MEAG MUNICH ERGO AssetManagement GmbH acquired 37,440 shares at €106.11 each and sold 2,593 shares at an average price of €98.15 in the financial year 2006 to safeguard obligations from its long-term incentive plan and thus has a portfolio of 86,911 Munich Re shares.
The acquisition costs of all Munich Re shares in the possession of Group companies at the end of the financial year totalled €460,022,921.03.
The Annual General Meeting on 19 April 2006 cancelled the Authorised Capital Increase 2001, due to expire on 18 July 2006, and approved an Authorised Capital Increase 2006 to issue employee shares.
The equity capital contains equalisation reserves of €4,915m (4,933m). Retained earnings were reduced by €52m due to adjustments pursuant to IAS 8. Owing to a change in preparing the IFRS financial statements of the consolidated special funds, retained earnings were reduced by €21m. In order to provide more accurate information, the method used for eliminating intercompany profits of intra-Group transactions was modified and standardised Group-wide. As changes in accounting methods have to be applied retrospectively, retained earnings were decreased by €29m. A top-up payment made by Munich Reinsurance Company to the Munich Re pension fund in the second quarter of 2006 was accounted for by reducing retained earnings by €15m, without impact on profit or loss.
The fair value of the subordinated liabilities at the balance sheet date amounted to €3,855m (4,038m).
Munich Re Finance B.V., Amsterdam, 6.75%, €3,000m, Bonds 2003/2023 2,977 2,975
All figures in €m* 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year *After elimination of intra-Group transactions across segments.
Unscheduled changes stem from alterations in the assumptions underlying the calculations, which required an adjustment in the measurement.
All figures in €m* 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year
In the life and health segment, the provision for outstanding claims consists of a provision for disability cases and a provision for other benefit cases. The disability claims provision involves periodic payments and is usually due long term. It is calculated as the present value of the expected future payments. Discount rates are disclosed in Note (36) “Risks from insurance contracts in the life and health segment”. The biometric actuarial assumptions are selected using appropriate actuarial principles. The provision for other benefit cases is largely measured at face value and is usually due short term. This provision includes an IBNR reserve, whose amounts are estimated with actuarial methods.
In the property-casualty segment, the claims reserve consists of the case reserve and the IBNR reserve. The case reserve reflects the amount which is expected to be needed to settle claims which are known and reported at the balance sheet date. The major part of this provision is measured at face value. A smaller part refers to provisions for annuities in personal accident, liability and workers’ compensation insurance. These are calculated as the present value of the expected future payments. The respective discount rates are disclosed in Note (37) “Risks in the property-casualty segment”. The biometric actuarial assumptions are selected using appropriate actuarial principles. The IBNR reserve is calculated using actuarial methods on the basis of current run-off triangles for payments made and reported losses.
The expected timing of payments from the provision for outstanding claims naturally involves considerable uncertainty. In reinsurance, we expect some 35% of the provisions to be paid out within a year, about 40% within a period of between one and five years, and a further 15% within a period of between five and ten years. In primary insurance, we expect around 40% of the provisions to be paid out within a year, roughly 35% within a period of between one and five years, and a further 15% within a period of between five and ten years. For about 10% of the provisions in reinsurance and primary insurance, we expect a settlement period over ten years.
Status at 31 Dec. previous year 42,016 4,324 37,692 35,761 3,554 32,207
Changes in the consolidated group result mainly from the acquisition of I
The claims expenses for the year under review show both payments made for the year under review and expenses for posting the claims reserve in that year. The provisions set up for claims from previous years are regularly updated using best estimates based on claims information and past claims experience. The respective change is shown under claims expenses for previous years. This change was mainly due to the following factors: In the year under review, reserves for Continental European motor excess-of-loss business and workers´ compensation claims in the US and Europe were increased, as assumptions regarding reporting and payment patterns were adjusted in response to a continued high level of claims activity. These portfolios are subject to future medical inflation and increased life expectancy among the claimants, which will have a leveraged effect on the expected future claims payments.
The increase in the provision for asbestos-related claims at Munich Re America did not have any run-off impact since unallocated risk margins at Munich Re Group level were released by an equal amount.
Net run-off results in property-casualty business The values in the following four run-off triangles cover more than 99% of our Group’s portfolio of property-casualty business.
Claims reserve for the individual accident years at the respective reporting dates (net)
The ultimate loss of an accident year comprises all payments made for that accident year up to the reporting date, plus the claims reserve at the reporting date. Given complete information regarding all losses incurred up to the balance sheet date, the ultimate loss status for each accident-year period would remain the same. In practice, however, it may be assumed that the ultimate loss status (based on estimates) is exposed to fluctuations that reflect the growth in knowledge about the claims cases.
The run-off triangles are prepared on a currency-adjusted basis. To this end, all figures are translated from the respective local currency into the Group currency (euro), consistently using the exchange rates applicable at the end of the year under review (i.e. at 31 December 2006). This ensures that neutral net run-off results in the original currency (i.e. where the ultimate loss originally estimated for an accident year and current loss estimate are identical) remain neutral when expressed in the Group currency.
Provision for premium refunds based on national regulations – – 4,313 3,187 4,313 3,187
– Thereof resulting from unrealised gains and losses (recognised in equity) – – 2,717 4,082 2,717 4,082
Provision for profit commission 1,038 762 – – 1,038 762 *After elimination of intra-Group transactions across segments. **Adjusted owing to first-time application of IAS 19 (rev. 2004).
Total net balance sheet liability 1,298 1,305 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Other –8 –3 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
The fair value of the plan assets includes own shares with a fair value of €21m.
For the financial year 2007, capital transfers of €12m to plan assets are expected.
The fair value of the notes issued by Munich Re American Corporation amounts to €434m (485m) at the balance sheet date. The ratings of the bonds and notes are given on page 101f.
ERGO International AG’s bonds exchangeable into E.ON AG shares were redeemed mainly through conversion in the first and third quarters of 2006, whilst its bonds exchangeable into Sanofi-Aventis S.A. shares were redeemed as planned through repayment.
Munich Re America Corporation*, Princeton 7.45%, US$500m, Senior Notes 1996/2026 378 423
ERGO International AG, Düsseldorf 2.25%, €345m, Bonds Exchangeable into E.ON AG Shares 2001/2006 0.75%, €345m, Bonds Exchangeable into Sanofi-Aventis S.A. Shares 2001/2006 – 674 *Formerly American Re Corporation
The accounts payable on primary insurance business mainly contain liabilities towards policyholders resulting from accumulated participation in surplus, premium deposits and insurance contracts without significant risk transfer. Of the amounts due to banks totalling €975m at 31 December 2006, €231m (–) concerns disposal groups held for sale; cf. (16) “Non-current assets and disposal groups held for sale”.
The miscellaneous liabilities contain liabilities of €189m (166m) resulting from reinsurance contracts without significant risk transfer.
Besides this, €210m (172m) of the other liabilities is apportionable to tax liabilities, €6m (37m) to liabilities for social security, and €140m (143m) to liabilities for interest and rent. In the previous year, this item also included €63m for the derivative components of ERGO International AG’s exchangeable bonds, which were redeemed in the financial year.
Premiums from long-term insurance business, especially in the segments life and health, are recognised in full as earned premiums and income when they become due. In the case of unit-linked business, only those parts of the premium used to cover the risks and associated costs are included. Of the gross premiums written from short-term insurance business, the portions attributable to periods after the balance sheet date are posted as unearned premiums; cf. Note (19). Unearned premiums are reversed, in accordance with the reduction in risk, over the duration of the contracts.
The change in the provision for future policy benefits (net) contains €100m (170m) in unrealised gains/losses from unit-linked life insurance. Expenses for claims and benefits include expenses for policyholders ’ bonuses. Of this, €1,504m (1,493m) is for the allocation to the provision for premium refunds on the basis of national regulations, €289m (52m)** for the change in the provision for deferred premium refunds recognised in the income statement, and €387m (202m) for direct crediting. The “other underwriting result” for life primary insurance mainly includes interest on policyholders’ accumulated credit.
Prev. Prev. Prev. Prev. Prev. All figures in €m* 2006 year 2006 year 2006 year 2006 year 2006 year**
– Provision for deferred premium refunds – –9 1 4 2,152 1,891 23 17 2,176 1,903
Change in technical provisions – Provision for future policy benefits 3 83 – – 128 121 – – 131 204
Other technical result – – – – – – – 13 – 13
Ceded share of expenses for claims and benefits 206 353 574 1,146 182 217 169 492 1,131 2,208
Change in technical provisions – Provision for future policy benefits 208 491 36 60 1,314 2,318 35 37 1,593 2,906
Prev. Prev. Prev. Prev. Prev. All figures in €m* 2006 year** 2006 year** 2006 year** 2006 year** 2006 year**
Amortisation of acquired insurance portfolios 1 3 – – 15 26 – – 16 29
(34) Finance costs By finance costs we understand all interest and other expenses directly attributable to strategic debt. Debt has a strategic character for us if it does not have an original, direct link with our operative business.
Subordinated bonds issued by Munich Re Finance B.V., Amsterdam 239 238
Bank borrowing of Munich Re America Corporation**, Princeton 13 13 * Redeemed in the second quarter of 2005. ** Formerly American Re Corporation.
Taxes on income 1,648 1,014 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
Deferred tax resulting from the occurrence or reversal of loss carry-forwards 103 –671
(35) Taxes on income This item shows the corporation tax and municipal trade earnings tax paid by the German companies (including solidarity surcharge) and the comparable taxes on earnings paid by the foreign companies in the Group. In accordance with IAS 12, the determination of taxes on income includes the calculation of deferred taxes.
Munich Re Group Annual Report 2006 Notes_Notes to the consolidated income statement
Taxes on income shown 1,648 1,014 *Adjusted owing to first-time application of IAS 19 (rev. 2004).
The effective tax burden is the ratio between the taxes on income recognised and the result before taxes on income (after “other tax”). In the year under review, the tax burden amounted to 32% (previous year: 27%). “Tax-free income” is made up of tax-free gains on the sales of shareholdings in joint-stock companies, tax-free dividend income and other tax-free income. Following a change in German corporate tax legislation that entered into force at the turn of the year 2006/2007, existing corporate tax credit will be paid out in the years 2008 to 2017. The claim had to be recognised in the 2006 balance sheet as an account receivable at its present value of €379m, resulting in a corresponding entry in the income statement (cf. page 67 in the management report). However, this positive one-off tax effect was more than offset by valuation allowances for deferred tax assets due to loss carry-forwards at our subsidiary Munich Re America Corporation (formerly American Re Corporation).
The item “municipal trade earnings tax” includes the differences between the trade-tax rate applied by the respective Group companies and the Group mixed trade-tax rate. No deferred taxes were recognised for retained earnings of affiliated companies, as there is no intention of distributing these earnings in the foreseeable future. The calculation of this unrecognised deferred tax would involve a disproportionately large amount of work.
(36) Risks from insurance contracts in the life and health segment Of primary importance in this segment are biometric risks, interestrate risks and lapse risks. The measurement of technical provisions and deferred acquisition costs is based on biometric calculation tables, i.e. on assumptions with regard to mortality, disablement and morbidity, and on the respective contract- or plan-specific discount rates and actuarial interest rates. Besides this, measurement includes assumptions regarding the lapse rate and profit sharing. In addition, other market risks from unit-linked contracts and risks from embedded derivatives have to be taken into account.
The quantitative structure of our business is shown in the notes to the consolidated balance sheet under (20) “Provision for policy benefits”.
– Actuarial assumptions fixed when contract is concluded; of disablement in the portfolio or a reduction in the premium ajustments not possible average age at which the insured event occurs
Life reinsurance – Largely long-term contracts under which mainly Mortality (short term): mortality and morbidity risks are assumed from – Increase in claims expenditure due to exceptional, cedants one-off circumstances
Health reinsurance – In most cases, short-term contracts under which morbidity Morbidity (short term): risks are assumed from cedants – Increase in costs of medical treatment within the risk period – Increase in claims expenditure due to exceptional, one-off events
Munich Re Group Annual Report 2006 Notes_Disclosures on the uncertainties of future cash flows from insurance contracts of the trend factors may result in a change in the provision for adverse deviation allowed for in the actuarial assumptions. This does not directly affect the value of the technical provisions or the deferred acquisition costs as long as there is sufficient provision for adverse deviation. In the view of the actuaries responsible, the biometric actuarial assumptions used by us are deemed to be sufficient and contain adequate provision for adverse deviation.
For annuity insurance contracts, the longevity risk plays an especially significant role. In primary insurance, the provisions for adverse deviation in our portfolio of annuity insurance policies have decreased in the past. If the longevity trend intensifies further compared with assumptions, additional amounts may have to be allocated to the provision for future policy benefits in the future. The longevity risk in our reinsurance portfolio has significantly less weight than in primary insurance.
Interest-rate risks Interest-rate risks have to be taken into account in both reinsurance and primary insurance. A distinction must be made between risks of changes in interest rates on the one hand and interest-rate guarantee risks on the other. Risks of changes in interest rates would result from the discounting of the provision for future policy benefits and of parts of the provision for outstanding claims. In accordance with accounting valuation rules, the discount rate is fixed at contract commencement and will generally not be adjusted during the term of the contract. To this extent, the accounting valuation of the technical provisions is not directly dependent on the level of the market interest rates.
For the whole portfolio, including that part where we use high discount rates for historical reasons, we check by means of the liability adequacy test as per IFRS 4 that the expected income from the investments covering the technical provisions is sufficient to meet future obligations.
This involves matching the provisions with suitable investments, albeit not always over durations that fully correspond to the respective settlement periods of the liabilities. In the case of a discrepancy between the durations of the investments and liabilities (”duration mismatch”), the main risk lies in the fact that if interest rates fall markedly over the remaining settlement period of the liabilities, the return on the reinvested assets may be lower than the discount rates and thus necessitate further expenses. But a complete duration matching of liabilities with fixed-interest investments would not be expedient, because if interest rates rise, policyholders might make increasing use of their surrender rights (see below), resulting in a liquidity requirement for premature payouts.
Other market risks and embedded derivatives In reinsurance, other market risks are generally ruled out through suitable treaty design. In the few exceptional cases where reinsurance contracts contain embedded derivatives, these are usually hedged by means of suitable capital market instruments.
Lapse risks In reinsurance, a lapse risk derives from the indirect transfer of lapse risks from cedants and can largely be eliminated through appropriate treaty design. Any residual risk is assessed by means of productspecific portfolio analyses and is taken into account in pricing. A financial risk from extraordinary termination of reinsurance contracts is generally ruled out through appropriate contract design.
Life Health Total All figures in €m* 31.12.2006 31.12.2006 31.12.2006 Prev. year
The actuarial interest rates relevant for the portfolio in calculating the provision for future policy benefits and the provision for outstanding claims are as follows:
In primary insurance, there is substantial risk minimisation through product design. For the most part, prudent actuarial assumptions are used in fixing the guaranteed benefits, in addition to which policyholders are granted a performance-related participation in surplus. More than 99% of the amount shown under (20) “Provision for future policy benefits” is apportionable to such contracts. Given the relevant margins in the actuarial assumptions, it is also possible to fulfil the future guaranteed obligations without adjusting the provisions in the case of moderate changes in assumptions. In addition, the provision for deferred premium refunds and portions of the provision for premium refunds based on national regulations, shown under (22) “Other technical provisions”, is of great significance for risk-balancing in the case of adverse developments. In health primary insurance, substantial risk minimisation is also provided for by the premium adjustment clause underlying most longterm contracts.
Impact on equity and the consolidated income statement In the liability adequacy test pursuant to IFRS 4, we regularly test the technical provisions and deferred acquisition costs to ensure they are appropriate. An adjustment is made if such tests show that the original provisions for adverse deviation allowed for in the biometric actuarial assumptions, or in the assumptions for discounting provisions and for lapses, have been exhausted. Particularly in primary insurance, the possibilities of adjusting participation in surplus are taken into account.
The basis for measuring the risk assumed is an estimate of the claims frequency to be expected for a portfolio of contracts. In addition, an estimation of the claims amount is necessary, from which a mathematical distribution of the expected losses is derived. The result of these two steps is an estimation of the expected overall claims in a portfolio. A third element comprises the expected cash flows to settle claims incurred, a process which frequently extends over several years.
The estimation of technological, social and demographic parameters plays an important part in assessing and pricing risks assumed in all classes of business. Beyond this, in liability insurance and sections of motor insurance, the development of economic and legal parameters is significant, whereas in the lines of business fire and marine, aviation, space and sections of engineering business and primary insurance, a high degree of sensitivity regarding the underlying assumptions about natural catastrophes can play the dominating role. In the latter area, we include expected trends in our considerations when assessing the risks, with special importance given to a precise analysis of climate-related changes in the risk profile.
The measurement of the provisions for outstanding claims is based on historical loss development data for the different classes of business. We use a range of well-established actuarial methods in both reinsurance and primary insurance for this purpose. These methods embed various pricing, coverage and benefit/inflation levels. The actuarial analysis is complemented by studies carried out by our claims and underwriting staff from which we derive foreseeable future trends. As part of our regular results monitoring process, we keep a close eye on trends to ensure that the assumptions underlying the measurement of the provisions always reflect the latest developments. Consequently, in the course of reserve run-off, it may be necessary to revise the original estimates of the claims expenditure required and to adjust the provisions accordingly. We view our level of reserves as sufficient to reflect both our best estimate of our current liabilities and an appropriate consideration of the uncertainty inherent in the estimate. It should, however, be noted that future changes to the provisions cannot be ruled out.
Significant time lags between major events leading to insurance claims are exacerbated when it comes to reinsurance claims. Loss notification often involves a long “chain”: exposure to the loss, manifestion of an injury, filing of a lawsuit against a defendant, adjudication of the suit, reporting and payment of an insurance recovery and then, finally, notification to the reinsurer. Therefore, besides monitoring these developments on a claim-by-claim level, we also monitor the development from an industry perspective, as this may be considered an important early indicator.
Interest-rate risks Economically, an interest-rate risk derives from the need to earn a return on the investments covering the provision that is commensurate with the discount rate used in measuring the provision. In balance sheet terms, the interest-rate risk affects the provisions for outstanding claims only to the extent that the estimated reserve values are discounted.
If interest income from the investments held to cover the provision is lower than the discount rate or the regulatory parameters change, a reserve adjustment is necessary.
Another important measure for controlling underwriting risks is the cession of a portion of our risks to third parties via external reinsurance and retrocession. All our companies have intra-Group and external reinsurance and retrocession cover. Particularly important in this context is an accumulation excess-of-loss cover, which provides protection against losses from natural catastrophes. The dimensions of this cover are based on analyses of our accumulation budgets in those parts of the world exposed to natural catastrophes. The protection afforded by retrocession comes into play if we are hit by an extremely large loss.
Impact on equity and the consolidated income statement As part of the monitoring of our portfolio, we check whether original assumptions need to be adjusted. By means of the IFRS 4 liability adequacy test, we review expected claims expenditure in the light of updated assumptions. If this test shows that an adjustment to technical provisions is required, the amount is recognised directly in the consolidated income statement.
All figures in €m 31.12.2006 Prev. year 31.12.2006 Prev. year 31.12.2006 Prev. year
(42) Long-term incentive plans Every year since 1 July 1999, Munich Reinsurance Company has set up long-term incentive plans, each with a term of seven years. Entitled to participate in these share-price-related remuneration plans are members of the Board of Management, senior management in Munich, and top executives in Munich Re’s international organisation. Participants receive a certain number of stock appreciation rights.
The relevant initial share price for the stock appreciation rights is calculated from the average of closing prices for Munich Re shares in Frankfurt Xetra trading over the last three months prior to plan commencement. The initial price for the 2006 long-term incentive plan is €108.87 (88.10). As a result of Munich Reinsurance Company’s capital increase in the financial year 2003, the initial share prices for the stock appreciation rights issued up to then and the number of stock appreciation rights already granted were adjusted in accordance with the conditions. In the year under review a total of 443,609 (487,544) stock appreciation rights were granted, 150,687 (138,833) of these to Board of Management members. The future obligations arising from the long-term incentive plans are covered with Munich Re shares.
The personnel expenses and income incurred for the stock appreciation rights are determined on the basis of the change in the fair value of the underlying options. The fair value recognises not only the intrinsic value (difference between current share price and initial share price of the stock appreciation rights) 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. At each balance sheet date, the fair value is calculated and reserved; this amount is recognised in full. The personnel expenses recognised in the income statement therefore correspond to the change in the provision in the year under review, taking into consideration any rights exercised. In the year under review, related provisions of €63.2m (46.8m) had to be posted for the reinsurers in the Munich Re Group; the personnel expenses totalled €22.2m (43.6m). The weighted average share price for the stock appreciation rights exercised in 2006 was €118.17 for plan year 2003 and €117.52 for plan year 2004. The intrinsic value of the exercisable stock appreciation rights amounted to €22.6m at the balance sheet date.
(39) Parent The parent of the Munich Re Group is Münchener Rückversicherungs -Gesellschaft Aktiengesellschaft in München (Munich Reinsurance Company Joint-Stock Company in Munich), Königinstrasse 107, 80802 München. Its registered seat is Munich, Germany. In addition to its function as a reinsurer, the parent also fulfils the function of holding company for the Group.
(40) Related parties Information on the remuneration of Board members and transactions with these persons can be found in the remuneration report, starting on page 114. Transactions between Munich Re and subsidiaries that are to be deemed related parties have been eliminated in consolidation and are not disclosed in the notes. Business relations with unconsolidated subsidiaries are of subordinate importance as a whole; this also applies to business relations with associates.
Number of rights on 31 Dec. 1999 110,840 – – – – – – –
Number of rights on 31 Dec. 2000 119,885 80,582 – – – – – –
Number of rights on 31 Dec. 2002 78,668 80,261 109,301 132,466 – – – –
Number of rights on 31 Dec. 2006 – 77,394 106,286 133,772 195,736 336,665 485,527 442,590
(43) Remuneration report The total remuneration of Munich Reinsurance Company’s Board of Management amounted to €25.6m (21.2m) and that of the Supervisory Board to €1.9m (1.9m). All other disclosures on the remuneration of and loans to Board members, share trading and shares held by the members of the Board of Management and the Supervisory Board, and the structure of the Board of Management’s remuneration system can be found in the remuneration report on page 114 f.
Incentive plans 2002–2004 of the Munich Re Group’s primary insurers and asset managers
New initial share price after 2003 capital increase €247.64 €82.02 €88.65 €88.10 €108.87
Number of rights on 31 Dec. 2004 54,795 156,917 154,189 – –
Number of rights on 31 Dec. 2005 42,892 59,108 122,059 187,530 –
(45) Number of staff The number of staff employed by the Group at year-end totalled 25,524 (27,063) in Germany and 11,686 (10,890) in other countries.
Following amendments to the German Insurance Control Act (VAG) at the end of 2004, all German life and health insurers of our Group are obliged to be members of a protection fund. For life insurers, the protection fund can levy special contributions of up to one per mille of total net technical provisions, in addition to a regular contribution of 0.2 per mille of total net technical provisions. For the health insurers, there is no pre-financing, but the fund may levy special contributions of up to two per mille of net technical provisions to fulfil its functions. This could give rise to a potential payment obligation of €127m (92m) at Group level. The functions and powers of the statutory protection fund for life insurance were transferred by the Federal Ministry of Finance to Protektor Lebensversicherungs-AG in a statutory order of 11 May 2006, and those of the statutory protection fund for health insurance were entrusted to Medicator AG in another statutory order of the same date.
The change shown for the primary insurance companies mainly results from the sale of the ADA HAS Group and the acquisition of the Turkish insurance group I
Payments from operating leases concern in particular rents for offices and business premises of the Group. At €3m (3m), the amount of minimum lease payments under finance leases at the balance sheet date was insignificant.
The Munich Re Group as lessor Operating leases mainly involve leased property. The total of future minimum lease payments under non-cancellable leases at the balance sheet date was €941m (1,064m).
There were no minimum lease payments under finance leases at the balance sheet.
Later than one year and not later than five years 448 514
(51) Proposal for appropriation of profit Munich Reinsurance Company’s net retained profits for 2006 according to its financial statements prepared on the basis of the German Commercial Code amount to €1,033m (712m). The Board of Management will propose to shareholders at the Annual General Meeting that this profit be used for payment of a dividend of €4.50 (3.10) on each share entitled to dividend and that any residual amount be carried forward to new account.
DKV Seguros y Reaseguros, Sociedad Anónima Española, Saragossa 94.69% 66,057 9,649
D.A.S. Société anonyme belge d’assurances de Protection Juridique, Brussels 94.67% 5,532 1,396
ERGO Latvija Versicherung AG (ERGO Latvija Apdrosinasanas Akciju Sabiedriba), Riga 93.38% 5,983 479
ERGO Vida Seguros y Reaseguros, Sociedad Anónima, Saragossa 94.69% 16,479 1,408
The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware 100.00% 36,748 4,171
Company % share Equity Result for of the year capital €’000** €’000**
Österreichische Volksbanken-AG, Vienna 9.47% 1,092,260 49,275 ***Some of these selected participating interests are held indirectly. They are calculated proportionally in each case. ***The amounts are taken from the individual companies’ financial statements.
We conducted our audit of the consolidated financial statements in accordance with Section 317 of the German Commercial Code and German generally accepted standards for the audit of financial statements promulgated by the German Institute of Certified Accountants (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework and in the Group management report are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements and the Group management report are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and Group management report. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRS, as adopted by the EU, and the additional requirements of German commercial law pursuant to Section 315a para. 1 of the German Commercial Code, and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The Group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group’s position and suitably presents the opportunities and risks of future development.
Klaus Becker Herbert Loy Wirtschaftsprüfer Wirtschaftsprüfer (Certified public accountant) (Certified public accountant)
Whether alternative risk financing or customised portfolio solutions, the topics handled by Munich Re are broad-ranging and complex. Our stakeholders benefit from the constant updating and successful exploitation of our knowledge.
Affiliated company In the consolidated financial statements of Munich Reinsurance Company (the parent) all companies are deemed affiliated companies in which Munich Reinsurance Company holds the majority of the voting rights either directly or indirectly.
Associate Companies on whose financial and operating decisions a significant (but not a controlling) influence can be exercised, regardless of whether this influence is actually exercised or not. A significant influence is presumed if the proportion of voting rights lies between 20% and 50%. Investments in associates are valued according to the equity method.
Captive An insurance company established as a subsidiary of one or more industrial/trading companies or groups mainly for the purpose of insuring the risks of these companies and their affiliates.
Cash-generating unit The smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets or groups of assets. If the recoverable amount of an asset cannot be determined individually in the impairment test for assets under IAS 36, the recoverable amount of a cash-generating unit to which the relevant asset belongs must be determined.
Compliance guidelines Rules for handling inside information. As a general principle, inside information may not be used for a person’s own investment transactions, for transactions conducted by a bank or for recommendations to others. Therefore, as part of the compliance procedure, business transactions are checked to make sure they are not based on inside information.
Contingent liabilities Possible obligations whose existence will be confirmed by the occurrence or non-occurrence of an uncertain future event and which are therefore not shown as liabilities in the balance sheet. They must, however, be included in the notes to the financial statements (e.g. guarantee obligations).
Corporate governance The legal and factual framework for managing and monitoring companies. Corporate governance rules serve to provide transparency and thus strengthen confidence in responsible management and control geared to the creation of value.
Directors’ and officers’ liability insurance Insurance for the personal liability of the directors and officers of companies, i.e. for board members, general managers and internationally comparable executives.
Disposal group A group of assets that are jointly sold or otherwise disposed of in a single transaction, along with any directly associated liabilities transferred as part of the transaction.
Exposure The measurable extent of a risk or portfolio of risks; basis for calculating premiums in reinsurance.
Facultative reinsurance The reinsurer assumes a share of selected individual risks. The primary insurer can offer an individual risk in reinsurance, which the reinsurer for its part can either accept or decline (cf. obligatory reinsurance).
Fair value The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s-length transaction. Where there is an active market, the fair value of an asset is its current market value. Alternatively, the fair value may be determined on the basis of recognised valuation methods.
Forward Contract to trade at a specified price on a specified future date. In contrast to futures, forwards tend to be individually designed derivative financial instruments.
Future Standardised contract to trade a financial instrument on a money market, capital market, precious-metals market or currency market at a specific price and on a specific future date. Frequently, rather than actually delivering the underlying financial instrument on that date, the difference between closing market value and the exercise price is settled in cash.
Hedging Protecting against undesirable developments in prices by means of special financial contracts, especially derivative financial instruments. Depending on the risk to be hedged, a distinction is made between two basic types: “fair value hedges” safeguard assets or liabilities against the risk of changes in value; “cash flow hedges” reduce the risk of fluctuations in future cash flows.
Integrated risk management (IRM) Holistic management of insurance risks in life and non-life business and of investment risks. IRM essentially rests on four pillars: assetliability management, active capital management, accumulation control, and operational risks.
International Accounting Standards (IASs)/ International Financial Reporting Standards (IFRSs) Standards formulated by the IASB with the intention of achieving internationally comparable preparation and presentation of financial statements. Since 2002 the standards adopted by the IASB have been referred to as International Financial Reporting Standards (IFRSs). Until existing standards are renamed, they continue to be referred to as International Accounting Standards (IASs).
Layer Term used in excess-of-loss reinsurance to denote a stratum of cover. Its point of attachment and extent is defined in terms of the sum insured. Example: €5,000 in excess of €1,000 refers to the layer
Net expenses for claims and benefits These include the expenses for claims (claims payments and the change in the provision for outstanding claims), expenses for premium refunds and the change in the remaining technical provisions (provision for future policy benefits and other), in each case after deduction of the ceded share.
Net premium Amount relevant for determining the provision for future policy benefits as per FAS 120. The net premium derives from the gross premium less the premium portions used to amortise the acquisition costs.
OTC derivative Derivative financial instrument which is not standardised and is traded not on an exchange but directly between two counterparties via over-the-counter (OTC) transactions.
Other securities held to maturity Debt securities that the company has the intention and ability to hold to maturity. They are valued at amortised cost.
Preferred lives products Special life insurance products available to “preferred lives”, i.e. applicants chosen according to criteria in addition to age, sex and tobacco use, and expected to experience lower mortality as a group than other persons of the same age. Such criteria usually comprise accident risk, sports and health. A preferred lives product provides suitable applicants with cover (e.g. for mortality) at a lower premium.
Premium The amount that has to be paid for the insurance cover provided by an insurer. It may be paid as a regular or single premium. In the case of products that are largely of an investment nature (e.g. financing treaties and unit-linked life insurance) it only includes – under IASs/IFRSs – the amount serving to cover the risk and costs. In IASs/IFRSs financial statements there are no “premiums from the provision for premium refunds” either. Premiums written means all premium income that has become payable in the financial year. The portion of this premium income that constitutes payment for insurance cover in the financial year is referred to as earned premiums.
Property-casualty One of the segments in our segment reporting, chiefly comprising the classes liability, accident, motor, marine, aviation, space, fire and engineering.
PVFP (Present value of future profits) When insurance companies or individual insurance portfolios are acquired, the present value of the expected earnings from the business acquired is capitalised as “PVFP”. This intangible asset arises in particular when life or health insurance companies are acquired.
Recoverable amount Under IFRSs, the recoverable amount of an asset is the higher of net sales price (i.e. sales price less sales costs) and the value in use (i.e. present value of the future cash flows). The recoverable amount plays a part especially in connection with impairments in the value of real estate, where an impairment loss has to be recognised if the recoverable amount is lower than the carrying amount.
Retention That part of the risk assumed which the insurer/reinsurer does not reinsure/retrocede, i.e. retains net for own account.
Risk The possibility of negative factors influencing the future economic situation of company. In insurance, it is also understood to mean the possibility of a loss being caused by an insured peril. In addition, insured objects or persons are frequently referred to as risks.
Risk management Systematic and continual identification, analysis, evaluation and control of potential risks that may jeopardise the assets, liabilities, financial position and results of a company in the medium to long term. The aim is to safeguard the existence of the company and its objectives against disruptive influences by means of suitable measures, and to increase corporate value.
Solvency II Project of the European Commission to revise European insurance supervisory regulations to protect policyholders against loss. The project’s main objectives are further harmonisation of the financial services sector, creation of a level playing field, risk-based determination of capital-adequacy requirements, inclusion of qualitative factors in the supervisory process, promotion of active internal risk management, and enhancement of risk transparency for supervisory authorities and the public. Solvency II follows the three-pillar approach used in Basel II: minimum capital requirements (quantitative ), supervisory review process (qualitative) and market discipline (disclosure).
Swap Agreement between two counterparties to exchange payment flows over a specified period in order to profit from relative cost benefits that one party enjoys on a particular financial market. In the case of an interest-rate swap, payment obligations in the same currency but with different interest rate conditions (e.g. fixed/variable) are exchanged. In the case of currency swaps, the payment obligations exchanged are in different currencies.
Ultimate loss As calculated at the end of the calendar year under consideration, the ultimate loss for an accident year indicates the estimated aggregate claims expenditure that will have to be paid to finally settle the claim(s). It comprises the claims payments already made for the accident year in question and the remaining claims reserve posted for payments in future years. Since claims reserves are based on estimates, the ultimate loss changes from one calendar year to the next. Reference may therefore also be made to the ultimate loss position or the ultimate loss estimate.
US Generally Accepted Accounting Principles (US GAAP) The principles of US accounting that are stipulated as compulsory for quoted companies in the USA. The individual accounting standards are referred to as Financial Accounting Standards (FASs).
Asset-liability management 53, 98, 123f., 127ff. Asset management 48, 51, 91ff., 122ff.
Life insurance 20, 53, 55, 63f., 71ff., 89, 122ff., 134, 159ff., 167, 173,
Münchener Rück Italia 49, 78 Munich American Capital Markets 49, 84 Munich American Reassurance Company 49, 72 Munich-American RiskPartners 49, 69, 85
Munich Re Foundation 108 Munich Reinsurance Canada Non-Life Group 49, 81f. Munich Reinsurance Company Canada Branch (Life) 49, 72 Munich Reinsurance Company of Africa 49, 73, 80 Munich Reinsurance Company of Australasia 49, 73, 79 Munich Reinsurance Company of Canada 49, 82
Pandemics 19ff., 132f. PICC Asset Management Company Ltd. 26, 52, 91, 123 Property-casualty 20, 22, 48, 53ff., 63 f., 66f., 69ff., 74 ff., 89 f., 120ff.,
Munich Re Group Annual Report 2006 General information_Index of key terms
UK Great Lakes Reinsurance (UK) PLC Upper Ground Floor 1, Minster Court Mincing Lane, London EC3R 7YH
Canada Munich Reinsurance Company of Canada (MROC) Munich Re Centre 390 Bay Street, 22nd Floor Toronto, Ont., M5H 2Y2
Hamburg-Mannheimer Versicherungs-AG Hamburg-Mannheimer Sachversicherungs-AG Hamburg-Mannheimer Rechtsschutzversicherungs-AG Hamburg-Mannheimer Pensionskasse AG Überseering 45 22297 Hamburg
Combined ratio property-casualty reinsurance % 92.6 91.2 91.6 91.6 1. Earned premiums 2. Investment result 4. Expenses for claims and benefits 5. Operating expenses 7. Result before impairment losses of goodwill 5,498 860 1,316 1,851 1,471 8. Impairment losses of goodwill 4 4 – – –
Picture credits Jörg Koopmann, Munich, cover, pp. 4–25, back cover Claudia Kempf, Wuppertal, pp. 29, 33 Karsten de Riese, Bairawies, p. 34
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