium income dropped by a total 3.0% to €3.4bn (3.5bn).
Hurricanes Katrina, Rita and Wilma had a major effect on the underwriting result for 2005. The combined ratio therefore rose by 32.0 percentage points to 126.0% (94.0%). Our book of liability business consists mainly of highly exposed risks such as industrial liability and specific segments like pharmaceutical risks, professional indemnity, and directors’ and officers’ liability reinsurance. Accident reinsurance is experiencing a further rise in the demand for catastrophe covers for accumulation events. Our mass business chiefly comprises motor reinsurance. The results of these classes of business are positive.
In property reinsurance, there is an increased need for protection from high exposures to natural catastrophes such as windstorm or earthquake. The business year was marked by Hurricanes Katrina, Rita and Wilma. The prices for such reinsurance covers had come under a certain amount of pressure before these major hurricanes, but rose significantly in the renewals as at 1 January 2006. We hold a leading position in agricultural reinsurance. The bulk of our agricultural business stems from the USA and derives largely from federally supported multi-peril crop insurance. The result we achieved in the year under review was also good.
Our space underwriting unit, which was founded 25 years ago, is by far the greatest risk carrier in the global market. The premium rates for the operation of satellites (in-orbit insurance) remained stable, whereas those for launch insurance dropped marginally.
Munich Re again achieved a clear profit in its core field of business trade credit and bonding in 2005. However, reinsurance premium volume in the European industrial countries barely increased and growth was predominantly generated by the USA and Asia. For this reason and owing to higher client retentions, total premium income reduced to €484m (574m). As we set up additional reserves for the financial institutions segment, which is also included in our credit business, we recorded a lower overall profit. The structuring of capital market solutions for the Munich Re Group, which we have concentrated in our subsidiary Munich American Capital Markets, was expanded as scheduled. Growth was especially significant in the weather derivatives segment.
If peak wind speeds of over 27 m/s are recorded at five adjoining weather stations in Germany and four other countries and an exposure-weighted windstorm index value is exceeded, Munich Re will receive the proceeds from placing the bond (€110m). The funds, invested in aaa bonds, are held in a trust account and investors receive interest of 4.75% over euribor for assuming the windstorm risk. The transaction does not give rise to any risks for us as potential beneficiary. Aiolos Ltd. has not been consolidated in the financial statements.
Our clients in the alternative markets segment are large industrial firms that generally offer their business either direct or via captives, i.e. via insurance companies belonging to an industrial group. This business segment is handled by our subsidiary Munich-American RiskPartners (marp), which has offices in Munich and London.
In 2005, we were able to expand liability business outside the USA in special segments such as directors’ and officers’ liability at risk-adequate prices. Moreover, we developed and implemented innovative cover concepts with selected clients. In property reinsurance – above all in the USA and in the global energy sector – we achieved appreciably better prices in the last quarter of the year. On the whole, premium income was higher than last year.
Investments Sfr m 3,542 2,876 *Financial statements in accourdance with national accounting law.
Owing to the hurricanes in the USA – Katrina, Rita and Wilma – this sector of our business recorded a negative result.
Primary insurance Health insurance strongest growth engine thanks to supplementary insurance products Combined ratio again low at 93.1% High investment result of €5.9bn thanks to favourable capital markets
The Group’s primary insurers essentially comprise the ergo Insurance Group, Europäische Reiseversicherung and the Watkins Syndicate. Until the fourth quarter, they also included the Karlruher Insurance Group.
Together, they are active in nearly all branches of life, health, property and casualty insurance. Around 81% of their premium income derives from Germany. The remaining 19% stems above all from other European countries. The bulk of business is therefore transacted in euros.
Karlsruher Insurance Group contributed approximately €120m after taxes on income to our consolidated result. The extensive restructuring of ergo’s management organisation reinforced our view that it would not make sense to integrate Karlsruher’s sales channels, with their strong regional orientation, into ergo’s nationwide sales forces. In addition, in its existing form the Karlsruher Insurance Group was not large enough to subsist on its own in a market that is increasingly consolidating.
Gross premiums written: Combined ratio property-casualty including legal expenses insurance % 93.1 93.0 96.4 99.9
Premium Premium income developed positively especially in health insurance, where it increased by 7.8%. In life insurance, gross written premiums, which include savings premiums for unit-linked life insurance and capitalisation products (e.g. “Riester” pensions), rose somewhat more slowly than overall premium income. The growth of 0.8% in property-casualty business was on the same level as the market as a whole.
As in the previous year, the premium volume of our primary insurers accounts for about 46% of the Munich Re Group’s total premium income.
Primary insurance result *Adjusted owing to first-time application of ias 1 (rev. 2003).
Gross premiums in the life segment in €bn Status: 31 December 2005
Reporting by subgroup In reporting on our primary insurance operations, we follow the structure of our subgroups, in each case referring to our subsidiaries’ individual or consolidated financial statements in accordance with ifrs.
In the business year ended, our life insurers’ premium income was down 4.5% to €7.4bn (7.8bn). As expected, new business remained 11.7% below the high level of the previous year, when policies were being purchased in anticipation of the change in fiscal parameters in 2005.
In the year under review, ergo clearly improved its result in all areas thanks to continued good underwriting results and favourable capital markets. In addition, with its new management organisation, ergo made its decision-making channels, structures and processes simpler and more efficient. Thus, in 2005, we took a great step forward on the way to achieving homogeneous management structures – a path we have pursued consistently since ergo’s formation. We have optimised steering and planning processes. At the same time, we are working on standardising the it landscape by creating a common health insurance platform to complement the ones we have already set up for Iife and property-casualty (see page 108 f.). We have also largely harmonised our pricing – for instance in motor insurance.
Marketing The brand names of ergo’s operative insurance companies continue to be of great significance. They are the cornerstones of ergo’s great franchise strength, as its strategy involves using multiple sales channels to gain access to clients. ergo has a sales force of over 21,000 selfemployed insurance agents working closely with brokers and strong partners. Its exclusive cooperation with HypoVereinsbank, which will not be ended by the merger between hvb and UniCredit, generated new business volume of €293m (334m) in 2005.
The joint venture KarstadtQuelle Finanz Service contributed €85m (87m) of new business volume. Moreover, in March of the year under review, an agreement was concluded with parts of Postbank ag to cooperate on cross-selling the insurance products offered by HamburgMannheimer and dkv, as well as the fund products provided by meag.
Result In 2005, the ergo Insurance Group’s operating and consolidated results exceeded the previous year’s figures and planning values. Its operating result increased by 192.1% to €1,128m (386m). The underwriting result was again good owing to satisfactory loss ratios and unchanged cost discipline, factors which in combination with the exceptionally high investment income were responsible for the increase in the consolidated result by 231.0% to €782m (236m). Favourable capital markets were helpful in reducing shares above all in the financial sector. For instance, we realised a substantial capital gain from the sale of shares in bhw and Commerzbank and from the merger between hvb and UniCredit. This gain and higher regular income caused the investment result to rise by 30.7% to €5,597m (4,283m). Claims expenditure in 2005 remained at the same low level as in past years. Consequently, the very good combined ratio of 90.0% in property-casualty insurance was again slightly better than the previous year’s exceptionally low 90.1%. In legal expenses insurance, the combined ratio remained below the 100% mark, at 99.7% (98.9%).
New business in Germany was influenced by changes in the tax environment at the beginning of 2005. As anticipated, it was significantly lower (by 11.7%) than in the previous year because of a moderate first half-year and the particularly strong fourth quarter of 2004. Sales (especially in the first quarter of 2005) clearly show that policies were taken out in the fourth quarter of 2004 in anticipation of the tax changes. In the second quarter, however, sales started to pick up again. Not surprisingly, the strong fourth quarter of the previous year could not be matched in 2005. For our clients, however, endowment insurance continues to be an attractive product, despite the new tax rules.
In our comprehensive health insurance business, the number of insured persons remained nearly constant. The integration of the insurance companies we had acquired in the previous year is going according to plan and was successfully concluded for Zürich Krankenversicherung in 2005; for Globale Krankenversicherung integration will be finalised by the end of the first quarter 2006. Various ventures in other countries have created new market potential. One example is the project adopted in the year under review by ergo’s Spanish subsidiary dkv Seguros to provide cover for the public healthcare system in the Spanish province of Denia for a period of 15 years starting in 2007.
In cooperation with etig (European Travel Insurance Group), an alliance of European travel insurers, europäische has created an international online booking platform. By introducing innovative technology, it has gained a major competitive edge in the growing market of online travel reservation.
Marketing The syndicate, which operates within Lloyd’s of London, is one of the leading primary insurers in international marine business. For Munich Re, the market leader in global marine business, the syndicate is an integral part of our corporate strategy and maintains close contact with Lloyd’s, still the most important marine insurance market.
Core business severely affected by Hurricanes Katrina and Rita Annual result in the medium-term target range, despite natural catastrophes
At the same time, we also offer our expertise in asset management to partners outside the Group, thus tapping additional sources of earnings. As at 31 December 2005, therefore, meag Munich and ergo Trust had investments of €10.2bn (12.8bn) under management for investors not belonging to the Group. ergo Trust’s concentration on the real estate sector and its resulting withdrawal from other financial investments led to a decline of the assets managed for third parties.
Development and structure of investments As at 31 December 2005, the Munich Re Group’s investments amounted to €177.2bn (178.1bn), down 0.5% on the previous year. The deconsolidation of the Karlsruher Insurance Group reduced Group investments by around €12bn compared with the previous year, especially in the area of fixed-interest securities. In our portfolio of non-fixed-interest securities, on the other hand, we recorded price gains. We invested the cash flows from underwriting business largely in fixed-interest securities and loans.
Other securities held to maturity – – – – 432 518 13 44 – – 445 562
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 1,430 1,319 – – – – 1,430 1,319 *After elimination of intra-Group reinsurance across segments.
The structure of our investments has changed only slightly compared with the previous year. The decrease in our real estate portfolio is partly due to the reclassification of owner-occupied land and buildings to the item “other assets”, which has now been concluded. The portfolio also declined owing to the sale of the Karlsruher Insurance Group. The proportion of the interest-sensitive items fixed-interest securities and loans increased by 2 percentage points to 71% as a consequence of new investments and price gains on bonds. Investments in affiliated companies and associates fell markedly, owing to sales of shareholdings as part of our diversification and streamlining strategy. HypoVereinsbank ag was previously recognised as an associate of the Munich Re Group. After exchanging our hvb shares into UniCredit stock, we show the resultant equity investment under securities available for sale, since we do not exercise a significant influence on UniCredit. By contrast, our portfolio of shares shows an increase due to the positive performance of share prices. Together, the two items make up some 14.1% of our total investments at carrying amounts at the end of 2005, compared with 13.9% in the previous year.
Owing to losses in value, various items had to be written down to their recoverable amount in the period under review. Impairment losses and depreciation on the overall portfolio totalled €446m.
The Munich Re Group had a total stake of 18.3% in the share capital of the hvb Group and accepted UniCredit’s exchange offer to hvb shareholders. After the exchange, the Munich Re Group sold 1.86% of its resultant stake in UniCredit’s share capital and now has a shareholding of under 5%. A little under half of this is held by Munich Reinsurance Company and the remainder largely by companies of the ergo Insurance Group. The exchange transaction resulted in a net capital gain of €1.15bn. Through its participation in the newly formed major European bank and the subsequent partial sale, the Munich Re Group has further diversified its investment in the banking sector. The sale of Munich Re’s 90.1% shareholding in Karlsruher Lebensversicherung focuses Munich Re’s primary insurance activities on the ergo Insurance Group, the Europäische Reiseversicherung Group and Watkins Syndicate. This transaction resulted in a one-off profit contribution of around €120m.
Fixed-interest securities Bearing in mind the interests of their policyholders, the primary insurance companies in the Munich Re Group concentrate on achieving a competitive net return. In order to earn sufficient regular income for this, they have invested in fixed-interest securities with longer terms to maturity and correspondingly higher coupon rates. In the year under review, we only slightly changed the duration – i.e. average capital commitment – of the bond portfolios in the Group. As at the balance sheet date, the duration was at the same level as in the previous year (6.2 years). Owing to pronounced low-interest-rate phase and the further fall in interest rates over the course of the year, the valuation reserves of our fixed-interest securities and loans developed positively.
Equities and equity funds In 2005, we continued our strategy of diversifying our equity investments more strongly. As described above, we sold shares in the banking and insurance sector and reduced our shareholding in man in the first quarter from around 7% to a small stake.
Valuation reserves The difference between the fair value of our investments and their balance sheet value developed very positively on the whole: Through the exchange of our hvb shares into UniCredit stock, we realised valuation reserves.
The valuation reserves of the significantly enlarged portfolio of loans were positively affected by falling interest rates but were reduced by the sale of Karlsruher Insurance
Information on the valuation reserves recognised in the balance sheet is provided on page 179 of the notes to the financial statements.
Valuation reserves not recognised in the balance sheet Valuation Fair value Carrying Valuation Fair value Carrying reserves amount reserves amount
The growth in the investment result is primarily attributable to the high gains on the disposal of non-fixed-interest securities, especially shareholdings in the financial sector. The positive result from the sale of hvb is reflected in the greatly increased result from associates. These contrast with write-downs of €1,150m in our real estate, mainly
Deposits retained on assumed reinsurance and ceded business and other investments 575 522 10.2
Investments for the benefit of life insurance policyholders who bear the investment risk 170 53 220.8
Expenses for the management of investments and other expenses 492 524 –6.1 necessitated by the continuing market weakness in Germany. Regular income includes a profit contribution for the first three quarters of €105m from the proportionate annual result of hvb. Despite persistently low interest rates, regular income from interest-bearing investments reached nearly the same level in 2005 as in the previous year.
Result Prices on the European stock markets surpassed their upward trend of 2004. The euro stoxx 50 rose by 21.3% in the course of the year. The Japanese Nikkei registered an even more pronounced increase of 40.2% in the same period. By contrast, the lead index for us shares – the s&p 500 – climbed by only 3.0%. The German bond markets for ten-year government bonds closed with a yield of 3.3%, whilst the yield on us government bonds stood at 4.4% at the end of the year.
A detailed report on the development of the capital markets can be found in the section “Economic parameters” on page 55.
In business with external investors, meag surpassed its targets for assets under management. As at 31 December 2005, the figure was €3.0bn (2.3bn) for institutional investors outside the Munich Re Group. Assets managed in retail funds totalled €2.7bn (2.4bn).
meag’s retail funds recorded net inflows of €226m (134m) in 2005, whilst in institutional third-party business meag recorded growth of €517m (€598m) overall.
In addition to the positive new business, the favourable performance of the capital markets played a significant part in the development of third-party business, given that the earnings contribution of asset management for clients outside the Group primarily depends on the volume of the assets managed.
At Group level, our capital structure remained largely unchanged in comparison with the previous year. Within the Group, however, some shifts occurred, as we increased the reserves of our us subsidiary American Re: we strengthened American Re’s capital base by us$ 1.1bn in the third quarter and converted two intra-Group financing instruments granted to two intermediate holding companies totalling us$ 1.6bn (owing to de facto irrecoverability) into equity.
Since we are an international (re)insurance group, some of our funds are subject to restraints on disposal. For example, the supervisory authorities in some countries require foreign reinsurers to establish premium and reserve deposits with the primary insurer. As at the balance sheet date, investments totalling €4.9bn were subject to restraints on disposal. In addition, there were contingent liabilities, which are described on page 206 of the notes to the financial statements. Off-balance-sheet financing measures do not play a significant role in the Munich Re Group.
(74% of the balance sheet total). Equity (11% of the balance sheet total) and bonds classified as strategic debt (2% of the balance sheet total) are the most important funds (see chart).
To configure our asset-liability management as effectively as possible, we also use derivative financial instruments, which are described on page 170 ff. of the notes to the financial statements.
Capital management In our capital management, we monitor the capital of the Munich Re Group on an ongoing basis. We thereby ensure at all times that – the Munich Re Group’s capitalisation is adequate but does not significantly exceed the required level, – its financial strength is guaranteed even after the occurrence of large loss events, – we fulfil the requirements of the insurance supervisory authorities, and – we meet the criteria of the leading rating agencies.
The aim of our value-based management (see page 46) is that every investment permanently achieves a risk-adequate return. To limit fluctuations in results owing to major losses, we have also developed guidelines and limit systems for underwriters within the framework of our integrated risk management and corporate underwriting for the reinsurance companies. We protect the results and capital of the primary insurance companies against unacceptable fluctuations by means of suitable reinsurance covers.
– Net unrealised gains rose by €1,507m compared with the position at the beginning of the year due to the rise in the net unrealised gains in our share portfolio resulting from the favourable development of the capital markets.
– Since the euro declined chiefly against the us dollar, the reserve for currency translation rose by €650m. In this reserve, we recognise the effects of changes in exchange rates arising from the translation into euros of our foreign subsidiaries’ assets and liabilities.
Strategic debt We define as strategic debt all borrowing with the character of outside financing that does not have a direct link with our operative business. It supplements our equity and is essentially designed to reduce the cost of capital and ensure that we have sufficient liquidity at all times. To make our capital structure transparent, we quantify our debt leverage. This is the percentage ratio of strategic debt to the sum of Group equity and strategic debt.
If the own funds recognised under supervisory law are taken as the basis instead of the balance sheet equity, the strategic debt is reduced to €1,869m (3,123m). This results in a debt leverage of 6.2% (11.5%).
We issued the exchangeable bonds in order to actively manage the underlying shareholdings. In the second quarter of the business year ended, we redeemed a Munich Reinsurance Company bond exchangeable into Allianz ag shares with the very strong cash flow from our operating activities. Two further exchangeable bonds were issued by ergo International ag in 2001. These are backed by e.on ag and Sanofi-Aventis s.a. shares and will both mature in 2006.
We show the interest expenses for strategic debt separately in the consolidated income statement under “finance costs” and present these in detail in the notes to the financial statements (Note 33). As at 31 December 2005, our debt
Our strategic debt as at 31 December 2005 is made up as follows: leverage was 17.6%, having decreased by 6.4 percentage points compared with the previous year due to a reduction of the strategic debt and an increase in Group equity. There are currently no plans to expand our financing with outside funds.
KarstadtQuelle Lebensversicherung Aktiengesellschaft BBB+ victoria Lebensversicherung Aktiengesellschaft A+ Aa3 A+ victoria Versicherung Aktiengesellschaft A+
The increase in eligible capital is attributable to the fact that our shareholders’ equity has risen by around €4bn and the Solvency Adjustment Ordinance has been improved. Since 1 January 2005, locally established claims equalisation provisions totalling just under €5bn, which are not allowed under ifrs, no longer have to be deducted from ifrs equity when determining eligible capital for solvency purposes.
Rating Munich Re’s financial strength is generally evaluated by the leading rating agencies as very positive, and our ratings remain at a high level. In 2005, our rating was adjusted as follows. In the first quarter, Moody’s revised the outlook for our financial strength rating (aa3 – Excellent) from
Standard & Poor’s A+ (Strong) Stable negative to stable. In the third quarter, A.M. Best placed its rating for the Munich Re Group (a+ Superior) under review, while Fitch lowered our rating from aa to aa– (Very strong). In the fourth quarter, A.M. Best took the Munich Re Group off the watch list and lowered its outlook from stable to negative.
Notes and debentures The notes and debentures issued by our Group are rated as follows: A.M. Best Fitch Moody’s S&P
Munich Re Finance b.v., 7.625%, £300m, Subordinated Bonds 2003/2028 a A A2 A–
The cash flow statement is adjusted to eliminate the effects of changes in exchange rates and influences from changes in the consolidated group.
The strong cash inflow from operating activities is attributable to the excellent performance of these activities. The already satisfying consolidated result of €2,743m is adjusted in the consolidated cash flow statement by €10,804m to take account of the change in underwriting provisions. On the one hand, there was an increase in the loss reserves of the Munich Re Group’s reinsurers for the Atlantic hurricanes and the reserve strengthening at American Re. On the other hand, there was an increase in provisions for future policy benefits posted by the Munich Re Group’s primary insurers as a result of the satisfactory decline in policy terminations and due to portfolio development and new business with young companies. Cash outflows totalling €1,374m for the acquisition of securities held for trading partially derived from a greater use of derivatives to hedge our investment portfolio against adverse market developments. The net gains on the disposal of investments – which in adjusting the consolidated profit have to be deducted from the cash flows from operating activities – are essentially ascribable to gains from the sale of shares and the exchange of hvb shares into UniCredit stock. The cash outflows from investing activities were determined by the outflows for the acquisition of investments. These exceeded the inflows from the sale/maturity of investments by a pleasing €2,529m. The inflows from the sale of consolidated companies include the Karlsruher Insurance Group and Nieuwe Hollandse Lloyd Verzekeringsgroep n.v. In the business year 2005, our disposals of consolidated companies totalled €398m. The sales prices were settled in cash and offset in the consolidated cash flow statement against the total cash of €225m held by the subsidiaries sold. Moreover, the Munich Re Group disposed of a total of €12,858m in investments and €12,881m in underwriting provisions by selling consolidated companies. In 2005, no major company acquisitions were made.
Other success factors Competence and up-to-the-minute knowledge for our clients Intelligent solutions for new challenges Highly qualified and motivated staff
Instrumental in securing the Munich Re Group’s sustained economic success are not only the high quality of our business operations but also a number of factors that cannot be measured by financial performance alone. These include: – Open dialogue with our clients – Our firm commitment to new, needs-oriented products and services – Our corporate responsibility towards employees, society and the environment – Efficient business processes for managing our Group and identifying or avoiding risks
Last but not least, our cedants worldwide benefit from our local presence. Branches and subsidiaries around the world ensure that our clients can always find us where and when they need us. We thus combine international knowhow with in-depth knowledge of local conditions, to offer our clients individual solutions in every case and continue to be their preferred partner in risk.
Primary insurance In primary insurance, our products and services are mainly for private clients throughout Europe, who make up the bulk of our clientele, along with small and medium-sized firms. They can choose from the full range of product groups: life and health insurance, property-casualty insurance, legal expenses insurance, travel insurance and assistance services, fund products offered by meag as the
ergo’s professional client management has been tested for client satisfaction and service by the German technical inspection agency tüv and rated as “good”. The quality of its claims management is certified to din en iso9001, for which regular on-the-spot checks are made in addition to extensive audit and claims controlling. Client service is dealt with by a centrally managed unit covering all ergo’s business segments and companies.
Our 23 centres of competence play a special role here: they are active in many different fields, and the significance of their work sometimes goes far beyond the immediate world of insurance. Not only do they create the basis for identifying new risks; they also help control them by making them insurable. Geo Risks Research, for example, supports our underwriting of natural hazard risks and is a much sought-after partner for our clients as well as for scientists and politicians. The Centre of Competence for Biosciences focuses on genetic engineering and explores the opportunities and risks of this key technology for the insurance industry. Other centres of competence deal with topics like the assumption of old loss portfolios (“customised portfolio solutions”), it risks and jewellers’ block – a line of insurance covering all the risks of jewellery business and diamond trade – and also workers’ compensation.
In 2004, we set up six cross-divisional innovation teams in underwriting, i.e. interdisciplinary groups made up of highly qualified experts who work in close contact with the underwriting units to identify and tap new business opportunities. We combine resources in this way in order to come up with intelligent solutions, which we are convinced are the key to a profitable future. Collaborating with the staff responsible in the divisions, our innovation teams develop new products, services and distribution channels. Our cedants benefit from their solutions in many areas, be it in the individual design of policies, in claims management, or in analysing and optimising a client’s portfolio structure. Thus, for example, solutions have been devised for motor own damage cover for a leasing fleet that redefine the interaction of brokers, primary insurers and reinsurers.
Our primary insurers place the emphasis of their research and development on forecasting demographic trends and incorporating the results into product design. For these trends constitute important parameters for calculating policy terms and thus for structuring products. Besides this, demographic change is affecting social security systems and consequently influencing our clients’ need for private provision.
In order to be able to work with all the available information, ergo collaborates closely with the Intergenerational Compacts Research Centre at the Albert Ludwig University in Freiburg, whose areas of research include old-age provision, healthcare, long-term care and tax. Our product development combines the scientific findings of the research centre with our own knowledge and ergo insurers’ own extensive experience with clients.
Facts and figures On 31 December 2005, a total of 37,953 (40,962) staff were employed with the Munich Re Group worldwide, 6,798 (6,612) in reinsurance, 30,465 (33,703) in primary insurance and 690 (647) in asset management.
The distinct reduction compared with the previous year results mainly from the sale of the Karlsruher Insurance Group, in which 2,282 were employed as at 30 September 2005. In addition, with due regard to social aspects, the ergo companies cut 574 jobs (2.8%), partly as a result of their continued cost-savings programme. In reinsurance and asset management, on the other hand, staff numbers increased slightly by 186 (2.8%) and 43 (6.6%) respectively.
In addition to this, in April 2005, Munich Re became a founder-member of the Munich Climate Insurance Initiative for insurance solutions intended to benefit people in developing countries. In the Climate Group, we work for the reduction of greenhouse gases from the 20 economies with the highest emission levels and the 500 largest firms. And we do not except ourselves from these endeavours: Munich Re Munich and victoria have had their environmental management systems certified to emas (eu EcoManagement and Audit Scheme) and to iso 14001; the ergo Insurance Group is also currently aiming to obtain an emas certificate.
People cannot and should not be considered purely in terms of their economic needs. That is why, for example, we support the Gustav Mahler Jugendorchester on its concert tours. This orchestra of young musicians keeps classical music very much alive and well. The past year’s intinerary took these highly talented musicians to venues like London and Madrid. Beyond this, Munich Re supports environmental, social and cultural projects through regular donation programmes.
Regular external audits have confirmed that Munich Re’s information security is at a high level. Nevertheless, given that we see security as a process rather than a state, we are constantly refining our strategies and standards. In doing so, we are concentrating especially on reducing those risks which are related to the “human factor” in the broadest sense.
Gloria Our reinsurance platform Global Reinsurance Application (Gloria) will provide the reinsurance group with a consistent data basis and an integrated system for all businessrelevant core processes. Building on various sap modules, we are thereby harmonising the business processes in our reinsurance, not only enhancing the quality and efficiency of individual process steps – such as underwriting, claims and accounting – but also improving the analysis, management and administration of our reinsurance business as a whole. The harmonisation of all core business processes will also serve our global risk management, which will have extensive data available even more quickly.
The project is very complex, and the risks are considerably higher than they would be if we were implementing proven standard products. We have therefore incorporated additional test cycles, especially for the accounts closing process, and put back the roll-out originally planned for 2005 to 2006. This will begin with Munich Re Munich and its branches and will be extended to the subsidiaries in the following years, starting with American Re.
Overview of corporate legal structure Munich Re is a joint-stock company (“Aktiengesellschaft”) within the meaning of the German Stock Companies Act. As prescribed by the Act, it has three governing bodies: the Board of Management, the Supervisory Board and the Annual General Meeting.
The Supervisory Board monitors the Board of Management and gives counsel where appropriate. Certain transactions, such as major investments or capital measures, require its approval, but it is not authorised to execute management measures. The Supervisory Board also appoints the external auditor. Remuneration of the members of the Supervisory Board is regulated in the Articles of Association, i.e. is determined by the shareholders.
Annual General Meeting At Munich Re’s agm, the principle of “one share, one vote” applies. Shareholders may exercise their voting rights personally or authorise a proxy appointed in writing, a bank or a shareholders’ association to cast their votes. Munich Re also offers its shareholders the opportunity to have their voting rights exercised in accordance with their personal instructions by one of the proxies nominated by the Company.
*Joint corporate governance report of the Board of Management and Supervisory Board in accordance with item 3.10 of the German Corporate Governance Code.
Corporate governance topics in 2005 One topic that had dominated public debate in Germany in 2004 was the individualised disclosure of remuneration paid to management boards. In summer 2005, a law on the disclosure of management board remuneration (Vorstog) was passed in Germany. Under this law, the remuneration of the Board of Management will have to be published in individualised form as from 2007 for the business year 2006. Munich Re will comply with this provision. The Board of Management and Supervisory Board will not be seeking a resolution from the Annual General Meeting that allows for an opt-out from individualised disclosure. As stated in our annual report for 2004, we have found it disquieting how far the important topic of corporate governance has been reduced to the question of individualised disclosure of board compensation. On mature reflection, the Board of Management has therefore again decided against publication in this form because it does not consider such disclosure to be appropriate. The remuneration report provides details of how much the Board of Management as a whole earned in the business year 2005, broken down according to the different remuneration components. By giving such information as a clear overview of individual components and their weighting, fringe benefits, pension entitlements and reserves, we show the structure of the compensation system in great detail. Even without individualised disclosure, Munich Re thus informs investors and shareholders objectively and extensively, enabling them in their investment decisions to assess the relationship between the Board of Management’s performance and compensation on the basis of the details they receive regarding the Board of Management as a collegial body.
Recommendations and suggestions of the German Corporate Governance Code In November 2005, the Board of Management and the Supervisory Board published the following declaration of compliance, in accordance with Section 161 of the German Stock Companies Act: ”Between the last declaration of compliance in December 2004 and 20 July 2005, Munich Re fulfilled the recommendations of the Government Commission’s German Code of Corporate Governance in the version of 21 May 2003, with the exception stated below. Since 21 July 2005, Munich Re has fulfilled the recommendations of the Government Commission’s German Code of Corporate Governance in the version of 2 June 2005 (published on 20 July 2005) and will continue to fulfil these recommendations, with the exception stated below: – Item 4.2.4 sentence 2 For the business year 2004, the remuneration of the members of Munich Re’s Board of Management was shown in detail for the whole Board in the notes to the consolidated financial statements, broken down according to fixed compensation, performance-related components and components with long-term incentive effect, although not individualised as recommended by the German Code of Corporate Governance. For the business year 2005, too, the Board of Management’s remuneration will be published in detail for the whole Board but not individualised.”
In summary, Munich Re again complies with all the recommendations of the German Corporate Governance Code, with only one exception.
Likewise, Munich Re complies with all the suggestions of the German Corporate Governance Code with only one exception. This concerns item 5.4.7 para. 2 sentence 2 of the Code, which suggests that the result-related remuneration of members of the Supervisory Board should include components based on the company’s long-term performance. We consider that a convincing remuneration model for this is still lacking and that our remuneration model, approved by the Annual General Meeting in 2005, is a good solution in terms of corporate governance aspects.
Structure of the remuneration system for the Board of Management In compliance with the German Corporate Governance Code, we here explain the principles of the remuneration system for Munich Re’s Board of Management and the structuring of the individual remuneration components. The structure and amount of the remuneration are determined by the Supervisory Board’s Personnel Committee, whose three members comprise the Chairman of the Supervisory Board, another of the shareholder representatives and one of the employee representatives. The full Supervisory Board discusses the remuneration structure and reviews it regularly.
Annual bonus In the annual bonus, the result for the year and the achievement of personal objectives are each weighted 50%. The portion linked to the annual result depends on the attainment of an objective for the whole Munich Re Group or a corporate objective; the achievement of personal objectives is based on divisional financial targets and individual objectives. In the case of the Group objective, we use key indicators of external accounting, whilst in the case of the corporate and division objectives, we use the performance measures embodied in value-based management.
Medium-term incentive plan The medium-term bonus is based on performance over a three-year period. Like the annual bonus, it is measured on the basis of the objective-based categories with a weighting of 50% for annual results and 50% for personal objectives. Payments are made only if the achievement rate is at least 70% on average for the three-year period.
Annual bonus, medium-term incentive plan and long-term incentive plan together form a well-balanced incentive system.
Other remuneration In the case of seats held on other boards, remuneration for board memberships must be paid over to the Company or is deducted in the course of regular compensation computation. Excepted from this is remuneration for personal memberships, which do not exist at present.
Pension entitlement In addition to the regular remuneration, the members of the Board of Management are members of a defined benefit plan under which they will receive a fixed pension whose amount depends on their basic remuneration and their years of service on the Board. The pension level starts at 30% and can reach a maximum of 60% of annual basic remuneration.
Total remuneration of the Board of Management In the year under review, after allocation to the appropriate periods, the remuneration of Munich Re’s Board of Management showed an overall rise of €5.8m or 31.5% from €18.6m to €24.4m. Of this, €0.4m was attributable to an increase in the fixed components and €3.3m to growth in the variable remuneration, mainly due to the good result for the year under review. In addition, with a comparable calculation approach for the long-term incentive plan, there was an increase of €2.1m resulting largely from the appreciation in the share price.
Personnel expenses for newly granted stock appreciation rights 5,476 – 79 –
Personnel expenses for stock appreciation rights granted in previous years – 8,1237 – 427
Basic remuneration made up 25% of overall compensation for 2005, and remuneration in kind and fringe benefits amounted to 2%. The variable remuneration includes allocations to provisions for the annual bonus probable on the basis of current estimates, for the medium-term incentive plan and the long-term incentive plans. Whether these amounts will actually be paid out to the Board members, and if so how high the sums will be, is not yet certain and will depend on the degree to which individual objectives are achieved, and on the exercise conditions of the longterm incentive plans. In accordance with the plan conditions, no payments were made under the medium-term incentive plan in the business year. Munich Re shares have been acquired to cover future obligations arising from the long-term incentive plans so as to neutralise the expenses resulting from a growth in value of the stock appreciation rights with an increase in the value of the share portfolio.
Pension entitlements In 2005, the average level of provision for the pension entitlements of the members of Munich Reinsurance Company ’s Board of Management amounted to 40% (38%) of basic remuneration. Personnel expenses of €1.1m (1.3m) were incurred for the increase in the pension obligations for active members of the Board of Management. As at 31 December 2005, the pension provisions and provisions for comparable benefits for the active members of the Board of Management amounted to €0m (–) after deduction of plan assets held by a separate entity (e.g. under a contractual trust agreement). The value of the defined benefit obligations pursuant to ifrs for active members of the Board of Management amounted to €46.2m (38.1m) as at 31 December 2005.
Total remuneration of the Supervisory Board The remuneration of the Supervisory Board was restructured by resolution of the 2005 Annual General Meeting to take account of the increased demands placed on Supervisory Board members in connection with the corporate governance discussion concerning transparent company management. At the same time, the change counters reservations about linking the performance-oriented remuneration component to the dividend. The new remuneration structure will apply for the first time to the business year 2005 and provides for a fixed remuneration component of €45,000 (instead of the previous €25,000) and a variable result-related (instead of dividend-related) remuneration component. The multipliers for calculating the fixed and variable remuneration of the Chairman of the Supervisory Board and Deputy Chairman remain unchanged. The additional remuneration for work on committees is based on the fixed remuneration only.
By significantly increasing the fixed remuneration, we ensure that in economically difficult times in which greater demands are made of the Supervisory Board, its overall remuneration remains appropriate and is less dependent on Company performance.
The work of Supervisory Board members on the committees has gained in significance and weight in the light of increased corporate governance requirements. The higher fixed remuneration component and the use of only the fixed remuneration as the basis for calculating the committee remuneration takes account of the consistently high
1 Plus turnover tax in each case, in accordance with Article 15 para. 6 of the Articles of Association. 2 In the case of members of the Audit Committee, the amount includes attendance fees in accordance with Article 15 para. 4 of the Articles of Association. 3 Based on the earnings per share of €11.70. 4 After capping in accordance with Article 15 para. 5 of the Articles of Association.
There were no pension commitments for former members of the Supervisory Board or their surviving dependants.
Advances and loans The members of the Supervisory Board and Board of Management did not receive any cash advances or loans in the year under review. Nor were there any notifiable transactions between Board members and the Munich Re Group.
Share trading and shares held by members of the Board of Management and the Supervisory Board No acquisition or sales transactions notifiable under Section 15a of the German Securities Trading Act had occurred up to the end of the business year 2005. The total number of Munich Re shares held by all members of the Board of Management and Supervisory Board amount to less than 1% of the shares issued by the Company.
The overall remuneration for each Supervisory Board member is limited to two-and-a-half times the fixed remuneration, thus ensuring that the overall remuneration of individual Supervisory Board members remains appropriate even if further committees are set up.
There is a growing tendency among some capital market players to sue companies in connection with statements they have published on future development, a trend that involves considerable loss potential for the companies concerned and for their other shareholders. This practice inevitably affects transparency, as many companies tend to be reluctant about the information they give on future business performance and disclose only what is required by law.
In primary insurance and reinsurance, we will adhere to our “profitability before growth” strategy in the years to come.
In reinsurance, we will continue to focus on adequate prices and wordings. There is no alternative to profitable underwriting and active risk diversification. It is the only way we can create added value for our shareholders and clients alike.
Primary insurance, especially the life and health segment, is going through a period of change. The public’s need for care and provision is rising and increasingly needs to be funded privately, as state social security systems throughout Europe are being scaled back. This opens up major opportunities in the medium and long term for our life, health and personal accident insurers. The changes in the legal parameters already underway or still in the pipeline – e.g. the fiscal treatment of life insurance or the debate on a reform of the German state health insurance system – entail certain risks. With their products, however, our companies are well prepared for the future.
Macroeconomic parameters and the situation in the capital markets are likely to be somewhat less positive in the coming year. In the year-end renewals of reinsurance treaties, risks affected by last year’s natural catastrophes saw some substantial price increases. Prices, terms and conditions for other business generally continued to be stable. It remains in the common interests of end-clients, primary insurers and reinsurers alike that we focus on sustained risk-adequate prices, terms and conditions, as was again illustrated by the loss events in 2005.
Economy The moderate slowdown of the global economy is likely to continue in the course of 2006. In the USA, higher interest rates are curbing consumer and investment activity. In addition, oil prices are unlikely to decline significantly in the foreseeable future, given the turbulent political situation in the Persian Gulf. The substantial deficits in the us current account and fiscal budget could also have a negative impact on the exchange rate of the us dollar and thus on economic development.
The Japanese economy will in all likelihood recover further in 2006, albeit with a somewhat lower growth rate. In addition, we expect a marginally positive rate of increase in prices, which means the almost seven-year deflation would be overcome.
Capital markets We assume that the expected gradual cooling of the global economy will mean that upward movement on the stock markets will tend to be modest. Despite interest-rate increases by a number of central banks, there seems to be only limited scope for markedly higher long-term yields in the bond markets. There is still validity in the arguments that price-increase rates in the global economy will continue to decline (disinflation). These include high productivity growth and increased competition resulting from the ongoing trend towards globalisation, so that the risk of inflation will remain limited.
Insurance industry If global dynamics slow down gradually as expected in 2006, growth of the global insurance industry is likely to be subdued. But demand for insurance cover should remain high, above all in the emerging markets. Private provision continues to be a major issue in the industrial nations and, at least in the medium term, its effect on the demand for life, health and personal accident insurance products should be positive.
The German economy will probably provide only weak impulses for property-casualty insurance in 2006. However, the concept of private provision should come more strongly to the fore in the medium to long term, not only in Germany but also in many other industrial nations, given that state social security systems are increasingly reaching their limits because of demographic trends. Private health insurance is likely to profit from this environment, although the political risks remain. Only by strengthening, not weakening, private provision and by expanding its funding basis can Germany’s structural problems be solved in the long term.
On the reinsurance markets, it will be important to underline the need for risk-adequate prices, terms and conditions in the course of the year. We reckon with keener competition but not with a drastic decline in prices.
Risks The economic prospects are subject to certain imponderables such as geopolitical threats – in particular in the Middle East and the Gulf region – and the risk of major new terrorist attacks. Other major risks are the global economic imbalances, especially the substantial deficit in the us budget and current account deficit, which could weaken the us dollar and cause interest rates there to rise – creating a burden for Europe’s economic situation. Furthermore, it is difficult to predict how energy prices will develop.
Uncertainties facing the insurance industry are macroeconomic and political risks, including sociopolitical developments such as fiscal policy and a possible reform of the German health insurance system. The significance of political influences has steadily increased in recent years and is making business management prognoses more difficult. There are regulatory risks too as supervisory regulations undergo revision worldwide and requirements for reporting, capitalisation and even fundamental assessment of individual types of business change.
We do not anticipate any shortages in reinsurance capacity. On the contrary, the attractive price levels are likely to give rise to greater competition from new reinsurers specialised in stop-loss covers.
For the forthcoming renewals on 1 April 2006 (Japan and Korea) and 1 July 2006 (parts of the us market, Australia and Latin America), we expect a similarly stable environment to that prevailing on 1 January 2006.
In life reinsurance, the strong growth of the past few years is unlikely to be repeated. We expect that premium rates will remain stable or rise slightly. At present, a host of opportunities for growth in various business models is opening up worldwide in the health segment. To tap these opportunities in primary insurance and reinsurance, Munich Re and dkv will work together more closely in specific foreign markets.
All in all, we expect gross premiums written for 2006 to total between €16.5bn and €17.0bn in primary insurance, which in addition to ergo Insurance Group essentially comprises Europäische Reiseversicherung and the Watkins Syndicate. Adjusted for the sale of the Karlsruher Insurance Group, our premium income is therefore likely to remain stable. At the same time, we assume that the combined ratio will remain below 95%. We aim to achieve a profit for the year in the range of €600m to €700m.
Asset management The current investment environment is in a pronounced low-interest-rate phase, the end of which is still not in sight. For this reason, the primary insurers in the Munich Re Group in particular have extended the terms of their fixed-interest securities in recent years to benefit from the higher interest rates. If interest rates remain low, however, fixed-interest securities (which make up the lion’s share of our investments) will not earn the same regular income as in previous years.
The prices of European and us shares developed positively in the past three years, although the volatility of the stock markets has increased since mid-2005. Given the risks described, we will, if required, further reduce our equity exposure, currently at 13.4% of total investments on a market-value basis, after taking hedging transactions into account.
Result and premium of the Munich Re Group If exchange rates remain steady, we expect gross premiums written for 2006 in primary insurance and reinsurance to total between €37bn and €38bn (consolidated) and thus to attain last year’s level, adjusted for the sale of the Karlsruher Insurance Group. Proceeding on the basis of statistically expectable claims experience, we project a combined ratio of less than 97% in property-casualty and health reinsurance and of less than 95% in property-casualty primary insurance. In life primary and reinsurance business and in health primary insurance, we aim to achieve eev earnings in the range of 8–9%, in relation to the value of the
Management report_Prospects business in force at the beginning of the year. In the investment sector, we anticipate a result equivalent to 4.5% of the average market values of the investments.
These are ambitious yet achievable goals. Our shareholders will continue to participate in Munich Re’s success: for the coming business years we plan to pay out at least 25% of the ifrs consolidated result as dividends.
By separating accountability and monitoring, we ensure the effective management of our risks. The functions and responsibilities of all participants – be they members of the Board of Management, executives, decentralised or central risk controllers or risk managers – are clearly defined.
The Board of Management is responsible for the Groupwide, cross-divisional planning, steering and controlling of the risk landscape as a whole. It has to be consulted regarding measures that may appreciably alter the composition of the risk capital and also where there are crossdivisional concentrations or loss scenarios, significant operational risks and operational measures or risks that may have a negative impact on the Munich Re Group’s reputation. The tasks that are the preserve of the Board of Management and its committees include the following: – Defining an investment portfolio which synchronises as closely as possible with fluctuations in the value of underwriting provisions and liabilities and on the basis of which investment opportunities and risks can be specifically identified
– Determining the Munich Re Group’s risk capital – Deciding on optimisations of the net underwriting portfolio – Selecting suitable measures to reduce accumulations across the balance sheet where necessary – Ensuring that supervisory requirements for risk management are met In the Munich Re Group, Integrated Risk Management, headed by the Chief Risk Officer, is centrally responsible for preparing these Board decisions and for identifying, evaluating, steering, monitoring and communicating risks on the asset and liability sides. At the beginning of 2006, Central Risk Controlling and important functions (such as asset-liability management, the control of risk accumulations across the balance sheet and capital modelling) were integrated into this unit. We manage business portfolios by assigning return expectations, derived from the size of the risks assumed, to individual business activities. Our internal risk model plays a central role here. We use it to analyse how certain risk scenarios affect the results of the segments life and health, property-casualty and the investments of the reinsurance group. We determine our economic capital on this basis so that we would be able to absorb two successive annual losses of a size only to be expected every 100 years. In the next step, this capital is allocated proportionately to the individual divisional units on a proportional basis in line with the volatility of their business activities. The procedure we use in the primary insurance group is similar, but substantially affected by
Management report_Risk report other steering aspects, as supervisory restrictions, clients’ participation in surplus and accounting play a greater role in that field of business.
In this way, we provide incentives to efficiently evaluate risks. Mismatched risks between assets and liabilities, for example, are significantly diminished by means of appropriate investment and hedging strategies, thus reducing the risk capital required while improving capital productivity.
Through our Central Risk Controlling unit, we conduct risk assessments each quarter using a standardised risk questionnaire and, together with the experts, examine the relevant risks, thus evaluating the risk situation holistically. We compare the findings with our operative corporate planning. Where risks or hazards suddenly emerge, we perform ad-hoc surveys. The staff of Central Risk Controlling inform the Board of Management – on the basis of the information from the risk assessment – about the current risk situation and check measures relating to risk policy, proposing new ones where necessary. Central risk management/controlling sets standards and develops methods and tools as a basis for consistent Group-wide risk management. The decentralised risk controllers in the units throughout the Group adapt these to the current situation when necessary. In day-to-day business, our executives are responsible for systematically handling individual risks in insurance and reinsurance. They identify, analyse, manage and monitor the risks on an ongoing basis with support from the decentralised risk controllers. The basis for handling risks is determined by management requirements and decisions on risk tolerance, which are defined by the Group’s risk strategy and risk policy, and geared to capitalisation as well as liquidity. Before we assume underwriting liabilities, for instance, we examine what claims burdens can be borne or are still tolerable in the event of catastrophes. We also use simulations of pre-defined catastrophe scenarios to ensure that extremely improbable events are also considered.
The Munich Re Group complies both with the German Law on Corporate Control and Transparency (KonTraG) and with local regulations on risk management in the different countries in which it operates. Our risk early-warning system is regularly examined independently, both by internal auditing units at the individual Group companies and by the external auditor as part of the annual audit.
Main underwriting risks One of the risks relevant for insurance business is the risk of change, meaning how changes in risk parameters and unforeseen factors may result in unexpectedly large claims. Often the risk of change coincides with the risk of random fluctuations, making it more difficult to identify and quantify the risk potential. For instance, the exceptional hurricane seasons in 2004 and 2005, with greater storm frequencies and intensities, led to record losses in Florida and the Gulf of Mexico. With a market loss estimated at us$ 45bn, Hurricane Katrina caused the largest insured loss in insurance history. Such increased exposures, which are attributable to the natural climate cycle on the one hand (current warm phase, see page 16) and anthropogenic climate change on the other, look set to continue in the next few years. At the same time, we are witnessing an increasing regional concentration of insured values, especially in highly exposed flood-prone regions. Extensive know-how, well-maintained data resources and underwriting based on this information are imperative for determining risk-adequate prices, terms and conditions in these circumstances. Prior to the hurricanes of the last two years, we had essentially observed the weather phenomena correctly, foreseeing the risks from windstorms, and had largely taken them into account in our models. What we underestimated, however, was the extent of the storm surges that could occur with the cyclones, as well as the price increases resulting from shortages of loss inspectors and adjusters, craftsmen and building materials after severe natural catastrophes. Particularly the latter effect was exacerbated
The interaction of risks of change and risk concentrations may lead to considerable loss potential. This not only involves the regional concentrations described above but can also occur within a class of business or across several classes (owing to events like natural catastrophes, pandemics or terrorist attacks).
In addition, scientific and technological innovations such as new products or production methods result in industry risk concentrations. In the pharmaceutical sector, for example, new products can simultaneously give rise to losses in pharmaceutical product liability and professional indemnity, possibly also due to exposures from other lines of insurance, thus resulting in very large losses. This concentration effect is intensified by socio-political trends like increased litigiousness.
Large losses in industry may also impact our investment portfolio if the firms affected suffer a fall in the prices of their shares or bonds. We consistently control the relevant accumulation risks across the balance sheet as far as possible, so that the resulting residual risk remains within the risk tolerance limits defined by management. The close link between knowledge management and risk management at Munich Re is an advantage in this respect, as is the analysis of historic major losses. These provide valuable pointers for identifying the respective risk drivers and incorporating them as parameters to be monitored in future in a suitable early-warning system.
The potential effects of the risk of change influence both our premium calculations and our reserves. Through selective underwriting, close collaboration with clients in claims handling and various methods for calculating appropriate claims reserves, we endeavour to minimise balance sheet risks emanating from expenses that can often drastically increase many years after the losses occur. Nevertheless, in 2005 we had to once again substantially strengthen the claims reserves of our subsidiary American Re for longpast underwriting and accident years. By generally selecting the highest indexed reserve amounts in each case from the results of differently oriented calculations, we are confident that we have drawn a line under the problems of the past years with a reserve strengthening of us$ 1.6bn. Only with liabilities for asbestos-related diseases is the degree of uncertainty still high: given the unpredictability of court decisions, the scope for estimation is very broad indeed. But we are proceeding on the assumption that here, too, the reserves we have posted are adequate.
The notes to the consolidated financial statements include a differentiated analysis of the factors influencing the underwriting provisions in property-casualty insurance, such as estimating claims expenditure. This presentation is in compliance with ifrs 4 accounting requirements.
In addition to other key indicators, combined ratios are important for us in monitoring the premium/claims risk in non-life (re)insurance (cf. page 47 ff.).
In reinsurance, we calculate the biometric risk mainly on the basis of tables relating to mortality and claims development, published by national actuarial associations. These tables are modified in accordance with the termination rates observed in the reinsured portfolios. Lapse risks can be reduced in insurance and reinsurance by means of suitable product and contract design. We estimate the residual lapse risk by means of product-specific portfolio analyses and take this into account in our pricing.
As far as the interest-guarantee risk in primary insurance is concerned, the guaranteed actuarial interest rate applicable at the time a policy is effected is used in calculating the actuarial reserve for that policy. Should capital market interest rates fall to a very low level for a prolonged period, our life, health and personal accident insurers might not be able to earn the required guaranteed interest rate. In reinsurance, we exclude the interest-guarantee risk in many cases through suitable treaty design. Furthermore, as a matter of principle, we use prudent assumptions regarding the probable interest rate when fixing the actuarial interest rate in premium and reserve calculations. The notes to the consolidated financial statements include a differentiated analysis of how the parameters determining the underwriting items of the balance sheet affect the risks in life insurance and reinsurance. This presentation is in compliance with ifrs 4 accounting requirements.
To ensure optimal diversification of our portfolio, we use a balanced range of measures, of which risk measurement is a central prerequisite for the controlled management of our portfolio. Risk measurement is based on our internal risk model (see page 125), with which we analyse effects of diversification and concentration.
Since the Group’s overall risk profile can be broken down into its individual components, we can measure the effects of significant risks. This allows us to accept risks on the basis of conscious economic decisions. In accordance with the principles of value-based management, capital in both insurance and reinsurance is only made available at conditions that promise an appropriate return. Thanks to the regular evaluation provided by the internal risk model, we are in a position to respond promptly to any errors identi-
For events with low occurrence probabilities but potentially high severity, we devise scenarios with which we test the robustness of our portfolio on both the asset and liability sides. Thus, for example, we have subjected our current life insurance portfolio to a stress test involving a pandemic scenario, in order to establish the effect of changes in mortality rates, taking this into account in determining the risk capital.
Besides addressing the internal structure of our equity portfolio, we also constantly review the percentage of equities in our overall portfolio. As at 31 December 2005, on a market value basis and taking hedging transactions into account, our ratio of equities to total investments amounted to approximately 13.4% (31 December 2004: 13.4%).
Our real estate holdings round off our investment portfolio from the return and risk point of view. The market value of our real estate, including buildings on land owned by third parties, amounted to €7.1bn at 31 December 2005. Owing to losses in value, various items had to be written down to their recoverable amount in the period under review. Impairment losses and depreciation on the overall portfolio totalled €446m.
The Munich Re Group’s reinsurance business is geared to the global market. The investments of Group companies that write a substantial part of their business in foreign currencies are subject to currency risks, as exchange rates fluctuate against the euro. However, these risks are balanced by partially similar changes in value among the liabilities.
The following sensitivity analyses for market-price risks serve to estimate potential changes in the value of investments under hypothetically possible market scenarios. The basis for the review are the investments of the Munich Re Group at 31 December 2005.
Fixed-interest investments are exposed to an interest-rate risk. Falling interest rates result in increases in the market value of fixed-interest securities, and rising interest rates to reductions in their market value. In order to earn higher regular income from such investments, the primary insurers in the Munich Re Group gave preference in 2005 to securities with longer terms. Looked at only in relation to the portfolio of fixed-interest securities, this increases the risk of losses in market value. Besides this, the low interest -rate level leads to a reduction in the difference between the interest rates guaranteed by our life insurers and the reinvestment return. In 2005, we countered the risk of a possible further decline in investment returns with interest -rate derivatives that enable free funds to be invested by the major life insurers in our Group in the future at a guaranteed interest-rate level already fixed today. Since the derivative financial instruments are measured at market value on the respective balance sheet dates and any changes in value are recognised in the income statement, strong interest-rate movements can give rise to major fluctuations in value.
The changes in share price assumed in these scenarios, ±10% and ±20% respectively, a corresponding shift in the interest rate curve of ±100 and ±200 basis points (bp) respectively, and a fluctuation in exchange rates of ±10%, would produce the following changes in the market value of the investments: Credit assessment is of central importance for the management of credit risks relating to fixed-interest securities. The main factor here is the quality of the issuer or the respective issue, which is primarily reflected – according to the investment principles of the Munich Re Group – in the ratings of international rating agencies: 94.3% of our investments in fixed-interest securities at 31 December 2005 had a rating of a or better (according to Standard & Poor’s rating classification). The majority of fixed-interest securities in our portfolio have been issued by governments or banks with excellent ratings or top security, e.g. German government bonds, us Treasuries, or mortgage-backed bonds.
The investment process for the Group’s own investments is controlled by the individual companies in the Munich Re Group themselves. In line with our asset-liability management, we match the maturities of our bond investments with the calculable cash outflows. In other words, besides return and risk aspects, our investment strategy considers requirements relating to underwriting, supervisory regulations, accounting, tax, liquidity and currencies.
Furthermore, in reinsurance for individual products involving explicit financial risks, such as interest-rate or currency risks, we already carry out asset-liability management at micro level when the product is being designed. This is especially the case with life business and long-tail propertycasualty business, owing to the long periods involved. The companies entrusted with our asset management, in particular meag, are given mandates by the insurance and reinsurance companies in the Munich Re Group, based on uniform investment criteria. The status of the individual mandates is continually monitored on the basis of various
Change in interest rates Change in market value of investments sensitive to share prices
Change in exchange rates Change in market value of investments sensitive to share prices
Management report_Risk report partners and strictly monitoring adherence to specifications in mandates and investment guidelines. In the first half-year, as part of our asset-liability management, we aligned the duration profiles of the asset and liability sides of the major life insurers in our Group for the eventuality of falling interest rates. In so doing, we made use of derivative financial instruments. Credit derivatives are only employed in our investment portfolio to a limited extent. We show the volumes of the derivatives on page 95.
Our counterparty system, with which we restrict default risks within the Group in respect of individual issuers, considers a whole range of factors. These include the issuer’s individual rating, its capitalisation as a basis for covering the liability, the quality of the collateralisation and of the respective issue, the sector concerned, and our internally defined risk tolerance. Munich Re’s investments were not affected by any significant defaults in 2005.
The liquidity risks of companies in the Munich Re Group are managed by the insurers and reinsurers themselves. Detailed liquidity planning ensures that the Group companies are able to make the necessary payments at all times. This planning concept, which has been in place for many years, has proved its value after major loss events such as the recent severe hurricanes in Central and North America.
key risk and earnings figures as part of a Group-wide earlywarning system for investments. This is designed to ensure the achievement of result targets, the fulfilment of solvency requirements and sufficient equity capital protection at individual company level. At all companies, we have established asset-liability teams that advise on and monitor strategic decisions relating to investments. This has enabled us to standardise the Munich Re Group’s risk management activities in the investment sector. In the asset management units of the Group, we pursue a policy of clear functional separation between portfolio management, trading and risk controlling at all hierarchical levels, in line with the requirements of banking supervision.
Market-price risks in investments are measured and limited using the value-at-risk approach, which is also employed in our strategic investment planning to model the optimum investment portfolio according to risk preference. Applying stress tests, sensitivity and duration analyses, we also simulate market fluctuations and devise strategies for counteracting them where necessary.
We only run currency risks to a very small extent, since we practise a policy of currency matching. This means that for the main currency liabilities in underwriting business, matching items are established on the assets side. We use derivative financial instruments to hedge parts of the portfolio against price fluctuations, to optimise earnings and to implement planned purchases and sales. There is trading in these instruments with a view to realising individual result targets, albeit only to a limited degree. Particular care is paid to limiting risks, choosing top-quality business
To prevent infringements of insider law, Munich Re has appointed a Compliance Officer who ensures that inside information is handled in conformity with the law and checks whether the other insider regulations are complied with. The Compliance Officer is also responsible for seeing that all price-sensitive information directly concerning the Group and legally requiring an ad-hoc announcement is published without delay. Finally, he makes sure that all the relevant supervisory regulations are adhered to. Compliance with antitrust regulations is a basic principle of Munich Re’s business policy. A violation can have farreaching implications for the particular member of staff involved and for the Group company. To prevent violations, staff are informed about antitrust regulations and are expected to comply with them.
We attach particular importance to precautionary measures that ensure continuity of our operations in an emergency or crisis. Business processes critical to value creation can be maintained or resumed as quickly as possible in such cases. Responsibility for establishing and monitoring this business continuity process in the Munich Re Group has been entrusted to a separate unit, which is guided by internationally recognised business continuity management standards (e.g. pas 56).
Staff who have to deal with confidential information undertake to comply with the relevant regulations and to handle the information responsibly.
The main human resources risks are shortages of qualified personnel, insufficient adaptation, demotivation and loss of staff. We identify these risks by means of appropriate indicators and metrics. Targeted personnel marketing measures, staff potential assessment and development schemes, and systematic succession planning are designed to reduce the risk of shortages in qualified staff. Individual development planning and suitable training offers enable our staff to adapt to current market requirements. Modern management tools and adequate monetary and non-monetary incentives ensure a high level of motivation. Our human resources tools as a whole serve to strengthen our staff’s ties with the Group and consequently to safeguard our business intelligence.
Legal and supervisory risks Legal risks may arise on the one hand from court decisions and legislation (changes in legal parameters) and on the other from legal disputes and arbitration proceedings in which we as an international insurance group are involved, especially in the area of claims settlement. We counter risks from changes in legislation and court decisions by constantly monitoring current developments and by actively participating in relevant bodies and associations in order to contribute our views.
– In April of 2004, New York State Attorney General Eliot Spitzer started an investigation into the use of Placement or Market Service Agreements (psa) in the insurance industry. Several other us state regulators subsequently commenced similar probes into this matter, as have other regulators. We have received requests to provide information in connection with these investigations and are cooperating fully with the authorities. Entities of the Munich Re organisation, together with several other insurers and brokers, have been named defendants in several psa-related class actions by us policyholders. Munich Re denies any wrongdoing and will defend itself vigorously.
Munich Re Group Annual Report 2005 Management report_Risk report claims filed. In the case of the Wilprop policy underwritten by us, the courts in question take the view that only one loss event was involved, but a final and absolute judgement is still pending. As far as the Allianz policy we also underwrote is concerned, however, the court before which the case was brought ruled that there were two loss events involved. Appellate proceedings are currently pending in New York. A case is also pending in New York regarding the claims amount to which the leaseholder of the wtc site is entitled. Decisions on this are to be expected in autumn 2006. To what extent appeals will be admissible and filed is not yet fully foreseeable.
As a result of our global activities, we are subject to a large number of supervisory regulations in different countries. These may give rise to legal and regulatory risks. In late 2004, the us Securities and Exchange Commission (sec) and the Office of the New York State Attorney General (nysag) initiated inquiries of Munich Re with respect to “certain loss mitigation insurance products”. Subsequently, a number of other authorities in the USA and elsewhere made both formal and informal requests for similar information from Munich Re and various of its subsidiaries. Munich Re and its subsidiaries are fully cooperating in these inquiries.
Thus, for instance, the ongoing discussion about the reform of the social security systems in Germany harbours substantial risks for the health insurers in the ergo Insurance Group. As the reform proposals are still not sufficiently concrete (even after the Federal election) and given that the new Federal Government has not yet submitted a concept for the restructuring of healthcare financing, the prospects for private health insurance in Germany continue to be unclear. In the most extreme case, the private health insurance model and its future existence would be in jeopardy. We are therefore closely monitoring developments by – among other means – being active at insuranceassociation level and making prompt scenario calculations that simulate the effects of possible changes in basic parameters.
Outlook The external requirements for Group-wide risk management will increase further as a result of the continued development and introduction of national and international initiatives such as ifrs, which is setting new standards for accounting, and Solvency ii, which is fundamentally restructuring state insurance supervision. Rating agencies increasingly and explicitly take the quality and effectiveness of risk management into account in their ratings, a trend we welcome. Insurance associations and research institutions such as the Geneva Association, actively promote an exchange of views on best practices and their establishment.
In keeping with its leading market position, the Munich Re Group provides input for these initiatives. The European Commission’s Solvency ii project continues to be actively partnered by interdisciplinary working groups, and we have ensured internal transfer of the relevant knowledge in the Group’s divisional units and central divisions. We constantly review changes in the parameters affecting our product portfolios as well as those of our clients and evaluate the resultant business opportunities. Besides this, we participate in working groups and projects of actuarial associations (Groupe Consultatif, dav), industry associations (cea, gdv) and research institutions (the Geneva Association, cro Forum) at national and international level, thus playing a major role in shaping future parameters like those of Solvency ii.
In primary insurance, we returned to the profit zone in 2004 and were able to significantly increase our profit in 2005. By systematically implementing its new structure, ergo has created a uniform group-wide management organisation, based on classes of business. And through the sale of the Karlsruher Insurance Group, our activities in primary insurance business are now clearly focused on ergo.
This principle and the above examples demonstrate how we concern ourselves with the whole of the Munich Re Group’s risk landscape and consider all facets of possible and necessary control measures.
Notes to the consolidated financial statements Application of International Financial Reporting Standards (ifrs) 152
(D) Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 160
(22) Gross underwriting provisions for life insurance policies where the investment risk is borne by the policyholders 186
C. Investments for the benefit of life insurance policyholders who bear the investment risk 1,430 1,319 111 8.4
D. Ceded share of underwriting provisions (11) 7,980 6,964 1,016 14.6
Munich Re Group Annual Report 2005 Consolidated financial statements_Consolidated balance sheet
Total equity and liabilities 218,639 214,791 3,848 1.8 *Adjusted owing to first-time application of ias 1 (rev. 2003). Details are provided in the notes on recognition and measurement.
Currency translation – – – – – –284 – – 3 –281
Allocation to retained earnings – – –720 – – – – 720 – –
Dividend – – – – – – – –286 – –286
Other changes – – –20 – – – – – –33 –53 *Adjusted owing to first-time application of ias 1 (rev. 2003).
The increase in the unrealised gains and losses recognised in equity of €1,657m comprises €2,972m (1,545m) in allocations and €1,315m (1,511m) in withdrawals, without impact on profit or loss in both cases.
Equity attributable to Munich Re equity holders Minority Total interests* equity*
Change in consolidated group – – –94 – –49 – – – 6 –137
Change from the acquisition, sale and maturities of investments –2,529 –3,389
Our reporting on the Group cash flow is based on ias 7 and the principles of German Accounting Standard No. 2 (drs 2) issued by the German Standards Board (dsr) for the presentation of cash flow statements. This has been supplemented by the requirements of drs 2–20, which applies specifically to insurance companies. In accordance with the recommendations of the dsr for insurance companies, we have applied the indirect presentation method. The “cash fund” within the meaning of the German Accounting Standard is limited to cash and cash equivalents shown under balance sheet item F “cash with banks, cheques and cash in hand”. Further information on the consolidated cash flow statement can be found in the management report on page 103.
The Munich Re Group’s segment reporting is based on ias 14 and the principles of German Accounting Standard No. 3 (drs 3) issued by the German Standards Board (dsr). This has been supplemented by the requirements of drs 3–20, which applies specifically to insurance companies.
The individual fields of business are shown after consolidation of internal transactions within the individual field but before consolidation across segments. This is shown separately in the “consolidation column”. Goodwill has been allocated to the segment of the respective subsidiary.
Investments* Reinsurers Primary insurers Asset management Total 31.12.2005 Prev. year 31.12.2005 Prev. year 31.12.2005 Prev. year 31.12.2005 Prev. year €m €m €m €m €m €m €m €m
Africa, Near and Middle East *After elimination of intra-Group reinsurance across segments. Presentation of the figures in the management report differs from this (cf. note on page 61).
Application of International Financial Reporting Standards (ifrs) Munich Re’s consolidated financial statements have been prepared on the basis of Section 315a para. 1 of the German Commercial Code in conjunction with Article 4 of Regulation (ec) No. 1606/2002 of the European Parliament and of the Council of 19 July 2002 concerning the application of international accounting standards. We have complied with the international accounting standards adopted in accordance with Articles 2, 3 and 6 of the aforementioned Regulation and with the Commercial Code rules designated in Section 315a para. 1 of the German Commercial Code. The consolidated financial statements also meet all the requirements of ifrs. Our presentation currency is the euro (€).
Since 2002, the standards adopted by the International Accounting Standards Board (iasb) have been referred to as International Financial Reporting Standards (ifrs); the standards from previous years continue to bear the name International Accounting Standards (ias). Insofar as we do not explicitly refer to a particular standard, we use the two terms synonymously.
We have also observed the German accounting standards (drs) adopted by the German Standardisation Council (dsr) provided they do not contradict the applicable ifrs.
Consolidation Consolidated group In accordance with ias 27, the consolidated financial statements include Munich Reinsurance Company (the parent) and all the entities in which Munich Re owns, directly or indirectly, more than half of the voting power or over which it has the factual ability to exercise control (subsidiaries). This applies analogously to the special funds held by Munich Re and its subsidiaries. The only exceptions are subsidiaries and special funds determined as being not material for assessing the Group’s financial position; insurance and reinsurance companies are consolidated regardless of their size. As a result of the sale of our majority stake in Karlsruher Lebensversicherung ag, the parent of the Karlsruher Insurance Group, in the fourth quarter and the resultant deconsolidation of the Karlsruher Insurance Group, the consolidated group was reduced by a total of 14 German subsidiaries. Our Dutch subsidiary Nieuwe Hollands Lloyd Verzekeringsgroep n.v. was also sold in 2005. An overview of the group of consolidated companies and other important shareholdings is provided on page 208. The list of all our shareholdings is deposited with the Commercial Registry in Munich under registration number
The changes among our unconsolidated subsidiaries in the business year were as follows: Consolidated subsidiaries*
Consolidation principles The balance sheet date of the consolidated companies is generally 31 December. Some of the special funds have other balance sheet dates. These funds are consolidated on the basis of interim accounts as at 31 December. We generally consolidate subsidiaries and special funds as soon as the Group holds the majority of the voting shares or has the factual ability to exercise control. Acquisitions are accounted for by the purchase method. In order to determine the equity capital at the time of acquisition, we measure the assets and liabilities of the subsidiary or special fund at fair value. The equity capital apportionable to the Group at the time of acquisition is netted against the acquisition costs of the shares. Any residual positive amount is capitalised as goodwill.
Associates Pursuant to ias 28, associates are generally all entities which are not subsidiaries but on whose financial and operating policies the investors can exercise a significant influence. In the case of shareholdings amounting to between 20% and 50% of the voting rights, the entities in question are deemed to be associates. Investments in associates are valued at equity unless they are not material for assessing the Group’s financial position.
Under ifrs 2, Share-based Payment, obligations arising out of our long-term incentive plans (stock appreciation rights) have to be measured at fair value for periods beginning on or after 1 January 2005. Previously, these obligations were measured at their intrinsic value (difference between current share price and initial share price for the stock appreciation rights). The fair value takes into account not only the intrinsic value but also the possibility of growth in value up to the date of forfeiture or expiry of the rights and is determined on the basis of recognised valuation models, taking into account the exercise conditions. The fair value at the balance sheet date is reserved in full. The changeover to fair value requires a one-off increase of €36.1m in the provisions concerned, which has been recognised in the income statement in the business year.
Under the new ifrs 3, Business Combinations, amortisation of goodwill has to be discontinued. In accordance with the revised ias 36, Impairment of Assets, goodwill has to be tested for impairment, i.e. the carrying amount of goodwill is compared with the recoverable amount and written down for impairment to the extent necessary. In keeping with the transitional provisions of ifrs 3, the rules have to be applied prospectively.
The amended rules of ias 16, Property, Plant and Equipment, for the calculation of depreciation (component approach) have been taken into account in measuring developed property. For the buildings in our portfolio as at 1 January 2005, the component approach has been implemented prospectively, with their carrying amounts at this date being allocated over the newly resulting remaining useful lives.
First-time application of ifrs 4, Insurance Contracts, has resulted in major changes only in terms of disclosure. As hitherto, the underwriting items are recognised and measured in accordance with us gaap (United States Generally Accepted Accounting Principles). The definition of insurance contracts under ifrs 4 has not had an appreciable effect on the product classifications underlying the accounting. Presentation of the ceded portion of deferred acquisition costs and the income and expenses from ceded reinsurance business has been changed compared with the previous year.
The other intangible assets are tested for impairment at each balance sheet date and write-downs made if required. Write-downs of software and other intangible assets are distributed in the consolidated income statement between the investment result, expenses for claims and benefits and operating expenses. If it is not possible to allocate the expenses to these functional areas, they are shown under “other expenses”. Write-downs of purchased insurance portfolios are recognised under operating expenses. Writeups of software and other intangible assets are included in “other income”.
Investments Land and buildings shown under investments comprise property used by third parties and are carried at cost. Maintenance expenses are recognised as an expense. Structural measures equivalent to 5% or more of the historical cost of a building are generally assessed with regard to whether they have to be capitalised. Buildings are depreciated in accordance with the component approach over 40 to 55 years, depending on the useful life determined for their specific building class. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount. Impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income.
A Investments in affiliated companies that we do not consolidate because they are not material are carried at their fair values insofar as these can be reliably measured pursuant to ias 39. If the investments are quoted on a stock exchange, we use the share prices at the balance sheet date; for other investments, the fair value is measured using the discounted earnings approach or the net asset value method. Changes in fair value are recognised in “other reserves” under unrealised gains and losses.
Investments in associates are valued by the equity method at the Group’s proportionate share of their net assets. The associate’s earnings attributable to the Group are included in the investment result. As a rule, the most recent individual or consolidated financial statements of the associate are used; exceptional transactions of material importance for a true and fair picture of the associate’s financial position are recognised in the same business year. Investments in associates that are determined as being not material for assessing the Group’s financial position are carried at fair value insofar as this can be reliably measured pursuant to ias 39. To determine the fair value, we use the share prices at the balance sheet date; for investments not quoted on a stock exchange, the fair value is measured using the discounted earnings approach or the net asset value method.
Loans are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost, i.e. any premiums or discounts are deducted or added to the acquisition costs according to the effective interest method, with impact on profit or loss, until the redemption amount becomes payable. Write-downs for impairments are made in cases where the repayment of a loan can no longer be expected. This item includes promissory notes and registered bonds.
Fixed-interest and non-fixed-interest securities available for sale are accounted for at fair value, with interest deferrals being made as with loans. Unrealised gains or losses are recognised directly in equity, after deduction of deferred taxes and the amounts apportionable to policyholders by the life and health insurers on realisation (provision for deferred premium refunds). This item also includes registered bonds and promissory notes.
With all fixed-interest and non-fixed-interest securities, impairments in value – in contrast to temporary diminutions – are recognised as an expense in the consolidated income statement. ias 39.59 contains a list of factors providing objective evidence of impairments in the value of such investments. 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. Acquisition cost is determined on the basis of the average company purchase prices. In the case of an impairment, a write-down is made to the fair value at the balance sheet date, i.e. generally the publicly quoted market price. In the case of a further fall in the fair value of equity investments that have already been written down once, a further write-down recognised in the income statement is made again immediately, even if the impairment is only temporary.
Securities held for trading comprise all fixed-interest and non-fixed-interest securities that we have acquired for trading purposes to earn short-term profits from price changes and differences; in addition, they include all derivative financial instruments with positive fair values which we have acquired for hedging purposes but which do not meet the strict requirements of ias 39 for hedge accounting. Securities held for trading are accounted for at fair value at the balance sheet date. If there are no stock market prices available, fair values (particularly with derivatives) are based on recognised valuation methods. All unrealised gains or losses from such valuation are included in the investment result.
are included in the investment result. Unrealised gains and losses are matched by corresponding changes in the underwriting provisions (equity and liabilities item D), which are taken into account in the underwriting result.
Ceded share of underwriting provisions The share of underwriting provisions for business ceded by us is determined from the respective underwriting provisions in accordance with the terms of the reinsurance agreements; cf. the notes to the equity and liabilities item C. Appropriate allowance is made for credit risks.
Deferred tax assets Under ias 12, deferred tax assets must be recognised in cases where asset items have to be valued lower, or liabilities items higher, in the consolidated balance sheet than in the tax accounts of the Group company concerned and these differences will even themselves out again with effect on taxable income (temporary differences). Also included are tax assets deriving from tax loss carry-forwards. We take into account the tax rates of the countries concerned and the company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries.
Other assets Other assets are generally carried at cost. Owner-occupied property is accounted for as outlined under B. Investments.
H Equity The item issued capital and capital reserve contains the amounts that the equity holders of the parent have paid in on shares. The capital reserve is reduced by the externally generated costs directly connected with equity capital measures, after taking into account tax effects. Under retained earnings, we show the profits which consolidated companies and special funds have earned and retained since becoming part of the Munich Re Group, and income and expenses resulting from consolidation measures. 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 and other reserves for the earliest prior period presented. Other reserves contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and investments in unconsolidated affiliated companies; they also include unrealised gains and losses resulting 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. Besides this, write-ups of other equity investments available for sale are also recognised in this equity item.
Gross underwriting provisions Underwriting provisions are shown gross in our balance sheet, i.e. without deduction of the share apportionable to business ceded by us; cf. the explanatory remarks on assets item D. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs are capitalised and amortised over the terms of the contracts (cf. notes on assets item G).
Other underwriting provisions mainly include the provisions for premium refunds in primary insurance and provisions for profit commission in reinsurance. Provisions for premium refunds are posted in life and health primary insurance for obligations involving policyholder bonuses and rebates that have not yet been irrevocably allocated to individual contracts at the balance sheet date. Where these provisions are posted on the basis of national regulations, a retrospective approach is usually taken based on supervisory or individual contract regulations. Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the valuation differences between ifrs and German Commercial Code on the basis of the expected future participation quota. If in this context unrealised gains and losses are recognised directly in equity (see assets item B), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in the provision for deferred premium refunds are recognised in the consolidated income statement.
The underwriting provisions are regularly subjected to a liability adequacy test. If the result of this test shows that the carrying amount of the provisions – less the related deferred acquisition costs – is inadequate in the light of the estimated future cash flows, the underwriting provisions are adjusted with recognition in profit or loss. The appropriateness of unearned premiums and the provisions for outstanding claims are assessed in relation to the realistically estimated future amount to be paid. Assessment of the appropriateness of the provisions for future policy benefits is made 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.
Pension obligations are recognised in accordance with ias 19, Employee Benefits, using the projected unit credit method and based on actuarial studies. This includes not only the pension entitlements and current pensions known on the balance sheet date but also their expected future development. The interest rate at which the pension obligations are discounted is based on the yields for long-term high-quality bonds (e.g. government bonds).
Actuarial gains or losses from pension obligations and plan assets result from the deviation of actual risk experience from estimated risk experience. They are recognised by means of the corridor method laid down in ias 19. According to this, actuarial gains or losses are recognised in the income statement if they exceed the higher of the following amounts at the beginning of the business year: 10% of the present value of the vested benefits or 10% of the fair value of the plan assets.
Amortisation and impairment losses – Amortisation (up to 31.12.2004) – 222
Carrying amount at 31.12. business year 3,264 3,144 *In accordance with ifrs 3.79 b, the gross carrying amount of €5,316m at 31 December 2004 has been netted against the relevant accumulated amortisation and impairment losses of €2,172m.
The goodwill results mainly from the acquisition of American Re in November 1996 and from the acquisition of the additional shares in the ergo Insurance Group in 2001 and 2002. The disposals of €45m stem largely from the sale of the Karlsruher Insurance Group.
Impairment test for the main items of goodwill For the purpose of impairment testing, ifrs 3 in conjunction with the revised ias 36 stipulates that the goodwill has to be allocated to the cash-generating units expected to derive benefit (in the form of cash flows) from the business combination. To ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cash-generating unit is compared with the recoverable amount. The “recoverable amount” is the higher of – its fair value less costs to sell and
Main assumptions for calculating the cash-generating units’ value in use The impairment test for the goodwill from the acquisition
Underlying assumptions for the cash flow prognoses at the time of the impairment test
Claims – Slight increase in combined ratios with stable absolute – Slight increase in combined ratio (but within the experience claims amount long-term target of 95%)
Return on investment Our basic assumptions for the planning period were moderately improving equity markets and virtually static interest rates, albeit with a slight fall expected in the interest-rate level in 2006. These basic assumptions have been adjusted to take account of national circumstances at the individual subsidiaries.
Detailed cash flow 3 years 3 years planning on the basis of financial plans/forecasts
Growth rate used 0–1.5% for extrapolating 1.5% as maximum growth factor as per Circular 2108/2003 of the German Insurance Association beyond the cash flow planning based on financial plans/forecasts
Discount rate 10–13% 8–9% The discount rate has been determined in the form of the weighted average cost of capital, using the Capital Asset Pricing Model (capm). The discount rate is calculated from a risk-free basic interest rate plus a risk loading and the market interest rate for borrowing, taking into account the capital structure. To derive the capital cost components (risk loading, capital structure ), a peer group of international insurers and reinsurers is used, in accordance with ias 36. The derivation of the risk-free basic interest rate and the borrowing costs is based on market data. It is a pre-tax calculation. A reconciliation to Munich Re’s cost of capital is not possible.
The figures shown under acquired insurance portfolios include amortised carrying amounts of €398m resulting from the assumption of cna Financial Corporation’s life reinsurance business and the acquisition of additional shares in the ergo Insurance Group. An adjustment has been made to the acquired insurance portfolios of ergo Previdenza, in accordance with ias 8. The additions for software concern €43m for the Gloria project.
Assets pledged as security and other restrictions on title amount to €1m (3m). Commitments to acquire other intangible assets total €2m (11m). Costs of €151m (59m) for research and development incurred in connection with software projects were not capitalised but recognised as expenses.
Carrying amount at 31.12. business year 393 577 66 1,036 1,243
The impairment losses largely result from market-value adjustments at Hamburg-Mannheimer VersicherungsAktiengesellschaft amounting to €152m and at Munich Reinsurance Company amounting to €53m.
The impairment losses are distributed between the different Group segments as follows: In the reinsurance segment, €13m (18m) is apportionable to life and health and €46m (77m) to property-casualty; in the primary insurance segment, €252m (94m) is apportionable to life and health and €8m (4m) to property-casualty; €0m (24m) is apportionable to the asset management segment.
Re Group sold 1.86% of its stake in UniCredit’s share capital and now has a shareholding of under 5%, which is recognised under “other securities available for sale”. The fair value of the investments in associates amounts to €1,353m (4,191m) at the balance sheet date. An overview of the most important shareholdings is provided on page 208.
Carrying amounts Fair values All figures in €m 31.12.2005 Prev. year 31.12.2005 Prev. year
Over four years and up to five years 41 43 44 45
All figures in €m 31.12.2005 Prev. year 31.12.2005 Prev. year 31.12.2005 Prev. year
Munich Re Group Annual Report 2005 Notes to the consolidated balance sheet – Assets of €10,973m (8,440m) in comparison with amortised costs. Of this – after deduction of provisions for deferred premium refunds, deferred taxes, minority interests and consolidation effects – unrealised gains and losses of €6,036m (4,441m) have been posted in equity (other reserves).
The corporate debt securities mainly comprise mortgage bonds with a high credit rating.
Over three years and up to four years 8,146 9,592 7,988 9,326
Over five years and up to ten years 28,564 34,101 27,528 32,728