1 Including Munich Health’s primary insurance and reinsurance activities in the health market as at 31 December 2012.
Net expenses for claims and benefits €bn 41.0 40.9 36.6 32.4 28.7 Net operating expenses €bn 12.6 12.0 11.1 10.2 9.1 Operating result €m 5,350 1,180 3,978 4,721 3,834
Munich Re’s market capitalisation at 31 December3 €bn 24.4 17.0 21.4 21.5 22.9 Book value per share € 152.25 129.86 126.31 114.89 106.42 Investments €bn 213.8 201.7 193.1 182.2 174.9
Off-balance-sheet unrealised gains and losses4 €bn 11.0 5.7 3.6 3.2 2.5
Primary insurance 1 Previous years’ figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly.
Comparability with the years 2009 and 2010 is thus limited. 3 Up to and including 2010, this contains own shares earmarked for retirement. 4 Including those apportionable to minority interests and policyholders. 5 The figures for 2011 are not adjusted for relief of 1.4 percentage points from economic risk transfer to the capital markets. 6 Excluding health insurance conducted like life insurance.
Consolidated financial statements and notes 149 Consolidated balance sheet 152 Consolidated income statement 154 Statement of recognised income and expense 155 Group statement of changes in equity 156 Consolidated cash flow statement 158
To begin with, there are major political upheavals, such as those witnessed most recently in North Africa, but also the conflicts that have troubled us for many years, like those in the Middle East. Other sources of uncertainty are the sovereign debt crisis and the future handling of systemic risk in the financial sector. Besides this, it still remains unclear how politicians propose to address the ever more urgent challenges facing humankind: the increasing gap between rich and poor; the problem of providing a continually growing global population with food, water and energy; or the deep­seated demographic changes, such as the ageing of the population in industrialised nations, which is putting immense pressure on social security systems in those countries. And then there is the issue which in our view has been pushed far too much into the background by the financial crisis: climate change, with the pressing need to reduce or at least restrict CO2 emissions and adapt to the already altered climatic conditions.
Even this far­from­complete list clearly illustrates the enormity of the challenges and related uncertainties. What does this mean for us as insurers? What are the implications for our busi­ ness strategy?
With our risk knowledge, we play our part in offering solutions for a few of the challenges I have just mentioned – solutions that can relieve individuals and companies of some of the uncer­ tainty. The spectrum ranges from life insurance for old age to assistance services after accidents and protection against busi­ ness interruption. And in reinsurance, we fulfil our economic function by providing primary insurers with cover against peak risks, such as those from large natural catastrophes. Whether primary insurance or reinsurance – what we offer has to be constantly adjusted to reflect the latest developments. Take life insurance, for example, where in the current environment of persistently low interest rates we intend to present a completely new product generation by the middle of this year. These prod­ ucts will take into account the wishes of many of our clients for more flexibility, geared to the different phases in their lives.
In our day­to­day business, we deal with a vast number of very different risks and, in covering them, we aim to make the world a little more secure by means of creative and tailor­made solutions. The “pacemaker” function of our insurance covers becomes evident in the context of responses to climate change. Here, we are partnering the introduction of new technologies in the field of renewable energy with innovative products. A good example is our performance guarantee insurance for photo­ voltaic modules, which provides manufacturers with balance sheet relief for a portion of the long­term technical guarantee risk. As a result, this solution also reduces risks for investors and offers additional security for buyers. And as investors our­
selves, we naturally also support a broad range of entrepre­ neurial activities that are essential for managing the major challenges of our time.
The main tool we use is our strict and disciplined risk manage­ ment, which is firmly embedded in all our business operations. We monitor and assess all the identifiable risks holistically, that is for both sides of the balance sheet. This begins with a dedi­ cated unit for “emerging risks”, by which we mean new types and combinations of risk whose implications are still uncertain. And it ends with the active management of diversification – the conscious mixing of risks that have little or no correlation. In all this, we use models based on assumptions and parameters that are continually checked for plausibility and comprehensibility, also by us on the Board of Management. Common sense is indispensable in these considerations, as is the readiness to challenge the results of calculations by means of stress tests and scenario analyses. It is not possible, of course, to properly identify every risk or to always assess the correlations between different risks correctly. But as recent years show, we have suc­ ceeded relatively well – also during the financial crisis – in taking sensible decisions on the basis of our risk management systems.
new risk situations. Our core business in insurance and reinsur­ ance is healthy, while the claims burden from major losses in 2012 was slightly below average. On top of this, we posted a good investment result. We want you, our shareholders, to par­ ticipate in last year’s success through a higher dividend. Sub­ ject to your adoption of our proposal at the Annual General Meeting, the dividend will increase to €7 per share.
Ladies and gentlemen, you again placed your trust in us in 2012, for which I would like to expressly thank you, also on behalf of my colleagues on the Board of Management and the staff in our Group. We will continue to make every effort to fulfil the expect ations you have of your investment in Munich Re shares.
To complement the perform­ ance guarantee cover for photovoltaic manufacturers, Munich Re launches a new product that provides protec­ tion against the risk of manu­ facturers’ insolvency, thus strengthening our position in the renewables market. The new insurance covers the risk borne by plant operators that solar module output may, in the course of time, fall below the level guaranteed by a manufacturer that can no longer be held liable under its warranties due to insolvency.
HSB introduces the first cyber­ risk cover combining protec­ tion against device failure with optional coverage for data loss and identity theft.
14 May 2012 ERGO publishes its first­ever customer report, presenting in a clear and understandable way what ERGO is doing to implement its brand propos­ ition “To insure is to under­ stand”. The report focuses on customers and their questions and suggestions.
On behalf of Munich Re, MEAG acquires three wind farms in the United Kingdom connected to the UK grid, with a total installed capacity of 102 mega­ watts. The investment in the low three­digit million range is part of the RENT programme (Renewable Energy and New Technologies) with an envis­ aged volume of €2.5bn.
Nikolaus von Bomhard, Chair­ man of Munich Re’s Board of Management, is chosen as the 2012 Insurance Leader of the Year by St. John’s University’s School of Risk Management in New York. The prestigious award is presented to him on 16 January 2013.
Munich Re celebrates the 100th anniversary of Munich Re’s first reinsurance treaty in Japan and the 50th anniver­ sary of our reinsurance branch in Hong Kong.
6 November 2012 Munich Health, Munich Re’s health specialist, and the underwriting agency Inter­ national Reinsurance Man­ agers, LLC agree to cooperate in the Latin American health reinsurance market. Their aim is to offer cedants their global pricing know­how, and ser­ vices specifically geared to Latin American customers’ challenges.
The Chairman of the Munich Re Supervisory Board, Hans­ Jürgen Schinzler, retires from office on age grounds. He joined Munich Re in 1968, becoming a member of the Board of Management in 1981 and hold­ ing the office of Chairman of the Board of Management from 1993 to 2003. He had been a member of the Super­ visory Board and its Chairman since 2004. He is succeeded as Chairman by Bernd Pischets rieder, a member of the Supervisory Board since 2002. Ann­Kristin Achleitner is selected as a new member of the Supervisory Board.
The sovereign debt and banking crisis in Europe continued to impact the capital mar­ kets in 2012. Our share price recorded its year low of €91.39 at the start of the year, on 9 January. The global economy soon showed signs of stabilising, however, and there was a recovery on the stock markets. Yet following worsening problems in the euro­ zone, global economic development lost momentum in the further course of the year. It was not until the European Central Bank announced that under certain circumstances it would buy up unlimited government bonds of crisis countries on the secondary mar­ ket, and the ESM (European Stability Mechanism) rescue fund was set up, that the financial markets became calmer again. With the alleviation of the situation in Europe, investors regained confidence: in the second half of the year, the stock markets profited from a growing investor risk appetite, fuelled by the low yields on the bond markets. Insurance stocks also benefited from this development. Our share price reached its year high of €137.95 on 27 December.
Munich Re shares closed the year at €136.00, once again having demonstrated the attractiveness of their clear and dependable investment profile. With a rise in price of 43.5% in the year under review, they outperformed both the DAX 30 (+29.1%) and the DJ EURO STOXX Insurance (+34.1%). Taking into account the dividend paid for the financial year 2011, the performance was even better, with a total return on Munich Re shares of +51.6%. The medium­ and long­term performance of Munich Re shares is also convincing: over the last three­ and five­year periods, their price performance (in terms of total return) has bettered that of the benchmark indices DAX 30 and DJ EURO STOXX Insurance.
More than 40 analysts from banks and brokerage houses regularly evaluate our shares. At the end of December 2012, some 36% of the analysts gave our shares a positive assessment, 45% a neutral one, and only 19% a negative rating.
Munich Re shares DAX 30 DJ EURO STOXX Insurance Munich Re (total return) Source: Datastream
Active capital management remains an integral part of Munich Re’s business policy. We pursue a policy of stable dividends with increases where possible, the payout essentially being based not only on the result for the year but also on our capital requirements. Bearing this in mind, we generally aim to pay out at least 25% of the annual result to our shareholders as a dividend.
For the financial year 2012, the Board of Management and the Supervisory Board intend to propose a dividend of €7.00 at the Annual General Meeting on 25 April 2013. Altogether, this would mean a total payout of just under €1.3bn (previous year: €1.1bn). Subject to approval by the Annual General Meeting, the dividend will be paid on 26 April 2013. With an increase in the dividend, we are again underlining the sustained profitability of our business model and the solidity of our capital position.
With a dividend yield of approximately 5.2% (in relation to the year­end share price), Munich Re shares remain an attractive equity investment, which is also included in the DivDAX, a subindex of Deutsche Börse AG featuring the 15 DAX companies with the highest dividend yields.
At the end of December 2012, a total of 143,000 shareholders were entered in our share register. The vast majority of shares were held by institutional investors such as banks, insurers or investment companies; approximately 11.4% were in the hands of private investors. At around 74%, the percentage of international investors was slightly higher than in the previous year.
Regional distribution1 30.3 % Rest of Europe 29.6 % North America 0.6 % Other countries 1 Percentage of share capital. Status: 31 December 2012. Source: Munich Re share register
Our investor relations work continues to meet with a positive response. In several cross-sector analyses of the quality of investor dialogue, Munich Re once more achieved leading positions in 2012, with our business partners particularly appreciating the consistency and transparency of our reporting. All the presentations we use in our meetings with analysts and investors and in our conferences and roadshows are published on the internet, and are sent to interested shareholders on request. Many of these events are transmitted live via webstreaming. Enquiries reaching us via our shareholder hotline or by e-mail are answered promptly by our team. Additionally, the service pages of our shareholder portal on the internet provide our registered shareholders with a wide range of information and communication options.
Our 125th Annual General Meeting was held at the ICM – International Congress Center – in Munich on 26 April 2012. Some 47.1% of the voting share capital was represented in the votes. With online participation in the Annual General Meeting and (electronic ) postal voting, Munich Reinsurance Company again offered its shareholders all the facilities for casting their votes on agenda items.
We combine primary insurance and reinsurance in one group. This set­up allows us to cover the relevant sections of the insurance industry’s value chain. It benefits our clients, because we can offer them customised solutions that draw on our full spectrum of knowledge. As a Group, we are also less dependent on cycles in individual lines of business and regional markets, or on developments in the capital markets.
Our business model is supported by disciplined financial management based on Group­wide risk management, an investment policy geared to the structure of our li abilities, and active capital management.
— New insurance solutions secure competitive edge, generate growth and win clients’ loyalty
Munich Re’s primary insurance operations are concentrated in the ERGO Insurance Group. ERGO offers a comprehensive range of insurances, provision products and ser­ vices, and is one of the leading insurance groups in Germany and Europe. It is repre­ sented in over 30 countries, focusing mainly on Europe and Asia.
ERGO offers the appropriate sales channel for every client. Self­employed agents ser­ vice private clients and firms. These are supplemented by direct sales staff, brokers and strong cooperation partners in Germany and abroad. ERGO also has a range of sales partnerships with banks in Germany, various other European countries, and India.
Details of our RORAC calculation can be found on page 38
The international healthcare market will continue to grow at an above­average rate. The ageing of societies in many countries and medical advances are leading to rising healthcare costs, often putting immense pressure on social security systems and increasing the need for private insurance solutions. We tap this profitable growth potential in our business field Munich Health, where our specialists for international health business from primary insurance and reinsurance are pooled in a separate organisation. We support our clients with needs­based products and innovative solu­ tions in risk management. To this end, we frequently collaborate closely with those in charge of social security systems, together making it possible for high­quality medical care to remain affordable.
Corporate governance report 026 How we view corporate governance 026 What rules apply to Munich Re? 026 Corporate legal structure 027 Board of Management 027 Collaboration between Board of Management and Supervisory Board 027 Supervisory Board 027 Annual General Meeting 028
Collaboration between Supervisory Board and Board of Management Cooperation between the Supervisory Board and the Board of Management was based on open and constructive dialogue, with the Supervisory Board being consulted on all decisions of fundamental significance for the Group. The Board of Management informed us regularly both verbally and in writing about all important business transactions, thereby satisfying its reporting obligations to the Supervisory Board in all respects.
Focal points of the meetings of the full Supervisory Board The business development of Munich Re (Group) was on the agenda of five of the six Supervisory Board meetings, being debated at length on each occasion. We discussed the strategic considerations of the Board of Management and looked at the risks in the individual fields of business. As in the previous years, we kept track of the situation on the capital markets and concerned ourselves with the impact of the sovereign debt and banking crisis on the Group’s assets and earnings. The Board of Management kept us up to date on the performance of the Company’s investments. We continued to monitor the measures taken by ERGO to investigate the aforementioned incidents, which remained the subject of sometimes intensive media coverage in 2012, and obtained infor­ mation on the individual steps to remedy any irregularities. The Board of Management also reported to us regularly on the latest position regarding the introduction of the planned new European supervisory regime Solvency II and the debate on the potential systemic importance of insurers, whose impacts for Munich Re we discussed in detail.
A meeting in April was devoted solely to matters involving the Board of Management: we evaluated the extent to which its members’ financial and individual annual objectives had been achieved and determined their bonus payments for 2011. We also decided on the degree to which objectives had been achieved under the value­based Mid­Term Incentive Plan 2009–2011 and on the resultant bonus payments for the Board of Man­ agement. At another meeting in April, directly prior to the Annual General Meeting, we obtained the customary report on the status of business development in 2012.
At the meeting in July, the CEO of ERGO Direkt Versicherungen presented his com pany’s business model to us. We discussed the focal points of human resources work in the Group and were briefed on the 2011 compensation report in accordance with the German Insurance Compensation Regulation. Moreover, we altered the distribution of responsi­ bilities on the Board of Management so that the compliance function became a separate central division reporting directly to the Chairman of the Board of Management.
At the October meeting, we looked closely at topics of corporate governance (see the relevant section later in this annual report). We also altered the rules of procedure for the Audit Committee in two respects: firstly, we added the Head of the Actuarial Func­ tion to the list of people who report to the Audit Committee; secondly, we specified procedure regarding the choice of external auditor for the financial statements and the explanation of the audit planning. Lastly at this meeting, we were given a special pre­ sentation on business in Latin America, which we followed with a detailed discussion on reinsurance strategy in these countries.
At the December meeting, routinely attended by two representatives of the German Federal Financial Supervisory Authority (BaFin) as guests, we dealt in depth with mat­ ters relating to the Supervisory Board. Owing to the retirement of Dr. Hans­Jürgen Schinzler as Chairman of the Supervisory Board with effect from 31 December 2012, we elected his successor and decided on the other changes required as a result of his leaving the Board. We also addressed a proposal to adjust the remuneration of the Supervisory Board and looked at issues involving the personal risk management of members of the Supervisory Board. After a detailed consultation, the Supervisory Board adopted changes in the remuneration system for the Board of Management with effect from 1 January 2013 and in that Board’s remuneration as from 2013. We also decided on the assessment bases for the 2013 financial objectives for annual and multi­ year remuneration. On the basis of the report by the Group’s Chief Risk Officer (CRO) on the Group’s risk situation and risk­bearing capacity, we discussed the Group’s risk strategy with him at length. In connection with the Group planning for 2013–2015 presented by the Board of Management, we queried deviations in actual business performance from the planning for the year under review. Finally, we were given a presentation that enabled us to obtain a picture of the status and development of ERGO International.
The Personnel Committee held six meetings in the period under review. At the begin­ ning of the year, it prepared the proposals to be submitted to the full Supervisory Board regarding the individual variable remuneration objectives for the members of the Board of Management in 2012. In addition, it agreed to propose to the Supervisory Board that the contracts of two members of the Board of Management, including the Chairman, be extended. Also on the agenda was the preparation of the proposals for the full Supervisory Board to adjust the pension scheme to take account of the altered statu­ tory age limits. The Committee discussed the proposals to be submitted to the full Supervisory Board for evaluation of the annual performance for 2011 with regard to the individual and financial objectives of the members of the Board of Management and their bonus payments. At the same time, it decided on the proposal to the full Super­ visory Board for evaluation of the degree to which objectives had been achieved under the Mid­Term Incentive Plan 2009–2011. The committee obtained extensive reports on the fringe benefits and remuneration in kind for the Board of Management as disclosed in the 2011 Annual Report. It also closely considered information on the succession planning process for members of the Board of Management and prepared the proposal for altering the distribution of responsibilities on the Board of Management. At various meetings, the committee approved changes in the memberships of supervisory and advisory boards and comparable offices held by members of the Board of Manage­ ment. The members of the committee obtained detailed information and intensively discussed changes in the remuneration system for the Board of Management with effect from 1 January 2013, prior to recommending the relevant proposal to the full Supervisory Board for decision. At the end of the reporting period, the committee con­ sidered the proposal to be submitted to the full Supervisory Board regarding the Board of Management’s remuneration from 2013 onwards. It also prepared submissions to the full Supervisory Board on the weightings of the individual target categories and measurement bases for the financial objectives in connection with the variable remu­ neration for 2013.
The Standing Committee held four meetings, each of which primarily served to pre­ pare meetings of the full Supervisory Board. Substantial attention was given to cor­ porate governance topics. Thus, the Standing Committee decided to review the efficiency of the Supervisory Board’s work in the year under review on the basis of an extensive questionnaire. After evaluating the responses to this survey, it discussed the results and agreed on a number of measures for improvement, which were presented to the full Supervisory Board by the Chairman. At one meeting, the committee also took delivery of a report on expenditure for donations and sponsoring in 2011. It was regu­ larly briefed on the current status of the share register.
Details of the tasks of the individ­ ual committees and their com­
position can be obtained from the corporate governance statement and our website at www. munichre.com/supervisory­board
In the past financial year, the Audit Committee again concerned itself with the impact of the continuing sovereign debt and banking crisis, especially on Munich Re’s asset man­ agement. The committee monitored the Group’s risk situation: alongside quarterly writ­ ten reports, it had the opportunity at three meetings to obtain information in person from the CRO, with whom the members of the Audit Committee gave detailed consideration to developments in risk management and the risk strategy. The CRO also provided a detailed insight into the internal control system and the status of its implementation in the Group. The committee additionally requested a report on the main innovations and adjustments of the core elements of the Group’s risk model. Besides this, the Audit Com­ mittee took a fundamental look at the form and content of the reporting.
It reviewed and monitored the auditor’s independence. In this connection, the commit­ tee obtained reports from the auditor on the latter’s auditing and non­audit­related services. Likewise, the Audit Committee prepared for the full Supervisory Board the appointment of the external auditor for the financial year 2012, determined the main points of the audits, and set the auditor’s fees. Following a resolution by the full Super­ visory Board, the Chairman of the committee commissioned the audit for the financial year 2012 and also commissioned the auditor’s review of the 2012 half­year financial report. The committee specified procedure regarding the choice of auditor and infor­ mation regarding the audit planning. These two changes, as well as the addition of the “Head of the Actuarial Function” to the list of persons reporting to the Audit Commit­ tee, were incorporated in a proposal submitted to the full Supervisory Board to adjust the rules of procedure for the Audit Committee.
In the second half of the year under review, the Nomination Committee devoted itself to considerations regarding the successor to the Chairman of the Supervisory Board and – taking into account the criteria catalogue and the objectives determined by the Supervisory Board for its composition – suitable candidates to fill the ensuing vacancy on the Board. It reached agreement that Professor Dr. Dr. Ann­Kristin Achleitner, Scien­ tific Director of the Center for Entrepreneurial and Financial Studies (CEFS) at the Technical University of Munich, be proposed as a candidate to the shareholders. At the suggestion of the committee and with the consent of the shareholders’ representatives, the Board of Management applied for the appointment of Professor Achleitner by the Registration Court. Under item 5.4.3 of the German Corporate Governance Code, this appointment is limited until the next Annual General Meeting. The Supervisory Board is proposing that she be elected by the 2013 Annual General Meeting for the remaining term of office.
The Conference Committee as per item 7.5 of the rules of procedure for the Super­ visory Board did not need to convene in the financial year ended.
Corporate governance and declaration of conformity The Supervisory Board closely considered the changes to the German Corporate Governance Code adopted in the year under review, particularly the topic of Super­ visory Board members’ independence, and added this criterion to the objectives for the future composition of the Board already decided on in 2010.
The Standing Committee informed the full Supervisory Board about the outcome of the efficiency review. On the basis of the responses to the survey, the Supervisory Board concluded that the Board of Management’s reporting and the work of the Super­ visory Board are appropriate and efficient.
Nearly all the members of the Supervisory Board took advantage of the internal infor­ mation event offered again in 2012, which this time dealt with the topics of reinsurance, accounting and – quite explicitly – the relevance of the interest­rate level in primary insurance and reinsurance.
Changes on the Supervisory Board The Chairman of the Supervisory Board, Dr. Hans­Jürgen Schinzler, retired from the Company’s Supervisory Board at the end of the year under review. We wish to thank Dr. Schinzler for his great commitment in responsibly and prudently chairing our Board over the past eight years. He was a very experienced counsellor to the Board of Man­ agement, of which he himself had been a member for many years, ten of these as Chairman. Dr. Schinzler played a substantial role in shaping Munich Re’s development over a long period, for which he deserves great gratitude and recognition. As a tribute to his achievements, the Supervisory Board has appointed him Honorary Chairman.
Company and Group financial statements for 2012 KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungs­ gesellschaft Steuerberatungsgesellschaft duly audited the Company and Group man­ agement reports and financial statements as at 31 December 2012 and gave them an unqualified auditor’s opinion. The respective reports and the Board of Management’s proposal for appropriation of the net retained profits were subsequently submitted directly to the members of the Supervisory Board. At its meeting on 4 February 2013, the Audit Committee had the opportunity to confer in detail about the preliminary year­ end figures as at 31 December 2012. On 10 March 2013, it prepared the Supervisory Board’s resolution on the adoption of the Company financial statements and the approval of the Group financial statements. To this end, the Audit Committee examined the Company and Group financial statements, the management reports and the Board of Management’s proposal for appropriation of the net retained profits. It discussed these at length with the auditor present at the meeting and gave detailed consideration to the auditor’s reports. On the following day, at the balance sheet meeting, the Chair­ man of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations.
Words of thanks to the Board of Management and employees The Supervisory Board wishes to thank all the members of the Board of Management and staff for their outstanding work, which resulted in a very gratifying business performance in 2012.
Further information on corporate governance in general is available in the joint report of the Board of
Corporate governance stands for a form of responsible company management and control geared to long-term creation of value. One of our aims in this context is to foster the confidence of investors, clients, employees and the general public. Also of great significance for us are efficient practices on the Board of Management and Supervisory Board, good collaboration between these bodies and with the Group’s staff, and open and transparent corporate communications.
Continually improving corporate governance is an important principle underlying our business activities.
As a result of its international organisation, Munich Re has to consider corporate governance rules in different national legal systems. We observe not only the respective national standards but also internationally recognised best practices. In Germany, where Munich Reinsurance Company has its headquarters, corporate governance rules are laid down above all in the German Stock Companies Act and the German Corporate Governance Code. The German Insurance Control Act standardises specific requirements for the business organisation of insurance companies and the “fit and proper” criteria for their Board members. It also provides particular rules for insurance com panies’ remuneration systems. These rules formed the basis for the regulation on remuneration schemes in the insurance sector issued by the German Federal Finance Ministry.
Also applicable to Munich Reinsurance Company is the German Act on the Co­Deter­ mination of Employees in Cross­Border Mergers (MgVG) and a co­determination agreement.
Munich Reinsurance Company is a joint­stock company (“Aktiengesellschaft”) within the meaning of the German Stock Companies Act. It has three governing bodies: the Board of Management, the Supervisory Board and the Annual General Meeting. Their functions and powers are derived from the Act, the Articles of Association and the co­ determination agreement. The principle of parity co­determination on the Supervisory Board has been upheld in the co­determination agreement, and strengthened by taking into account staff employed in the rest of Europe.
Pursuant to Article 16 of the Articles of Association, the Board of Management must comprise a minimum of two persons; beyond this, the number of members is deter­ mined by the Supervisory Board. Munich Reinsurance Company’s Board of Manage­ ment has nine members.
Board of Management and Supervisory Board cooperate closely to the benefit of the Company. The Board of Management reports regularly to the Supervisory Board about all questions relevant to the Company. Certain types of transaction require the consent of the Supervisory Board.
An overview of the composition of the Board of Management and the distribution of responsibilities can be found on page 42
Information on the Board of Management’s work is available in the corporate governance statement
— In selecting candidates for membership, the Supervisory Board should pay due regard to diversity, especially in terms of age, internationality and gender. By the beginning of the next term of office (scheduled for 2014), at least 20% of the members should be female, with this figure increasing to at least 30% by the start of the following term of office (scheduled for 2019).
The aforementioned objectives apply to the Supervisory Board as a whole. Shareholder and employee representatives will each contribute their share to meeting them, and the bodies responsible under the co­determination agreement for election proposals to the European Electoral Board are requested to take due consideration of the objectives within the framework of the current rules.
In the period under review, as in the previous reporting period, four members of the Supervisory Board were women: two representatives of the employees and two share­ holder representatives. As from 3 January 2013, the Supervisory Board will have five female members, three representatives of the shareholders and two employee repre­ sentatives.
The regular responsibilities of the Annual General Meeting include reaching a reso­ lution on the appropriation of profits and approving the actions of the Board of Man­ agement and Supervisory Board. Besides this, the Annual General Meeting elects the shareholder representatives on the Supervisory Board and, in particular, votes on changes to the Articles of Association and certain capital measures. Also, certain Com­ pany contracts require the approval of the Annual General Meeting to become effective.
At the Company’s Annual General Meeting, the principle of “one share, one vote” applies. With the aim of making it easier for shareholders to take part and exercise their rights, the Company provides the option of online participation and a postal vote (also in electronic form).
Risk report 115 Risk governance and risk management system 115 Economic risk capital 124 Available financial resources 129 Selected risk complexes 131 Summary 136
Prospects 140 Comparison of the prospects for 2012 with the result achieved 140 Outlook for 2013 142
Domination and profit-transfer agreements are in place with many Group companies, especially between ERGO Versicherungsgruppe AG and its subsidiaries.
Munich Health operates on a global basis in reinsurance and exploits business opportunities in the field of health primary insurance outside Germany in selected growth markets such as the Gulf region, India and the USA.
Munich Reinsurance Company and ERGO Versicherungsgruppe AG are under unified control within the meaning of the German Stock Companies Act. The relevant statutory regulations, domination agreements and Group directives govern the distribution of responsibilities and competences for key decisions between Group management and ERGO.
— ERGO continues expansion in the growth region of Asia — Munich Health combines health primary insurance outside Germany and health reinsurance worldwide
Munich Re, Seoul3 Munich Re, Auckland Munich Reinsurance Company of Africa Ltd., Johannesburg Munich Re, Singapore3
North America American Family Home Insurance Company, Jacksonville, Florida American Modern Home Insurance Company, Amelia, Ohio American Modern Insurance Company of Florida, Inc., Jacksonville, Florida American Modern Insurance Group, Inc., Amelia, Ohio American Modern Select Insurance Company, Amelia, Ohio American Modern Surplus Lines Insurance Company, Amelia, Ohio American Southern Home Insurance Company, Jacksonville, Florida
In international business, ERGO has been pursuing its expansionary path in the growth region of Asia. In spring 2012, ERGO launched a joint venture for selling life insurance products with a local partner in the Chinese province of Shandong. ERGO China Life Insurance Company Ltd. is scheduled to commence operations in 2013 once approval has been granted by the authorities. A joint life insurance venture with the Avantha Group was launched in India in November 2012. We already provide property insurances in India through the joint-venture company HDFC ERGO. In the difficult South Korean market, ERGO has sold the property insurer ERGO Daum Direct General Insurance Co. Ltd. (ERGO Daum).
Munich Health The global health market is one of the fastest-growing sectors of the economy. This applies to healthcare and insurance alike. In order to maximise the opportunities involved, Munich Re has combined its health reinsurance worldwide and health primary insurance outside Germany under the brand of Munich Health. This covers large stretches of the healthcare-sector value chain and has been shown as a separate segment since 2010.
The growth dynamics of the healthcare market and Munich Health’s good positioning provide the segment with access to new markets. In 2012, Munich Health expanded its primary insurance activities with Daman Health Insurance – Qatar LLC, Doha, Qatar, which will operate in the young market of the MEA (Middle East and Africa) region with its very promising growth prospects. Munich Health also intends to tap into local primary insurance business in Saudi Arabia via the Saudi Enaya Cooperative Insurance Company, established as a joint venture.
Property-casualty D.A.S. Deutscher Automobil Schutz Allgemeine RechtsschutzVersicherungs -Aktiengesellschaft, Munich DAS Legal Expenses Insurance Company Limited, Bristol DAS Nederlandse Rechtsbijstand Verzekeringmaatschappij N.V., Amsterdam D.A.S. Österreichische Allgemeine Rechtsschutz-VersicherungsAktiengesellschaft, Vienna D.A.S. Société anonyme belge d’assurances de Protection Juridique, Brussels ERGO Assicurazioni S.p.A., Milan ERGO Direkt Versicherung AG, Fürth ERGO General Insurance Company S.A., Athens ERGO Russ Versicherung AG, St. Petersburg ERGO SIGORTA A.S., Istanbul ERGO Versicherung AG, Düsseldorf MTU Moje Towarzystwo Ubezpieczen S. A., Sopot Sopockie Towarzystwo Ubezpieczen Ergo Hestia Spolka Akcyjna, Sopot 1 A detailed list of shareholdings can be found on page 276 ff. in the notes to the consolidated financial statements. 2 Only subsidiaries with premium volume exceeding €50m are listed.
1 A detailed list of shareholdings can be found on page 276 ff. in the notes to the consolidated financial statements. Only Group companies with equity capital generally exceeding €5m are listed.
Apollo Munich Health Insurance Co. Ltd., Hyderabad Daman – National Health Insurance Company, Abu Dhabi Daman Health Insurance – Qatar LLC, Doha, Qatar DKV Belgium S.A., Brussels DKV Luxembourg S.A., Luxembourg DKV Seguros y Reaseguros, Sociedad Anónima Española, Saragossa ERGO Generales Seguros y Reaseguros, S.A., Madrid ERGO Vida Seguros y Reaseguros, Sociedad Anónima Española, Saragossa Globality S.A., Luxembourg Marina Salud S.A., Alicante MedNet Holding GmbH, Munich Munich Health Holding AG, Munich Munich Health North America, Inc., Wilmington, Delaware Munich Re Stop Loss, Inc., Wilmington, Delaware Unión Médica la Fuencisla, S.A., Compañía de Seguros, Saragossa Windsor Health Group, Inc., Brentwood, Tennessee
— We clearly assign responsibilities and make the levers for adding value transparent for both management and staff.
We calculate the value we have created at Group level in a given period – largely in harmony with the future Solvency II supervisory regime – using economic earnings, although we are still working on improving and refining the methodology and data bases. The starting point in determining economic earnings is the change in economic capital during a given period. This is adjusted for capital inflows and outflows, including dividend payouts.
Information on how the economic capital is calculated is provided on page 129 ff.
RORAC is defined as follows: The numerator in the formula comprises the published IFRS net income after deduction of risk-free interest after tax (interest rate x [1 – tax rate]) generated on capital not subject to risk within the given risk tolerance. The basis for the adjustment is the capital exceeding the necessary risk-based capital, which is referred to as additional available economic equity. This may be necessary in certain cases for rating and solvency purposes, as well as for profitable growth. The additional available economic equity in the system presented here earns a risk-free interest rate because all the risk components of the investments and underwriting are covered with risk-based capital by the internal risk model, and assigned return requirements. If the risk capital exceeds the available economic equity, we set the adjustment item in the RORAC formula to zero.
RORAC is a pragmatic mixture of accounting ratios and economic indicators, which are not mutually consistent. Only when the requirements of Solvency II for capital resources and performance calculation have been reliably established do we intend to gear our targets to these performance measures. Irrespective of the risk-based perspectives we emphasise, we always aspire to meet the high, but fair, expectations of our investors with regard to the return on total capital placed at our disposal (return on equity).
When interpreting the combined ratio, the particular circumstances of the class of business in question have to be taken into account. The composition of the portfolio, for example, is of great significance. The following factors (among others) are important: — The more the claims burden fluctuates over time, the greater the risk is, and so the premiums needed to cover the risk must be higher. This means that the loss ratios in good years are low, as are the average loss ratios that provide the reinsurer with an adequate return for assuming the risk. This is particularly true in the case of natural catastrophes, which may occur rarely, but are often severe when they do.
This is why the combined ratio is not our only target. This figure is also only of limited suitability for comparing the financial performance of competitors owing to differing calculation methods and portfolio mixes. Generally, however, we aim to keep the combined ratio as low as possible by means of good underwriting and claims management.
We compare the result adjusted in this way with the requisite cost of equity. A significant factor in calculating the cost of equity is the risk-based capital, which we determine using our internal model. For property-casualty business and health reinsurance, value is added to the extent that, measured on the basis of one calendar year, the adjusted result exceeds the cost of equity.
The change in MCEV within one year, adjusted for effects of exchange-rate fluctuations, acquisition or sale of companies, dividends and capital injections, is shown by us as the total embedded value earnings. Additional adjustments to eliminate the influences of changes in fiscal and capital market parameters result in the operating embedded value earnings, which are a measure of the operative business performance for one year. This performance indicator can be broken down into parameters including “change in value of new business” and “value of in-force business”.
A detailed presentation of MCEV is provided at www.munichre.com/ embeddedvalue/en 1 © Stichting CFO Forum Foundation 2008.
The main focus of Munich Re’s investment strategy is asset-liability management (ALM), which is a fundamental pillar of our value-based management system, and in which we take into account key characteristics of underwriting and other liabilities in structuring our investment portfolio and measure investment risks not only in absolute terms but also in relation to changes of values in our liabilities. With ALM, we aim to ensure that economic factors influence the value of our investments and that of our technical provisions and liabilities in the same way, which reduces our vulnerability to the effect of capital market fluctuations and stabilises our equity. For this purpose, we mirror important features of the liabilities, such as maturity patterns, currency structures and inflation sensitivities, on the assets side of the balance sheet by acquiring investments with similar characteristics if possible. In terms of currency positioning, exchange-rate fluctuations thus affect assets and liabilities in equal measure. Currency translation losses on assets are largely offset economically by currency translation gains on underwriting liabilities, although this relationship is not always adequately reflected in the financial statements owing to economically imperfect accounting regulations. In this approach, any deviations from the structure of our liabilities are made consciously, taking due account of our risk tolerance and the risk spreads achievable. To a limited extent, we also align our investment portfolio in such a way that it increases in value in line with rising inflation rates. To achieve this, we invest in inflation-sensitive asset classes such as inflation-linked bonds and inflation-linked swaps, as well as in real assets.
To configure our economic ALM as effectively as possible, we also use derivative financial instruments to hedge against fluctuations on the interest-rate, equity and currency markets. Under IFRS accounting, we recognise these in profit or loss, i.e. as income or expense in our income statement. However, such recognition in the income statement is not usually possible with regard to the related underlying transactions themselves. Despite our economically well-balanced underwriting and investment portfolios, accounting inconsistencies of this kind and other differences between the economic and balance-sheet perspectives can give rise to considerable fluctuations in our IFRS investment, currency and consolidated result, particularly in times of greater volatility on the capital markets.
We mirror important features of our underwriting liabilities on the assets side of the balance sheet
Dr. jur. Jörg Schneider Group Reporting Group Controlling Corporate Finance M&A Integrated Risk Management Group Legal Group Taxation Investor and Rating Agency Relations
Dr. oec. publ. Wolfgang Strassl (Board member responsible for personnel and welfare matters, within the meaning of Section 33 of the German Co-Determination Act) HealthCare Human Resources
Dina Bösch Member since 22 April 2009 Member of the National Executive Board of ver.di (trades union)
Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann Member since 22 July 1999, last re-elected 22 April 2009 President of acatech – German Academy of Science and Engineering
Andrés Ruiz Feger Member since 22 April 2009 Employee of Munich Re, Sucursal en España
Standing Committee Dr. jur. Hans-Jürgen Schinzler (Chairman until 31 December 2012) Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (Chairman since 1 January 2013) Herbert Bach Hans Peter Claußen Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann (since 1 January 2013) Wolfgang Mayrhuber
Personnel Committee Dr. jur. Hans-Jürgen Schinzler (Chairman until 31 December 2012) Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (Chairman since 1 January 2013) Herbert Bach Wolfgang Mayrhuber (since 1 January 2013)
Audit Committee Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann (Chairman) Christian Fuhrmann Marco Nörenberg Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (since 1 January 2013) Anton van Rossum Dr. jur. Hans-Jürgen Schinzler (until 31 December 2012)
Nomination Committee Dr. jur. Hans-Jürgen Schinzler (Chairman until 31 December 2012) Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (Chairman since 1 January 2013) Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann Peter Löscher (since 1 January 2013)
Conference Committee Dr. jur. Hans-Jürgen Schinzler (Chairman until 31 December 2012) Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (Chairman since 1 January 2013) Herbert Bach Hans Peter Claußen Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann (since 1 January 2013)
Georg Daschner – – Dr. rer. nat. Torsten Jeworrek – –
Dr. rer. pol. Peter Röder EXTREMUS Versicherungs-AG Munich Re America Corp., USA2 (Chairman) Munich Reinsurance America, Inc., USA2 (Chairman)
Munich Re Group Annual Report 2012 2 Own group company within the meaning of Section 18 of the German Stock Companies Act.
Dr. Ing. e. h. Dipl.-Ing. Bernd Pischetsrieder (Chairman since 1 January 2013)
Prof. Dr. rer. nat. Peter Gruss Siemens AG Actelion Ltd., Switzerland Prof. Dr. rer. nat. Dr.-Ing. e. h. Henning Kagermann
Wolfgang Mayrhuber Bayerische Motoren-Werke AG Infineon Technologies AG (Chairman) Lufthansa-Technik AG
In accordance with item 4 of the German Corporate Governance Code, the remuneration system for the Board of Management is determined and regularly reviewed by the full Supervisory Board. The Personnel Committee of the Supervisory Board, comprising the Chairman of the Supervisory Board, one shareholder representative and one employee representative, prepares the resolutions for the full Supervisory Board.
Fixed components Basic remuneration The fixed annual basic remuneration is paid in the form of a monthly salary.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits are granted according to function, and are commensurate with market conditions (DAX 30 companies). Income tax on the benefits in question is paid individually for each member of the Board of Management, with the Company bearing the amount due. Remuneration in kind and fringe benefits are valued on the basis of expenditure for disclosure in the annual report.
Group objective Company objective Divisional objectives Individual objectives 0–200% (fully achieved = 100%)
In the second year, on condition that 50% of the net amount paid out is invested by the Board member in Munich Re shares that must be held for at least a fouryear period 70% multi-year performance (for 100% achievement of objectives)
Achievement of objectives is measured at the end of the performance terms, there being no adjustment of the targets during these periods. Payouts are made at the end of the one- and three-year periods under consideration. With a view to promoting a management approach that takes due account of the Company’s long-term interests, the members of the Board of Management are obliged to invest 50% and 25% of the paid-out variable remuneration in Munich Reinsurance Company shares.
Variable remuneration based on annual performance Annual performance targets for the variable remuneration component geared to annual performance are set on the basis of divisional results and individual objectives as well as the Company result (property-casualty reinsurance) and Group result. 30% of the overall target amount for variable remuneration can be earned in the event of full achievement (= 100%) of the objectives.
The variable remuneration for annual performance is reviewed and decided on by the full Supervisory Board and then paid out in the year after the one-year period under consideration. Payment is effected on condition that 50% of the net payout amount is invested in Munich Reinsurance Company shares that must be held for at least a fouryear period.
Details of the assessment bases for the multi-year performance can be obtained from the following table: The variable remuneration for the multi-year performance is reviewed and decided on by the full Supervisory Board and then paid out in the year after the three-year period under consideration. Payment is effected on condition that 25% of the net payout amount is invested in Munich Reinsurance Company shares that must be held for at least a two-year period.
Whether the stock appreciation rights can be exercised and, if so, when, is not certain. The exercising and proceeds depend on the development of the share price and on fulfilment of the exercise conditions. The Company’s future obligations arising from the long-term incentive plans are partially hedged in such a way that the expenses resulting from a growth in value of the stock appreciation rights are neutralised as far as possible by an increase in the value of the share portfolio. The amount of income from the stock appreciation rights is limited. Up to now, it has only been possible to exercise stock appreciation rights under the plans set up in 1999, 2003 to 2006, and 2009.
The level of target overall direct remuneration (= basic remuneration + variable remuneration on the basis of 100% achievement of objectives) for the individual members of the Board of Management is set by the full Supervisory Board, acting on recommendations from the Supervisory Board’s Personnel Committee. Criteria include the respective Board member’s duties, the Board member’s personal perform ance, the performance of the Board as a whole and the financial situation, performance and future prospects of Munich Re. The consideration of what is appropriate remuner ation takes into account data from peer-group companies and the relation to remuner ation of other Munich Reinsurance Company employees. New Board members are generally placed at a level which allows sufficient potential for development of the remuneration in the first three years.
Continued payment of remuneration in the case of incapacity to work In the case of temporary incapacity to work due to illness or for other cause beyond the Board member’s control, the remuneration is paid until the end of the contract of employment. The Company may terminate the contract prematurely if the Board
Further information on the Long-Term Incentive Plan can be found on page 267 ff. in the notes to the consolidated financial statements
Munich Re Group Annual Report 2012 member is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him (permanent incapacity to work). In this event, the Board member will receive a disability pension.
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 remuneration computation. Exempted from this is remuneration for memberships explicitly recognised by the Company as private.
Pensions Up to and including 2008, the members of the Board of Management were members of a defined benefit plan, providing for payment of a fixed pension amount depending on their basic remuneration and years of service on the Board. The pension level started at 30% and could reach a maximum of 60% of annual basic remuneration.
Beginning in 2009, pension plans for Board members were changed to a defined contribution system. The main aim of this change was the fullest possible outsourcing of all pension-specific risks from the Company’s balance sheet. This major risk transfer was achieved by financing increases in entitlements exclusively by paying premiums into insurance policies concluded to cover these benefit obligations. This means the Company is no longer liable for the pension benefits, as these are covered by the aforementioned insurance policies. The longevity risk, the biometric risks of premature occurrence of a pensionable event (e.g. disability or death of a member of the Board during active service), and the capital market risk were thus transferred to the insurer and the individual Board members.
Board members who had already reached the age of 55 at the conversion date were not transferred to a defined contribution system and remain members of the previous system ’s defined benefit plan.
Owing to the increase from 25% to 30% in the share of basic remuneration in overall remuneration as at 1 January 2010, there was a change in the assessment basis for the Board members’ pensions. An unintended rise in the pensions would otherwise have been the consequence. From 1 January 2010 onwards, the defined benefits are fixed on the basis of “pensionable basic remuneration”, which corresponds to 25% of the target overall direct remuneration. In the case of the defined contribution plan, the rate is fixed on the basis of the target overall direct remuneration.
— Under the defined contribution plan for new members as from 2009: Annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum
Disability pension Board members are entitled to a disability pension if, due to permanent incapacity to work, their contract ends by mutual agreement, is terminated by the Company, or their appointment is not extended or revoked. Permanent incapacity to work means that the Board Member is incapacitated for a period of longer than 12 months and it is probable that he will be permanently unable to fully perform the duties conferred on him.
— Under the defined contribution plan for new members as from 2009: 80% of the insured occupational pension up to the age of 59, with subsequent occupational pension
— Under the defined contribution plan for new members as from 2009: Annuity based on the policy reserve built up under the external insurance or payment of the policy reserve as a lump sum at the date the pension benefit is claimed
Vested benefits under the German Employers’ Retirement Benefits Act: Board members have vested benefits under the German Employers’ Retirement Benefits Act if they leave the Company before reaching the age of 60 or 62 and the pension commitment has existed for at least five years before.
— For the share from the defined benefit plan: Defined benefit of between 30% and 60% of the pensionable basic remuneration, reduced by 2% for each year or part thereof short of the Board member’s 60th birthday
— Orphan’s pension amounting to 20% of the defined benefit or insured occupational pension per orphan.
— Doubling of the orphan’s pension if no widow(er)’s pension or pension for registered civil partner is payable.
The benefits for surviving dependants are not payable for widow(er)s or registered civil partners if the marriage or registered civil partnership was not contracted until a point in time when the Board Member was already drawing the occupational pension, and for orphans if they were not born until after such a point in time. The entitlement for orphans ceases on their reaching the age of 18 (or 20 for orphans of Board members transferred from the old system to the new). For orphans who are in full-time education or vocational training, doing military or civilian service, or are unable to support themselves owing to a physical or mental disability, the entitlement is extended until they reach the age of 25 (or 27 for orphans of Board members transferred from the old system to the new). The entitlement to a surviving dependant’s pension under the defined contribution plan ceases if the Board member draws the pension in the form of a lump sum. Pensions for surviving dependants cease upon their death.
Total remuneration of the Board of Management The basis for reporting the remuneration of Board members is German Accounting Standard No. 17 (DRS 17, revised 2010), according to which the amount shown as remuneration for annual performance is the provision established for that remuneration, since the performance on which the remuneration is based has been completed by the balance sheet date and the requisite Board resolution is already foreseeable. Under DRS 17, remuneration for multi-year performance is not recognised until the year of payment. The members of Munich Reinsurance Company’s Board of Management received remuneration totalling €13.3m (9.8m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. Total remuneration thus shows an increase of €3.5m compared with the previous year. The main reason for this is that, according to current estimates, the overall achievement of objectives for the annual performance in 2012 was significantly higher than in the previous year.
The amounts shown for the annual performance 2012 comprise the respective provision for 2012 and the relevant extra expenditure for 2011.
Remuner- Basic ation in Annual Financial remuner- kind/fringe perform- Name year ation benefits ance1 Total
The following table shows the amounts payable for the variable remuneration.
Pension entitlements Personnel expenses of €5.0m (4.5m) were incurred in the financial year 2012 to finance the pension entitlements for active members of the Board of Management. Of these, €1.5m was apportionable to defined benefit plans and €3.5m to defined contribution plans. As a consequence of the risk transfer to an external insurer under the defined contribution system, the visible pension costs since 2009 are noticeably higher. The Company accepts this increase in order to avoid higher costs in future and to eliminate long-term pension-specific risks. The following defined benefits, present values, contribution rates and personnel expenses result for the individual members of the Board of Management: Amounts payable for the variable remuneration of the individual Board members in the event of full achievement of objectives (= 100%) as per DRS 17 (revised 2010), corridor 0–200%
2 The remuneration set for multi-year performance for 2012 is payable in 2015, that for 2013 in 2016. 3 The information on the calculation bases and parameters on page 48 f. for the amounts set for 2012 also apply to the amounts set for 2013, with the exception of the changes with effect from 1 January 2013, described on page 59.
Georg Daschner 6 2012 – – – – 2011 – – – –
1 In the case of Board members transferred from the old system to the new, the amount corresponds to the value of the vested pension at 31 December 2008; in the case of Mr. Daschner, it corresponds to the defined benefit at 31 December of the reporting year.
6 No transfer to defined contribution system, as Board member had already reached 55 at the conversion date. Entitled to an occupational pension in the event of pre mature or regular termination of employment.
Munich Re Group Annual Report 2012 to be given to the overall performance of individual members of the Board of Management and the Board as a whole in the period under review, including performance elements for which no concrete objectives have been set. This component is to be applied by the Supervisory Board taking into account Section 87 of the German Stock Companies Act and the German Corporate Governance Code.
The individual variable components are granted – subject to different weightings – at all management levels. For the first management level below the Board of Management, the share of aggregate variable remuneration is more than 50% of total remuneration (fixed remuneration plus all variable components). Proceeding down the management hierarchy, this percentage decreases successively, making up around one-third at the lowest management level. There is a well-balanced combination of short- and longterm components. At the first management level below the Board of Management, the Mid-Term Incentive Plan makes up around 25% of total remuneration or more than 50% of overall variable remuneration, so that a longer-term incentive system is provided for. No guaranteed variable remuneration components are granted.
Members of the Supervisory Board committees receive an additional 50% of their fixed remuneration, with the Chairs of the committees receiving 100%. This takes account of the substantial workload involved.
The total annual remuneration of each Supervisory Board member is limited to three times the fixed remuneration, thus ensuring that the overall remuneration of individual Supervisory Board members remains appropriate even if further committees are set up.
Result- related remuneration with Result- long-term Fixed related incentive remuneration remuneration function Financial For committee Name year Annual work2 Annual Annual Total 1 Plus turnover tax in each case, in accordance with Article 15 para. 6 of the Articles of Association. 2 In the case of members of the Audit Committee and/or Nomination Committee, the amount includes attendance fees in accordance with
Munich Reinsurance Company is obliged to publish information of this kind on its website without delay.
The total number of Munich Reinsurance Company shares and financial instruments based on these held by all members of the Board of Management and Supervisory Board amounts to less than 1% of the shares issued by the Company.
Result- based Fixed remuneration remuneration For committee Name Financial year Annual2 work2 Annual Total 1 Plus turnover tax in each case, in accordance with the relevant provisions of the respective Group companies’ articles of association. 2 Including attendance fees in each case insofar as provided for under the relevant provisions of the articles of association.
The year 2012 was marked by the continuing sovereign debt and banking crisis in the eurozone and a further cooling of global economic growth. Monetary policy in the major industrialised countries remained expansive, yields on US and German government bonds fell further, and inflation rates stayed moderate worldwide, whilst the stock markets advanced.
Global economic growth was again only moderate. This was mainly due to the stillsmouldering sovereign debt and banking crisis in the eurozone, which recurrently unsettled the financial markets and the real economy. The eurozone as a whole had already slid into a recession in late 2011 from which it was unable to free itself during the period under review. Budget consolidation measures curbed growth, and at the same time the rate of unemployment continued to rise, reaching a record level with an annual average of 11.4%. Even the economy in Germany, which had seemed barely affected by the crisis at the start of the year, flagged in the second half of the year.
Chinese economic growth slowed considerably, due in part to receding export demand. The performance of the Japanese economy also weakened over the course of the year. The impetus provided by reconstruction activ ities following the earthquake in 2011 dried up and the lower export demand from Europe and China left its mark. Meanwhile, the moderate economic growth of the USA buttressed the global economy. Initial indications of improvement were apparent on the housing market, and private consumption also rose. However, the rate of unemployment fell only slightly, averaging 8.1% for the year. This led the Federal Reserve to continue its expansionary monetary policy.
1 National economic output weighted for aggregation with purchasing power parities. Source: International Monetary Fund
Investors’ confidence returned in the second half of the year, primarily due to the ECB announcement that under certain circumstances it would buy up unlimited shortmaturity government bonds of crisis-afflicted countries on the secondary market. Yields on German and US government bonds consequently rose somewhat, but were still below their beginning-of-the-year level at the close of 2012, and continued to display a negative real interest rate, i.e. remained below inflation rates. The euro regained ground against the US dollar, Japanese yen and pound sterling in the second half of the year. The stock markets in the USA, Japan, Germany and even the eurozone showed clear improvements at year-end 2012.
Adjusted for inflation, global non-life premium income grew more strongly in 2012 than in the previous years. Although insurance demand in Europe was curbed by the weakness of the economy, premium growth was sustained by a slight increase in prices in property-casualty insurance and by further burgeoning demand for insurance cover in many emerging markets. Global premium income in life insurance showed a slight fall after adjustment for inflation. The main reasons for this were the shrinking premium volume in Europe and weak growth in the USA and China.
The continuing low-interest-rate environment poses considerable challenges for insurers owing to the decline in investment returns. Life insurers needing to meet interestrate guarantees are particularly affected.
Meanwhile, the shareholders’ equity of most insurers and reinsurers grew in 2012 due in part to low interest rates, because current accounting practice resulted in higher values for fixed-interest investments, whereas changes in market interest rates have scarcely influenced the valuation of liabilities. This apparent capital strengthening had a curtailing effect on demand for reinsurance cover, yet stimulated its supply. Whilst in
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the first half-year reinsurance prices had risen significantly, owing partially to the exceptional accumulation of major losses in the previous year, the average price increases realised in the 1 July renewals were already only marginal. In the renewals at 1 January 2013, prices remained almost the same on average.
According to provisional estimates, inflation-adjusted premium income in the German insurance industry stagnated in 2012. While premiums in private health insurance and property-casualty insurance increased significantly, those in life insurance decreased after adjustment for inflation. This was due to a further decline in single-premium business in life insurance, which had enjoyed exceptionally strong growth in 2009 and 2010.
— Increase of 5.1% in gross premium income — Below-average expenditure for major losses, but performance also good when adjusted to eliminate major losses — Good investment result — Return on risk-adjusted capital (RORAC) of 13.2% after tax — Dividend increase to €7.00 (6.25) per share planned
We want our shareholders to participate in last year’s success and will therefore propose to shareholders at the Annual General Meeting payment of a dividend of €7.00 (6.25) per dividend-bearing share.
Given the below-average burden from natural catastrophes, the combined ratio in property-casualty reinsurance was significantly better than in the previous year. The combined ratio in property-casualty primary insurance improved slightly.
Combined ratio 1 Previous-year figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly.
Group premium income 11% (13%) Primary insurance life 11% (12%) Primary insurance health 11% (11%) Primary insurance property-casualty 13% (12%) Munich Health
To improve the quality of advisory services, ERGO intends to harmonise the various advisory and support functions in its sales organisations and reduce the complexity of its sales structures, thereby significantly lowering costs. To this end, five sales organisations are to be merged into two, under the umbrella of a single sales company. As a result, ERGO will achieve cost savings as from 2014, the full volume of which is targeted to total over €160m gross annually as from 2015. For this reorganisation, ERGO made provisions for restructuring costs totalling €258m across all segments in the year under review. These provisions impacted the consolidated result in primary insurance with a total of €128m.
Business performance in life reinsurance was gratifying in 2012. The technical result amounted to €420m (354m) and we were thus able to surpass our target of around €0.4bn. The operating result totalled €719m (629m) and the consolidated result €495m (334m).
Share of gross premiums written in reinsurance1 % 39.5 36.4 33.5 31.2 1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years 2009 and 2010 is thus limited.
The chief reason for these excellent figures was satisfying claims experience overall in our core markets. The performance of disability and long-term care business, which in the previous two years had led to burdens on the result, improved in 2012. The high- volume treaties concluded in recent years also continued to contribute their share to the result.
The investment result was up on the previous year and totalled €913m (883m). We benefited from lower write-downs on equities and a positive result from the disposal of equities and fixed-interest securities. Regular income declined as expected owing to the low interest-rate environment, and we also recorded losses on derivatives.
In the United Kingdom, our branch Munich Re, London (Life) increased its premium volume to €0.9bn (0.8bn). As in prior years, the technical result remained at a very good level. Owing to an oversupply of reinsurance capacity, the pressure on the prices of pure mortality covers was unabated. Our business policy is strictly geared to writing business at risk-commensurate prices. New business production was restrained last year, since the primary insurance market was preparing for the introduction of unisex pricing. For the future, we expect positive impulses for our business to come from this area. It continues to be our strategy to offer our clients added value by expanding our product range, one example being the assumption of longevity risks, which by nature are particularly difficult to assess. We cautiously started writing business in 2011 in this segment to diversify our portfolio even better.
Our subsidiary Munich Reinsurance Company of Australasia Ltd., which writes life reinsurance business in Australia and New Zealand, has recorded strong growth in recent years. Premium income was up to €629m (487m) in 2012. Thanks to our excellent positioning, we can participate in the dynamic development of the primary in surance market. Following the strain on the result in disability insurance in 2011, the technical result returned to a satisfactory level.
— Increase in premium income of 3.0% to €17.1bn, due to currency translation effects — Excellent combined ratio of 91.0% — Good investment result of €2,148m — Outstanding consolidated result totalling €2,561m
We achieved an appreciable improvement in the consolidated result in property- casualty reinsurance to €2,561m compared with the previous year (€169m), which had been heavily affected by major losses. The operating result, which includes the investment and technical result, rose to €3,596m (–250m). Our investment result amounted to €2,148m (1,871m) and the technical result to €2,788m (–813m). These gratifying figures reflect not only slightly below-average costs for major losses, but also an otherwise good business performance. Munich Re’s customary review of reserves resulted in a reduction in the claims provisions for prior years amounting to around €900m for the full year, which is equivalent to 5.5 percentage points of the combined ratio. This positive development involved many underwriting years, in particular 2005–2009, and essentially concerned property, marine and aviation business. Over the year as a whole, the safety margin in the reserves rose slightly despite the reserve releases.
Aggregate losses from natural catastrophes came to €1,284m (4,538m), representing 7.7 (29.4) percentage points of net earned premiums. In particular Windstorm Sandy (around €800m), which formed over the Caribbean in October and then moved northwards over Jamaica, Cuba and the Bahamas to the northeastern United States, led to significant losses. On top of this, we were impacted by approximately €160m in claims under crop failure covers due to the persistent drought in large agricultural areas of the USA and by €150m from severe earthquakes in northern Italy. Further sizeable losses were caused by tornadoes at the beginning of March (€68m) and in April (€38m) as well as by Hurricane Isaac (€70m) in the USA in August. Moreover, we raised our claims estimate for the floods in Thailand in 2012 by approximately €80m.
The Europe and Latin America Division writes business in Europe (except Germany), the Caribbean and Central and South America. With regard to the division’s premium income, approximately 80% derives from Europe, of which approximately half is attributable to the United Kingdom. While the focus in the Caribbean and in Central and South America is on fire business, particularly in the area of natural hazards covers, European business is strongly determined by UK motor business.
The combined ratio of 93.6% was better than in the previous year (95.8%), essentially due to the release of loss reserves.
Premium income showed an increase to €3,408m (3,130m), bolstered by increasing commodity prices for agricultural goods and a further expansion of agricultural reinsurance and New Re’s business.
Key figures1 1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accord ingly. Comparability with the years 2009 and 2010 is thus limited.
1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly. Comparability with the years 2009 and 2010 is thus limited.
The severe drought in the USA led to above-average claims expenditure in agricultural reinsurance. Notwithstanding these random drought losses, agricultural reinsurance is part of our attractive core business. The insurance product SystemAgro, for instance, combines the interests of government, farmers and the insurance industry within the framework of a public-private partnership, in the US market. We intend to offer this insurance scheme in other markets and grow our premium further there.
In addition to traditional business with a focus on natural hazards covers, New Re has specialised in structured, made-to-measure reinsurance solutions. As in the previous year, New Re again achieved a positive technical result, benefiting from below-average major losses.
Our Risk Trading Unit places insurance risks on the capital and retrocession markets. We mainly provide the unit’s services to clients but also use them for our own purposes in order to buy retrocession cover on the basis of our defined risk strategy. In two major client transactions, liability capacity with a volume of US$ 585m was placed with investors in 2012.
— Technical result improved to €17m — Substantial increase in investment result to €3,626m — Consolidated result of €164m, with strong international business — Significant improvement in Market Consistent Embedded Value (MCEV) to €260m
In Germany, our overall premium volume totalled €5.4bn (5.9bn). The decline in single- premium income was particularly strong (–24.8%), especially from MaxiZins, our short-term-oriented capitalisation product. We had reduced the interest rates for this product, and our single-premium business was thus €242m lower than in the previous year. New regular-premium business was also down by 3.4%, clearly reflecting the market - wide reduction in the maximum actuarial interest rate to 1.75% as at 1 January 2012. Al together, new business volume was down by 20.7% year on year, or 9.7% in terms of annual premium equivalent (APE) – the customary international performance measure. Gross premiums written in Germany totalled €4.4bn (4.6bn).
At €1.8bn (2.0bn), overall premium income from international business decreased by 8.4% compared with the previous year. We earned significantly lower single- premium income in international business, especially from unit-linked life insurance in Austria. Regular new-business premium rose by 2.7% on the previous year. Overall, new business reduced by 15.1%, or 3.5% measured in terms of APE. Gross premiums written in international business fell to €1.4bn (1.5bn) (–6.3%).
In the life primary insurance segment, the consolidated result for the past financial year rose to €164m (67m). The operating result increased even more strongly, climbing by 263.4% to €367m (101m). The technical result totalled €17m (–59m). These figures were shaped by positive and negative factors: the investment result was appreciably higher at €3,626m than in the previous year (€2,427m), when it had been severely impacted by write-downs of Greek government bonds. An adverse effect derived from the restructuring costs for the sales quality and efficiency programme, impacting the consolidated result in the life insurance segment with €46m.
Persistently low market interest rates present life insurance companies with considerable challenges, mainly because of the long-term interest-rate guarantees they offer their clients. Since 2005, we have been making provision for prolonged phases of low interest rates by making extensive use of derivative financial instruments (“swaptions”) for hedging against the reinvestment risk. This hedging programme benefits our policyholders and shareholders alike. Nevertheless, the low-interest-rate environment has left its mark on our financial reporting. Whilst we post the “additional interest reserve” prescribed by German law only in the German Commercial Code accounts for the respect ive life primary insurance companies, our IFRS consolidated financial statements were adversely impacted by a burden of €16m (34m) from write-downs of deferred acquisition costs, which we made in the respective observation periods mainly owing to the lower future interest income expected. In addition, we increased the assumption regarding the extent to which policyholders in German business will participate in surplus. This had an impact on the valuation differences between the German Commercial Code and IFRS. The result effect in 2012 totalled –€55m.
New business in life insurance 2012 Prev. year Change €m €m % Germany
International Regular premiums 187 182 2.7 Single premiums 607 753 –19.4
Annual premium equivalent1 248 257 –3.5 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
Further details on the sales quality and efficiency programme can be found on page 71
German comprehensive health insurance offers a range of policyholder options, which means that policyholder behaviour can have a significant influence on the MCEV. Examples of these options are that policyholders have the right to change provider and take ageing reserves with them to a certain extent, their cover cannot be cancelled if they fail to pay their premiums, and they may switch to a different policy/plan. This is taken into account in the MCEV model on the basis of current experience, but future client behaviour is difficult to estimate. Discussions regarding the German healthcare system are ongoing, and future legal reforms could naturally lead to significant changes in our MCEV figures.
— Premium income of €5.6bn almost unchanged compared with previous year — Slightly improved combined ratio of 98.7% — Investment result of €376m slightly down on 2011, but better when adjusted for previous-year effect
In the past financial year, premium volume in property-casualty insurance was stable overall year on year. German business grew by 1.6% to €3.3bn (3.2bn). Growth continued to be driven mainly by commercial and industrial insurance (+6.0%). In motor insurance, premium was also up slightly by 0.3%. Personal accident insurance, by contrast, saw a decrease of 1.4% in premium volume, primarily because we concluded fewer personal accident policies with premium return. This product was discontinued as at the end of 2012. Our premium income in German legal protection business was roughly the same as in 2011 (–0.4%).
In international business, two factors had an adverse impact on premium volume. One of these was the sale of companies. In the previous year, we sold our Portuguese subsidiary, whose premium income was still included in the figures for 2011. In the year under review, we sold ERGO Daum in South Korea, thus reacting to the persistently difficult market situation in Korean motor insurance business. This transaction took effect as at 1 October 2012. The other factor was our focus on improved profitability and thus on price increases, which led to pressure on premium income in several international markets. We posted good growth especially in legal protection insurance in the United Kingdom. Our international business showed an overall decline in premium volume of 3.9% to €2.3bn (2.4bn).
The consolidated result in property-casualty insurance totalled –€4m (65m). It was significantly burdened by provisions totalling €76m for the restructuring of our German sales forces, while the technical result improved substantially to €226m (192m). By contrast, there was a decrease in the operating result to €290m (385m), mainly owing to a decline in the investment result to €376m (408m). In the previous year, the sale of a consolidated company with a block of real estate in Singapore had had a positive effect on the result. On the other hand, 2011 had also been impacted by high write-downs of equities and derivatives, which were significantly lower in the year under review.
The combined ratio for 2012 amounted to 98.7% of net earned premiums – a slight improvement on the previous year (99.1%). Paid claims and the change in claims provisions amounted to €3,429m (3,407m) and net operating expenses to €1,802m (1,789m), compared with net earned premiums of €5,301m (5,246m).
— Marked premium growth of 12.3% to €6.7bn — High combined ratio of 100.2% — Satisfactory investment result of €115m — Negative consolidated result of –€92m in the year under review
With the exception of the German health insurers belonging to ERGO, Munich Re’s global healthcare insurance and reinsurance expertise is combined under the Munich Health brand. With over 5,000 staff at 26 locations, we offer our international clients innovative solutions and individual consultancy and services along the value chain of health insurance.
There was a further rise in gross premiums compared with the previous year, with growth of 12.3% to €6.7bn (6.0bn).
Gross premiums written in reinsurance were up by 11.0% to €4.4bn (4.0bn), mainly owing to higher premium income from large-volume treaties and organic growth in North America in particular. In primary insurance, the premium income from our European companies and North America grew by 15.0% to €2.3bn (2.0bn) overall. If exchange rates had remained the same, Munich Health’s gross premiums would have increased by 5.8%.
Key figures1 1 In 2012, our segment reporting was modified and no longer has a consolidation column. The figures for the previous year have been adjusted accordingly.
Investment performance — High portfolio weight of government bonds with very good credit ratings; rise in market values due to decrease in interest-rate level
— Portfolio of fixed-interest securities from southern European states and Ireland reduced significantly
— Positive result from disposals; low write-downs — Investment result of €8.4bn — Return on investment up on previous year at 3.9% despite falling interest rates
Despite the uncertainty over the further course of the euro and debt crisis, the capital markets calmed in the course of 2012, although they were still afflicted by ongoing nervousness. Risk spreads for fixed-interest securities fell, and stock market volatility was also down on the previous year. In the period under review, the EURO STOXX 50 climbed 14%, and the DAX 30 by an impressive 29%. Particularly yields on German and US government bonds and covered bonds continued to fall, hitting a historical low. We also saw lower yields on corporate bonds, as well as shrinking risk spreads.
Reinsurance Primary insurance Munich Health Asset management Total Life Property-casualty Life Health Property-casualty €m 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year Land and buildings, including buildings on third-party land 245 257 1,224 1,187 1,393 1,445 777 796 95 109 30 31 67 64 3,831 3,889
Other securities held to maturity – – – – 7 13 – – – – – – – – 7 13 Other securities available for sale
Designated as at fair value through profit or loss Fixed-interest – – – – 167 161 – – – – – – – – 167 161
Investments for the benefit of life insurance policyholders who bear the investment risk – – – – 5,957 5,092 – – – – 1 1 – – 5,958 5,093
The carrying amount of our investments showed a rise since the beginning of the year, the lower interest-rate level having a positive effect on the market values of fixed- interest securities. Government bonds and covered bonds benefited from this in particular. Furthermore, a greater volume of insurance transactions naturally meant an increase in investments. Besides this, the development of global exchange rates against the euro led to a marginal rise. We had already reduced our portfolio of southern European government bonds and covered bonds significantly in 2011. Through yet more disposals in the current financial year and repeated investments in government bonds of the highest credit standing, we were able to further bolster the security of our investment portfolio.
Our return on investment rose to 3.9% (3.4%). The previous year’s result was burdened primarily by write-downs on Greek government bonds.
Tangible assets in renewable energies 500 267 – 7 500 260 1 Including owner-occupied property.
Carrying Unrealised gains €m Amortised cost amounts Fair values and losses3
At fair value through profit or loss Belgium – – – –
Spain – – – – Other eurozone countries 1 1 1 –
Information on the levels of the fair value hierarchy is provided on page 175 f. in the notes to the consolidated financial statements
At the reporting date, around 90% of the eurozone government bonds and governmentguaranteed securities measured at fair value are allocated to Level 1 and 10% to Level 2. Investments from the category “available for sale” allocated to Level 2 mainly involve borrower’s note loans of German “Länder”.
Our overall portfolio of eurozone government bonds has a good rating structure. As at 31 December 2012, 89% were rated AAA to A.
The rating categories are based on those of the leading international rating agencies. In deviation from the purely economic view, the carrying amount of the securities represents the maximum exposure to credit risk at the balance sheet date, in accordance with IFRS 7.
Munich Re Group Annual Report 2012 €19.6bn or around 60% of our government bonds and government-guaranteed securities with a period to maturity in excess of five years are German government bonds. The periods to maturity of our bonds from Irish, Italian and Spanish issuers are as follows: At the reporting date, 28% of our interest-bearing investments were in covered bonds and other securities and debt instruments with collateralisation, around 38% of which were German pfandbriefs. In the course of the financial year, we disposed of sections of our Spanish covered bonds (cedulas) and switched into British and French covered bonds. We increased our investments in corporate bonds again, these making up 10% of our fixed-interest portfolio at the reporting date. Falling interest rates and risk spreads were beneficial to us here, bringing about an additional rise in the market value of our portfolio. We continue to hold a small quantity of credit derivatives, thus increasing our exposure mainly to corporates by another percentage point.
Information on the risks from eurozone government bonds and government-guaranteed securities can be found on page 131 f.
In the current environment of low interest rates and higher volatility, our active duration management also helps reduce risk. Although the average durations of fixed-interest investments exceed those of liabilities in reinsurance, the durations of fixed-interest items in primary insurance are shorter than those of liabilities. On balance, this diversification in opposite positions allows us to reduce the interest-rate risk for the Group as a whole.
The carrying amount of our equity portfolio (before taking derivatives into account, and including investments in affiliated companies and associates at market value) was €8.4bn (6.7bn), or 3.7% (3.2%) of our total investments. In the second half of 2012, we disposed of large portions of the derivatives used to hedge this equity portfolio. At the reporting date, our equity exposure after hedging thus increased to 3.4% (2.0%) of our total investments.
In the write-ups and write-downs of our investments, we posted minor net write-ups of €8m (–1,625m). We recorded gains on our swaptions and other interest-rate derivatives, as their market values had been bolstered by falling interest-rate levels. Swaptions are used in hedging long-term interest-rate guarantees extended to life insurance clients. Even if we do not sell them, the changes in the market value of our derivatives are reflected in the net balance from write-ups and write-downs. The previous year’s result had been burdened mainly by write-downs on Greek government bonds.
Investment result by type of investment 2012 Prev. year Change €m €m %
Deposits retained on assumed reinsurance and other investments 326 229 42.4 Investments for the benefit of life insurance policyholders who bear the investment risk 603 –263 – Expenses for the management of investments and other expenses 484 453 6.8
Also included in investments are securitisations by means of which we pass on or assume underwriting risks via capital market covers. These include catastrophe bonds and special forms of unit-linked life insurance (variable annuities). Regular income or expenditure, realised gains and write-ups/write-downs arising from changes in the value of our capital market covers are shown as a result from derivatives in the investment result. Such covers contributed approximately €17m to the investment result for the current year, whereas in the previous year a particularly high positive balance of around €200m from write-ups and write-downs was posted in the wake of the earthquake in Japan.
— Significant increase in equity attributable to good consolidated result and net unrealised gains on investments
— Debt leverage remains low — Group capital over 2.7 times the solvency requirement
The increase in equity was attributable not only to the consolidated result but also largely to higher net unrealised gains, which derived mainly from our fixed-interest securities available for sale. The dividend payment was the chief lowering factor.
We define as strategic debt all financial instruments with the character of outside financing that do not have a direct link to our operative business. Strategic debt supplements our financial resources, is essentially designed to optimise the cost of capital and ensures that we have sufficient liquidity at all times. With a view to making our capital structure transparent, we quantify our debt leverage, which is pleasingly low compared with that of our competitors: it is defined as the ratio – expressed as a percentage – of strategic debt to the sum of Group equity and strategic debt. Our technical provisions are not considered, even though they are mostly available to us on a long-term basis as a source of financing for investment.
Reinsurance business accounts for approximately 33% of technical provisions, primary insurance for about 66% and Munich Health for around 1%. In contrast to liabilities under loans and securities issued, we cannot foresee with certainty how high our liabilities from underwriting business will be and when they will arise. This is especially true of reinsurance. Whereas in property insurance a major portion of the provisions is generally paid out within two to three years, in life or liability insurance substantial amounts may still be due decades after the contracts were concluded. The currency distribution of our provisions reflects the global orientation of our Group. Besides the euro, our main currencies are the US dollar and pound sterling.
Since we are an international (re)insurance group, some of our financial resources are subject to restraints on disposal. Supervisory authorities in some countries, for ex ample, require foreign reinsurers to establish premium and reserve deposits to the benefit of primary insurers or set up trustee accounts or guarantees with certain financial institutions. At the reporting date, this involved investments with a volume of €9.5bn (11.0bn). In addition, there were contingent liabilities.
Information on contingent liabil ities is provided on page 272 in the notes to the consolidated financial statements
Through active capital management, we ensure that Munich Re’s capital is maintained at an appropriate level. Munich Re’s available financial resources must always be sufficient to cover the capital requirements determined both by our internal risk model and the requirements of supervisory authorities and rating agencies. We aim to ensure that our financial strength is such that it enables us to take advantage of profitable opportunities for growth, is not significantly affected by normal fluctuations in capital market conditions, and remains at a reasonable level even in the wake of major loss events or substantial falls in the stock markets. At the same time, we also define an appropriate level of Group economic capital as one which does not lastingly exceed that required. Such a needs-based, risk-commensurate capital level makes a decisive contribution to financial discipline in all our business processes.
In line with our active capital management, we bought back a nominal amount of €0.7bn of the subordinated bond 2003/2023 in the period under review, out of the total outstanding amount of €1.7bn as at the end of 2011. We also issued two subordinated bonds with nominal volumes of €900m and £450m.
Munich Re Group Annual Report 2012 full voting and dividend rights, with the exception of the 813,942 shares held by Munich Re itself at 31 December 2012 (Section 71b of the German Stock Companies Act). Each voting share carries one vote at the Annual General Meeting. With respect to the Company, the only parties deemed shareholders in accordance with the German Stock Companies Act (Section 67) are those entered as such in the Company’s register of shareholders.
Like other shareholders, employees of Munich Reinsurance Company exercise control rights in accordance with statutory provisions and the Articles of Association.
The German Stock Companies Act contains special regulations on amendments to the Articles of Association where increases and reductions in share capital are concerned (Sections 182–240 of the Act). Under these regulations, resolutions on capital measures are generally to be made by the Annual General Meeting. Within a self-determined scope, however, the Annual General Meeting can authorise the Board of Management to initiate certain (capital) measures. The authorisations relating to Munich Reinsurance Company are listed below. In all such cases, a resolution of the Annual General Meeting is required that has been adopted by at least a three-quarter majority of the share capital represented in the vote. Where these resolutions are concerned, the Company ’s Articles of Association again do not provide for other (i.e. higher) majorities or further requirements. Pursuant to Article 14 of the Articles of Association and Section 179 para. 1 sentence 2 of the German Stock Companies Act, the Supervisory Board is empowered to make amendments to the Articles of Association which affect only the wording.
The complete wordings can be viewed on our website at www.munichre.com/agm
The adjusted solvency ratio rose from 245.3% in the previous year to 277.8% in 2012. The rise was due mainly to the increase in equity.
Munich Re Group Annual Report 2012 solar-park operating company in Spain, in a solar park company in Italy, in six wind farm companies in Germany, and in three wind farms in the United Kingdom for a total of €274m. In the cash flow statement, we have reduced the purchase prices by the cash held by the companies acquired.
— Munich Re as clients’ first port of call for all risk matters — Continued implementation of ERGO’s brand proposition
As reinsurers, we apply our extensive risk knowledge to find individual solutions that meet our clients’ diverse requirements, and to add value. Knowing our clients’ needs, we devise innovative risk transfer solutions with them, and aim to expand risk competence through strategic partnerships, thus providing our cedants with the full range of underwriting products. We regularly assume a pioneering role in new coverage concepts – for example, in preparing European cedants for the introduction of Solvency II. In addition, we offer our clients consultancy and other risk-related services. We reach new client groups through our operating field Risk Solutions, where we provide customised solutions for corporate clients and industrial firms. Predominantly in North America, but also in the Asia-Pacific region, we generate business via managing general agencies (MGAs). Beyond this, our target groups include public-private partnerships and insurance pools. With branches and subsidiaries around the world, we ensure that our clients can always find us where they need us.
In 2012, ERGO continued to implement its brand proposition “To insure is to understand ”, which expresses the primary insurance group’s aim of focusing systematically on customers’ actual requirements, with an approach that sets it apart from the competition. An important consumer concern is clear and comprehensible communication. As part of its “clear language” initiative, ERGO significantly shortened and simplified its insurance terms and conditions for more products in 2012, with the aim of avoiding mis understandings by policyholders. It also reworded the majority of centrally prepared letters to clients along these lines.
In 2012, ERGO removed the compliance function from its legal department and established a separate compliance unit. This unit reports directly to the CEO and has subsequently been significantly expanded, with compliance measures being further developed and intensified. This had been preceded by massive public criticism of ERGO due to cases of misconduct and other shortcomings, most of which had occurred a con sider able time ago. In order to regain lost trust, ERGO launched a transparency ini tiative in October 2012. The audit findings regarding misconduct on incentive trips and at other events were published by the group on the internet, stating the measures that ERGO had taken in response.
By contrast, the growth dynamics in the healthcare market and our good local positioning in the Middle East last year enabled us to extend our primary health insurance operations to Qatar, where we now operate through Daman Health Insurance – Qatar LLC. In Saudi Arabia, moreover, we have joined forces with local partners to set up the primary insurer Saudi Enaya Cooperative Insurance Company.
Munich Re Group Annual Report 2012 strating its capacity for innovation by investing in renewable energy, new technologies and infrastructure, thus helping secure our future viability.
In reinsurance, Munich Re continues to attach importance to new solutions in the field of climate change and energy. In the case of new wind power plants, for instance, Munich Re insures manufacturers against serial losses arising from guarantee and maintenance contracts. We also offer insurance solutions for the financial consequences of unexpected deviations in the weather compared with the long-term average.
Another important field of development is the use of reinsurance solutions for capital optimisation. Despite the renewed delays in the introduction of Solvency II, there is a growing demand among many primary insurers for stabilisation of their capital base. Munich Re has upped its efforts in this field, establishing the necessary competence on a broad basis in its operational organisation. Beyond this, our Financial Solutions unit devises special life reinsurance solutions for capital relief in connection with guaranteed products.
Attractive opportunities are also emerging in the public sector. These include not only pool solutions for certain risks, such as natural catastrophes, but also the coverage of risks in public infrastructure projects via public-private partnerships. In 2012, Munich Re amalgamated its activities relating to cover for the public sector with a view to exploiting the potential for profitable growth.
Our clear goal is to identify, develop and retain the loyalty of the best talent globally and locally. At Group level, we have therefore begun looking at prospective candidates for top management across all our fields of business, thus significantly enhancing transparency and our Group-wide potential. In reinsurance and Munich Health, the initiative “Career @ Munich Re” has been implemented internationally, thereby creating a uniform understanding of career throughout our global organisations. This also forms the basis for increased job rotation within the Group. MEAG has streamlined its job application processes, especially with a view to hiring highly qualified people just starting their careers, and has strengthened its recruitment of university graduates.
To further enhance the promotion of diversity, we redefined diversity management Group-wide in 2011. The focus in 2012 was on implementation measures and initiatives. Within ERGO, for example, our support and mentoring programme for female staff with management potential was taken a stage further, while a new HR process for partnering employees on parental leave was introduced. In a pilot project, we are examining the necessary parameters for extending the option of part-time employment to senior management. With a view to the impact of demographic change, we are looking at flexible options for employees that take account of their particular life stage and career phase. Our diversity seminar for trainees won first place in the InnoWard 2012, a training prize awarded by the German insurance industry.
The fact that changes in market requirements can lead to structural adjustments with major consequences is illustrated by ERGO’s quality and efficiency programme for its German sales organisations, launched in 2012. This project has three main aims: to improve quality, reduce complexity and cut costs. To achieve these goals, ERGO’s current five tied-agency sales forces in Germany are to be merged – under a single ERGO sales company – into two homogeneous organisations, each of an appropriate size and with uniform structures. The envisaged reduction to 120 regional offices throughout Germany and the new orientation of the sales-based central divisions will also result in a decrease in personnel requirements. ERGO is striving to implement the necessary measures in a socially acceptable way and has commenced negotiations with the relevant co-determination bodies.
Staff by field of business 65.5% (66.3%) Primary insurance 8.3% (8.3%) Munich Health 1.8% (1.7%) Asset management
At the end of 2012, it was decided to set up a cross-business-field Corporate Responsibility Committee for the Group-wide management of these activities.
In recent years, Munich Re has played an active part in developing the Principles for Sustainable Insurance (PSI) of the United Nations Environmental Programme Finance Initiative. In June 2012, the PSI were officially unveiled and signed at the RIO+20 UN conference. As with the PRI, which Munich Re was the first German company to join, we were among the first signatories. We will use the PSI as a yardstick for integrating environmental, social and governance criteria even more strongly into our core busi­ ness. In so doing, we will simultaneously improve our risk management.
Commitment to conserving natural resources is an equally important part of our cor­ porate responsibility strategy, given that our economic success is inseparably linked with protecting people and the environment. With this in mind, we are recording our envir onmental data with increasing precision: in 2012, a total of 80% of all employees in 31 Munich Re units were covered by our environmental management system, with 30% working in units that have been certified to ISO­14001.
To help raise public awareness regarding climate change, we endeavour to set a good example ourselves: by 2015, we will make business operations throughout our Group carbon­neutral. The first step was to reduce emissions Group­wide by at least 10% per employee, based on emissions in 2009. In a second step, we are neutralising unavoid­ able CO2 emissions by means of appropriate certificates. Our Munich site has been carbon­neutral since 2009, as have the major locations of ERGO Germany since 2011. This objective was achieved for the whole reinsurance group in the reporting year 2012. Since the end of 2012, for example, more than 4,000 square metres of solar panels have been powering the office buildings of Munich Re in Princeton with a volume of 2.5 megawatts per year. Our subsidiary DKV Seguros in Spain, which already achieved the objective in 2007, last year became the first European insurer to have its products certified as carbon­neutral. Altogether, we have saved more than 5,500 tonnes of CO2 globally since 2009 with our consistent environmental management.
Corporate responsibility offers Munich Re the chance to strengthen the trust of shareholders, clients, employees and the public in our Group and to successfully meet tomorrow’s challenges.
The Group Committee meets quarterly as the Group Risk Committee, the membership of which additionally includes further specialists from our business segments, to deal with risk issues affecting the Group as a whole.
Additionally, there is the Group Compliance Committee (GCC), which deals with compliance and reputational risks at Group level, with a view to standardising the handling of these risks throughout the Group. In contrast to the Group Corporate Responsibility Committee (GCRC), which concerns itself with identifying sensitive issues on an
The risk appetite laid down ensures that an appropriate balance is maintained between business opportunities and risks incurred. Our risk strategy process proved its worth in both the financial crisis and the country debt crisis. Our business model of combining primary insurance and reinsurance under one roof ensures that – even in particularly difficult markets – we are always in a position to be a strong partner for our clients and a stable investment for our shareholders. With our broadly diversified portfolio of investments, we are well equipped for all market scenarios – even extreme ones – that could realistically arise.
Our implementation of risk management at operational level embraces the identification, measurement, analysis and assessment of risks, and the resultant risk reporting, limitation (reduction to a level we have defined as appropriate) and monitoring, which enables us to follow all significant risks closely.
Risk identification is performed by means of appropriate systems and indicators (quantitative component) and a number of risk surveys, which are supplemented by expert opinions and assessments by selected, highly experienced managers (qualitative component ). Our ad-hoc reporting process provides for staff to report risks to the central risk management function (IRM) at any time. We are constantly enhancing our risk measurement tools, which are tailored to each segment. Our lead risk measure is based on economic principles. We regularly compare the results produced by our risk model with those of supervisory authorities, rating agencies and commercial modelling companies at a number of levels, including Group, segment, legal entity and risk type. We also regularly perform benchmarkings of our risk-model results and participate in industry surveys to constantly challenge and refine our risk measurement tools.
Our financial strength is an important criterion for the success of our business. As far as our financial strength ratings are concerned, our aim for the present is the secondhighest rating from each of the main agencies that rate us. Meeting this objective is a supplementary parameter of our corporate management and is monitored at regular intervals. We currently assume that our financial strength, our good competitive position and our sophisticated risk management will continue to be recognised through correspondingly high ratings.
Munich Re Group Annual Report 2012 numerous units and experts. This provides us with a quantitative and qualitative assessment that considers possible interactions between risks.
Our internal control system (ICS) is a worldwide system for managing operational risks integrated across all risk dimensions and areas of the Group that both meets Group management needs and complies with local regulations.
The Board of Management has Group-wide responsibility for the ICS, which falls structurally under the responsibility of the CRO. Experts and staff in our specialist areas are responsible for the detailed content of the system and perform the risk and control assessments at least annually. For each of Munich Re’s business segments, the ICS delivers a risk map, which systematically links the significant risks and processes and shows all relevant risk control points. By making our risk situation transparent in this way, we can focus on and react rapidly to weaknesses or changes in internal and external requirements. This means that we are able to identify risks at an early stage, locate control shortcomings immediately and take effective remedial action.
Our financial accounting and reporting is subject to carefully defined materiality thresholds to ensure that internal controls are appropriate. Significance, risk experience and compliance are taken into account in determining the thresholds. All risks significant for financial reporting from a Group perspective are integrated into the ICS in accordance with uniform criteria. The ICS risk map is checked annually by the risk carriers and updated and amended as necessary.
By means of our accounting manual and regular circulation of information on changes required, Munich Re ensures that uniform rules are applied throughout the Group for the treatment, valuation and disclosure of all items in the balance sheet, income statement and other components of the financial statements. Any amendments are subject to a mandatory procedure as regards timing, responsibilities and circulation of information.
A central IT solution drawing on general ledgers largely standardised throughout the Group is used to produce the consolidated financial statements. It is based on harmonised basic data, uniform processes and posting rules, and a standard interface for delivery of data to the Group or subgroup. Authorisation procedures regulate access to accounting systems.
However, notwithstanding the careful design and diligent use of our ICS, it can provide only adequate, but not total, certainty that all risks have been covered. The controls put in place, the processes coordinated Group-wide and the supporting IT solutions cannot guarantee the complete avoidance of errors or prevention of individual cases of fraud.
The Audit Committee of the Supervisory Board regularly calls for reports on the effectiveness of the accounting-based ICS and changes to the risk map from the previous year. With the help of the reports prepared by our external auditors and Group Audit, the controls applied are explained and it is demonstrated that all controls considered necessary have been correctly performed. To this end, risk-based audits of the units in the Group are performed and the results summarised in internal audit reports. In 2012, the audits showed that the structure of the ICS is appropriate and that the design and quality of the controls were such as to render them effective. Through continuous auditing, revision and enhancement of our ICS, we intend to ensure that it remains effective in the future.
According to our classification, significant risks are risks that could have a long-term adverse effect on Munich Re’s assets, financial situation or profitability. We have applied this definition consistently to the individual business units and legal entities, taking account of their individual risk-bearing capacity. There are significant risks in the following risk categories: Underwriting risk: Property-casualty insurance Underwriting risk is defined as the risk of insured losses in property-casualty business being higher than our expectations. The premium and reserve risks are significant components of the underwriting risk. The premium risk is the risk of future claims payments relating to insured losses that have not yet occurred being higher than expected. The reserve risk is the risk of technical provisions established to cover losses that have already been incurred being insufficient.
Due to the diversity and extensive ramifications of Munich Re’s business, it is not possible to produce a set of rules for acceptance that would fully cover relevant risks. The expertise of our underwriters on the ground is therefore of prime importance and we recognise this by providing advanced training and IT systems for risk assessment and pricing, publishing internal information sheets and underwriting recommendations, and setting up working groups to create and transmit underwriting knowledge.
Underwriting risk: life and health insurance The underwriting risk in this case is defined as the risk of insured benefits payable in life or health insurance business being higher than expected. Of particular importance are the biometric and lapse risks. We differentiate between risks that have a short-term or long-term effect on our portfolio.
Further information on risks in life and health insurance can be found on page 251 ff. in the notes to the consolidated financial statements
Changes in client biometrics or lapse behaviour are risks that have a long-term effect on the value of a portfolio, making it necessary to adjust the actuarial assumptions. In health insurance, morbidity risks are understandably important, whereas in life insurance mortality, longevity and disability risks are the most significant. Limits are laid down for the short-term pandemic scenarios and the longer-term longevity scenarios in conformity with the risk strategy. In German health primary insurance, especially comprehensive health insurance, there are additional uncertainties because policyholders’ options have changed since 2009. These include: — portability of reserves when moving to another insurer (ageing reserves), — obligation on insurer to pay benefits for insureds who have not paid premiums, with no ability to terminate the contract,
The changes are a result of the law reforming German healthcare (WSG). The new policyholder options are taken into account in the valuation model on the basis of experience to date. Under the new regulations for policyholders in Germany, it is, for example, no longer possible for an insurer to terminate an insurance contract on the grounds of non-payment of premiums by the policyholder.
Market risk We define market risk as the risk of economic losses resulting from price changes in the capital markets. This includes equity risk, general and specific interest-rate risk, property risk and currency risk. The general interest-rate risk relates to changes in riskfree interest-rate curves, whereas the specific interest-rate risk arises out of changes in credit risk spreads, for example on government bonds or credit default swaps (CDSs). We also include in market risk the risk of changes in inflation rates and implicit volatilities (cost of options). Fluctuations in market prices affect not only our investments but also our underwriting liabilities, especially in life insurance. Due to the long-term interest -rate guarantees given in some cases and the variety of options granted to policyholders in traditional life insurance, the amount of the liabilities is highly dependent on the capital markets.
We use a cross-balance-sheet counterparty limit system valid throughout the Group to monitor and control our Group-wide credit risks. The limits for each counterparty (a group of companies or country) are based on its financial situation as determined by the results of our fundamental analyses, ratings and market data, and the risk appetite defined by the Board of Management. The utilisation of limits is calculated on the basis of credit-equivalent exposure (CEE). All investments in structured products and the vast majority of securities lending transactions are monitored separately and controlled using volume limits. The resultant credit risk is reduced by means of Group-wide rules for collateral management, for example for OTC derivatives and catastrophe bonds issued.
In order to take account of country risks other than the credit risk on government bonds, our advisory unit for strategic and economic issues, Group Development, also produces specific country scores in addition to the pure default ratings. These cover the significant political and economic risks and those relating to a country’s internal security, and enable us to assess comprehensively additional country risks of varying importance for different business segments.
In the area of retrocession, we control the default risk through the Retro Security Committee. The experts on the committee review the quality of our main retrocessionaires independently and on the basis of various criteria (e.g. minimum ratings, market data and capital requirements) and allocate appropriate limits for the counterparties based on underwriting guidelines laid down by the risk management function.
Operational risk Munich Re defines operational risk as the risk of losses resulting from inadequate or failed internal processes, incidents caused by the actions of personnel or system malfunctions, or external events. This includes criminal acts committed by employees or third parties, insider trading, infringements of antitrust law, business interruptions, inaccurate processing of transactions, non-compliance with reporting obligations, and disagreements with business partners. These risks are qualitatively identified and managed through our ICS.
In addition, our Security and Continuity Risk Management Framework defines the rules for a standard Group-wide procedure for identifying and assessing security risks for people, information and property. Our aim is to ensure that our business activities are not disrupted. We take all possible steps to ensure that employees are aware of the need to identify potential security risks and thus to establish an appropriate risk culture. This includes willingness to learn from mistakes and to recognise them as opportunities for improvement.
Our objective in managing liquidity risk is to ensure that we are in a position to meet our payment obligations at all times.
We counter this risk by discussing significant strategic issues and decisions at our Strategy Committee and regularly monitoring their implementation. The Strategy Committee comprises the members of the Group Committee, and hence the CRO, plus the Chief Executive Officers (CEOs) of the business segments and the Head of Group Development. As a result, strategic decision-making processes are intermeshed with risk management. IRM is additionally involved in the operational business planning and in the processes for mergers and acquisitions.
Munich Re Group Annual Report 2012 and handling throughout the Group. Furthermore, sensitive issues that could lead to reputational risks are handled for all segments by our Group Corporate Responsibility Committee (GCRC).
In 2012, there were again reports in the press on inappropriate behaviour at ERGO in connection with incentive trips and criticism regarding the switching of insurance policies. They had an adverse effect on ERGO’s – and hence Munich Re’s – reputation. ERGO’s reaction included the disclosure on its website of comprehensive information on misconduct during incentive trips and at other sales events. Measures were also taken to prevent similar cases from occurring in the future. Central conduct and organisational guidelines at ERGO were revised and the compliance function was strengthened in 2011 and further expanded in the course of 2012.
Munich Re manages its business on the basis of a consolidated Group view, using its own integrated risk model to determine the capital needed to ensure the Group’s ability to meet its commitments even after extreme loss events.
Every risk category is depicted in both reinsurance and primary insurance. In the Munich Health segment, the life and health risk category and operational risks are shown, but not market and credit risk, which we cover in the reinsurance and insurance segments through our internal risk control.
The table shows Munich Re’s economic risk capital and risk categories as at 31 December 2012. Over last year, the economic risk capital rose by €2.9bn. The following factors contributed to the increase: — The economic risk capital for our life and health business rose by €0.6bn. In primary insurance, the rise resulted from further falls in interest rates, especially in the eurozone. In addition, lower risk cushions, for example for future policyholder bonuses, are increasing the risk for insurers. In reinsurance, the changes are due primarily to the substantial increase in new business in Asia and Canada. For Munich Health, the 5030 A+B economic risk capital (eRC)
ERC has risen as a result of more precise modelling of the pandemic risk. We have also adapted the model to take account of the higher degree of uncertainty in the US health insurance market.
— As last year, we used scenarios to determine the economic risk capital requirement for operational risk. Various teams of experts in the Group have compiled the scenarios and adjust them annually. The change in economic risk capital resulted from the updating of the expert estimates.
Munich Re Group Annual Report 2012 current limit utilisation is determined by a bottom-up process. As ERGO’s portfolio is more stable, its exposure is only updated annually. The economic risk capital for large and accumulation losses was virtually unchanged from the previous year, with opposite effects offsetting each other. As in 2011, the largest natural catastrophe exposure for Munich Re is the €3.3bn currently retained for the “Atlantic Hurricane” scenario (value at risk for a 200-year return period). With a retention of €2.7bn, “Cyclone Australia” is the second-largest scenario. The modelling of the scenario has been fundamentally revised, leading to an increase in the value at risk calculated. The scenario was expanded geographically, and risks from other classes of business and exposures were depicted in the model. The effect of various return periods on the portfolio structure was also reflected more precisely. In addition, there has been an expansion in the business exposed to this scenario. Our exposure to European windstorms has been quantified at €2.0bn using the scenarios we have drawn up.
life and health In life and health business, the risk modelling takes account of countervailing developments with both short- and long-term effects on the risk drivers that influence the value of our business.
economic risk capital (eRC) – Market 31.12.2012 Prev. year Change Segment Segment Re- Primary diversi- Re- Primary diversi- €bn Group insurance insurance fication Group insurance insurance fication Group
Diversification effect –10.1 –6.7 –5.4 – –7.4 –4.7 –4.0 – –2.7
The rise in the general interest-rate risk is essentially due to the fall in interest rates compared to the previous year and the effect of that fall on life primary insurance business. The specific interest-rate risk increased as a result of an improvement in the depiction of the spread risks in life and health primary insurance.
Credit risks Munich Re determines credit risks using a portfolio model, which takes into account both changes in market value caused by rating migrations and debtor default. The model is calibrated over a credit cycle.
The market value of our investments in fixed-interest securities and loans as at 31 December 2012 was €188.4bn, representing 83.9% of the market value of Munich Re’s total investments. These securities thus made up the bulk of the portfolio.
The economic capital buffer is the amount by which the available financial resources exceed the economic risk capital. The economic solvency ratio is the ratio of the available financial resources (less announced but not yet completed capital measures such as the dividend payment for the year just ended) to the economic risk capital. The table below shows the changes in the figures: 1 The impairment test of deferred tax assets on loss carry-forwards takes into account the US tax group for the first time (adjusted previous-year figure = €0.04bn). 2 Besides subordinated liabilities, hybrid capital now also includes the funds financing new business of German life insurance com panies (adjusted previous-year figure
Available financial resources 36.5 28.3 8.2 economic solvency ratio components 31.12.2012 Prev. year Change (A) Economic equity €bn 29.7 23.6 6.1 (B) Available financial resources €bn 36.5 28.3 8.2 (C) Available financial resources after dividend and share buy-back €bn 35.2 27.2 8.0 (D) Economic risk capital (ERC) €bn 27.3 24.4 2.9
(B) minus (D): Economic capital buffer €bn 9.2 3.9 5.3 (C) divided by (D): Economic solvency ratio % 129 111
In both our insurance and reinsurance business, we review the underwriting prices calculated by our valuation and pricing systems to ensure that they take adequate account of the current interest-rate environment. Reinsurance business activities exposed to significant economic risks are reviewed and exposure limited where appropriate.
We report on our regulatory solvency requirement on page 104 f.
In monitoring the country risks, we do not simply rely on the customary ratings, but perform independent analyses of the political, economic and fiscal situation in those countries in which investments might potentially be made. Our experts also evaluate and draw conclusions from the movements in the market prices of the bonds issued by the country concerned. On this basis and taking account of the investment requirements of the fields of business in the respective currency areas and countries, proposals for limits or action to be taken are submitted to the Group Risk Committee. These limits are mandatory throughout the Group for investments and the insurance of political risks, and any exceptions must be approved individually by the Group Risk Committee. Our direct and indirect exposures in countries on the euro periphery are also minor due to this close monitoring.
On the basis of defined stress scenarios relating to further developments in the sovereign debt crisis, our experts forecast potential consequences for the financial markets, the market values of our investments, and the present values of our underwriting liabilities. At Group level, the high degree of diversification in both our investments and our liability structure together with our active Group-wide asset-liability management counter any negative effects.
Climate change represents one of the greatest risks of change for the insurance industry. In our Corporate Climate Centre, we analyse and assess this risk and are developing a holistic strategic approach. The findings are made available to all business areas of the reinsurance group, to our asset-liability management function, and to ERGO.
However, changes in the physical environment and new regulations resulting from climate change also open up many business opportunities. Applying the knowledge we have accumulated over decades, we exploit these opportunities – for example, through new insurance products for renewable energy technologies.
Our early identification of risks also covers emerging risks, i.e. those that arise as a result of legislative, socio-political, scientific or technological changes and are therefore liable to have unmeasured or unknown effects on our portfolio. The degree of uncertainty as to extent of damage and occurrence probability is by nature very high.
Legal, supervisory and tax risks legal risks The proceedings started by the Spanish antitrust authority (CNC – Comisión Nacional de la Competencia) in 2009 against several insurers and reinsurers, including Munich Re’s Spain and Portugal branch, for alleged collusion restricting competition in Spanish decennial liability business (compulsory insurance for guarantee claims in respect of contract works) continue. In December 2009, Munich Re’s Spain and Portugal branch lodged an appeal against the fine of €15.9m imposed by the CNC. The court has meanwhile upheld our appeal. In response, the CNC has appealed against the court’s decision within the prescribed period.
After the federal legislative procedure for the US Fairness in Asbestos Injury Resolution Act foundered in February 2006, several US states adopted legislation initiatives (tort reform), which in our view may have a positive effect on the settling of asbestos claims. Following revelations about often questionable asbestos-related disease diagnoses and the resultant lawsuits, a number of investigation committees are at work. Similar questionable practices have come to light in silicosis lawsuits. These developments indicate that US legal practice is contesting abusive liability claims with increasing resolve. However, it is too early to say whether and to what extent this will have favourable implications for future loss development in the insurance industry, particularly as plaintiff attorneys are trying hard to repel the tort reform initiatives. We are currently still being affected by late-reported claims – in some cases for high amounts – for asbestosrelated diseases and similar liability complexes. Though the total number of asbestos claims is declining, the number of severe cases of mesothelioma and other types of cancer has remained relatively constant in recent years.
Former minority shareholders of ERGO Versicherungsgruppe AG have attempted to gain increased squeeze-out cash compensation by taking out company law award proceedings. The material risk is limited by the number of shares eligible for compen-
Following the 2012 Annual General Meeting, three of our shareholders brought actions for nullification and disclosure against Munich Reinsurance Company. Both suits were dismissed in December 2012. The disclosure action is not subject to appeal, but the dismissal of the nullification suit has been appealed against. It is our assumption that the appeal will be unsuccessful.
Work is still in progress at global level on additional supervisory requirements for systemically important financial institutions (SIFIs). Systemic importance is determined not by the fundamental significance of a sector for the economy, but by the impact the insolvency of a company could have on the real global economy. The discussions, which are being held primarily by the Financial Stability Board (FSB), are currently focusing on the banking sector. The investigations relating to the insurance industry are not following the same timetable as those for banking and are being led by the International Association of Insurance Supervisors (IAIS). The insurance industry believes that its core business does not give rise to a systemic risk. Munich Re is actively participating in the consultations. We will probably have to wait until mid-2013 before we can say with any certainty whether the insurance industry as a whole, and reinsurance companies and Munich Re in particular, could be subject to additional requirements. Specific requirements for SIFIs range from additional reporting to higher capital requirements.
The ongoing discussions regarding the German healthcare system, notably the “citizens’ insurance scheme”, may result in further changes in the statutory framework. If, unlike now, all citizens were to be compulsorily included in the German public health insurance system, it would spell the end of at least new business for private health insurers in comprehensive health insurance. We have been monitoring this risk for many years. Similar proposals have been put forward for “citizens’ long-term care insurance”.
The business model pursued by Munich Re combines primary insurance and reinsurance under one roof. We are convinced of the future potential of traditional reinsurance; and with the primary insurance activities we operate out of the reinsurance segment and our involvement in ERGO and Munich Health, we have tapped profitable growth opportunities unlikely to be available to companies that conduct reinsurance only. We assume risks from many different areas of private and economic life, and provide financial protection and risk management. In the section “Prospects”, we offer an overview of how our business will probably develop under realistic parameters. We endeavour to address global trends with a long-term impact as extensively as possible. However, surprising and unforeseen developments can never be ruled out completely. To protect ourselves against risks, we have established a sophisticated risk management system described in detail in our risk report. At the same time, we are also well prepared to seize unexpected opportunities to the benefit of our Group.
Other trends and upheavals with an impact on our clients’ demand for insurance and on supply include technological progress, demographic shifts and changes in the legal environment, in particular regulatory intervention. Given our good capitalisation and high degree of expertise, and a rapid adjustment of our product portfolio, Munich Re could participate in the newly emerging markets in all of its business segments.
— Technical progress, the demographic trend and regulatory changes offer profitable growth opportunities
Rules of insurance supervision and accounting that accurately reflect economic conditions and are internationally harmonised benefit clients and providers.
A major impact on our business also derives from trends in the development of severe natural catastrophes. We expect climate change to lead to a long-term increase in weather-related natural catastrophes and the resultant losses, with different effects depending on the region and type of exposure. Where necessary, we are adjusting our risk models and risk management accordingly. Measures to contain climate change provide Munich Re with substantial business opportunities, as the use of new technologies, for example in the field of renewable energies, is facilitated by new kinds of risk transfer solutions.
But irrespective of this, there are long-term opportunities for expansion in reinsurance’s core business, since the values in many regions exposed to natural hazards are increasing steeply and the demand for insurance is thus growing. Munich Re is excellently positioned in this regard, thanks to our expertise in analysing major-loss events.
You can find out more in the section “Research and development” on page 109 f.
Consumers are increasingly purchasing insurance cover using a range of different channels. ERGO is already a proven partner for banks and is steadily developing this field. Opportunities to gain profitable market share also derive from internet sales, where ERGO has acquired a great deal of experience via ERGO Direkt and is systematically expanding its position.
ERGO will indirectly benefit from a rising level of regulation as well. When risks from long-term life and health insurance contracts are made easier to measure and thus more transparent, and have to be backed with the requisite capital, competitive discipline should improve and the products offered should be limited to those that generate value for clients and providers. As a result, life insurance, which is particularly challenging when market interest rates are low, could become more attractive for us again in the long term.
In property business, power generation from alternative energy sources gives rise to additional cover requirements, both for damage to installations and for lost revenue. Increasingly, capacities can also be offered here in the European single market, in particular in industrial business. In the European and Asian growth markets, moreover, ERGO is exploiting its extensive know-how in products and distribution channels to implement the best business model in each case and hence to continue growing in international business.
As from 2012, we modified our segment reporting with the aim of reflecting internal management criteria more closely and thus providing for even greater transparency with regard to income and expenses. Previously, the segment balance sheet and segment income statement had reflected the situation prior to the elimination of intraGroup business (including a separate column for consolidation). Since the first quarter of 2012, both items have been shown after the elimination of intra-Group business. For this reason, the outlook we gave for 2012 in the 2011 annual report for the segments reinsurance, primary insurance and Munich Health can no longer be directly compared with the figures in this annual report for these segments. In general, the segment premiums and the segment result are lower or at most the same compared with the view prior to the elimination of intra-Group business.
Comparison of Munich Re (Group) targets for 2012 with results achieved
— With a consolidated result of €3.2bn for 2012, original target of €2.5bn significantly surpassed
At €52bn, gross premium was around €2bn higher than the upper limit of the target corridor, the additional income deriving from reinsurance and Munich Health.
The technical result in life reinsurance totalling €420m surpassed the target of around €0.4bn for 2012 by 5%. The value added by new business in life reinsurance, which is calculated on the basis of Market Consistent Embedded Value Principles, was an excellent €573m. The objective we aim to achieve by 2015 is €450m a year.
At 91.0%, the combined ratio in property-casualty reinsurance was considerably better than the envisaged figure of around 96% across the market and interest-rate cycle, in part thanks to the reduction in reserves for claims from prior years.
In life primary insurance, total premium income amounted to €7.3bn compared with a target figure for 2012 of slightly more than €7.5bn. Gross premiums written came to €5.8bn versus an envisaged figure of just under €6bn. In the health primary insurance segment, gross premiums written totalled €5.7bn; at the beginning of the year, our assumption had been an amount of somewhat less than €6bn. In property-casualty primary insurance, gross premiums written reached €5.6bn, compared with a target figure for 2012 of marginally below €6bn.
The combined ratio in property-casualty business was 98.7% and thus above the target ratio of under 95%, because the losses actually incurred in Germany were well above our expectations, taking into account normal fluctuations.
At €6.7bn, gross premiums were well above our target of just over €6bn, the increase being essentially due to reinsurance treaties with a large premium volume.
Munich Health’s consolidated result totalled –€92m. We fell far short of our profit guidance of €50–100m owing to write-downs for impairments of goodwill and intangible assets necessitated by the deterioration of the medium-term earnings situation of our US primary insurance subsidiary Windsor Health Group (WHG) in the Munich Health segment.
Capital markets A slow upturn in economic activity over the course of 2013 (driven by further expansive ECB measures in connection with a gradually receding credit crunch in the eurozone) should improve the position on the markets for risky assets. In turn, yields on German government bonds, which are currently extremely low, should rise again. Based on the very low volatility of the stock markets recently, greater fluctuations can be expected, as political uncertainty is still high. Moreover, some market participants now anticipate that Spain will submit an official application for assistance in 2013 so as to qualify for unlimited bond-buying by the ECB. Further fiscal policy decisions which could induce major market movements are also due to be taken in the US. Given the continuing crisis in the eurozone and the greater dynamism of the economy in the US, the US dollar should gain in attractiveness against the euro.
Far-reaching changes are also on the horizon in the medium term for the accounting of insurance contracts and financial instruments in our consolidated financial statements. These changes will have major consequences for the primary and reinsurance markets. After revising its schedule several times, the International Accounting Standards Board (IASB) is due to publish its revised proposals for the future accounting of insurance contracts in the first half of 2013, which are intended to achieve a consistent inter national approach to the way insurance contracts are accounted for in financial statements. However, we do not expect these regulations to be finally adopted before mid-2014. Concerning the new requirements for the accounting and measurement of financial instruments under IFRS 9, which EU companies may not yet apply, the IASB submitted a revised proposal in late November 2012 for expanding the permissible measurement categories for financial assets. A further exposure draft for the new rules regarding recognition of impairments has been announced for the first quarter of 2013. The new regulations concerning the recognition of hedging relationships have been finalised. We thus currently expect IFRS 9 to be adopted in its entirety at the end of the current year.
Outlook for Munich Re limits to forecasting results It is not only the obvious fluctuations in the incidence of major losses that make an accurate forecast of IFRS results impossible. The pronounced volatility of the capital markets and exchange rates as well as the special features of IFRS accounting also make it difficult to provide a result forecast. Thus, there may be significant fluctuations in the investment result, currency result and consolidated result, despite the fact that our assets are geared to the characteristics of our liabilities. In particular, a rising interest -rate level will initially tend to lead to lower results, and falling interest rates to higher results, than those forecast in these prospects. Net gains or losses on the disposal of derivatives used by us as hedging instruments and/or for fine-tuning investments can influence the result, as can changes in their market value. Changes in exchange rates influence our result in different directions, depending on which foreign currencies are affected, although economically speaking we do not have any major open currency items on our books.
For 2013, we expect gross premiums written of €10–11bn and a technical result of around €0.4bn.
In property-casualty reinsurance, which is traditionally exposed to market cycles, Munich Re will maintain its clear, profit-oriented underwriting policy and accept risks only at commensurate prices, terms and conditions.
The renewals at 1 January 2013 again took place in a very competitive market environment. The demand for reinsurance cover was relatively stable overall, given the primary insurers’ good capitalisation. At the same time, growth in primary insurance continued to be impacted by the difficult economic environment, but nevertheless remained largely constant. Reinsurers provided enough capacity, since their capital base continued to strengthen in 2012.
Prices generally moved sideways. Rate increases were achieved only in segments with high loss ratios, especially in marine insurance, where Windstorm Sandy and the accident involving the Costa Concordia led to significantly higher prices. US natural hazards business did not see any broad-based hardening of the market, despite Sandy. However, prices rose for loss-affected treaties; otherwise, rates remained largely stable. Latin American business showed slight price increases. In Australia, prices were maintained at the previous year’s good level. By contrast, the market environment for natural catastrophe risks in Europe proved rather difficult, with further price reductions in some cases. Since the end of the last financial crisis, a certain amount of pressure on rates has also made itself felt in credit and surety business but rates are still at an acceptable level.
The renewals at 1 April 2013 (Japan and Korea) and 1 July 2013 (mainly parts of the US market, Australia and Latin America) will involve a premium volume of around €3.3bn, with a greater proportion of natural catastrophe business than the renewals in January. Altogether, we project that the markets will move sideways at a good level. Assuming the absence of major loss occurrences, we expect rates in natural catastrophe business to be stable. In casualty business, however, a further continuation of the low-interestrate phase would favour the positive price trend.
If exchange rates remain constant, gross premiums in reinsurance should range between €27bn and €28bn overall in 2013. We project that the consolidated result in reinsurance will total between €2.3bn and €2.5bn in 2013.
Primary insurance We see good opportunities not only in evolving foreign markets but also in various sectors of our German domestic market. Munich Re’s consolidated financial statements show the business transacted by ERGO in the three primary insurance segments life, health, and property-casualty. For 2013, we expect premium development in the individual segments to be varied.
In the health primary insurance segment, the premium adjustments for our business in force as at 1 April 2013 will be more significant than in the previous year. The prices for new business, partly as a result of the adjustment to the actuarial interest rate and the introduction of unisex pricing, will also rise appreciably. This could have an adverse impact on the ability to attract new clients, as could the political debate on private health insurance. In supplementary health insurance, we expect further growth, partly owing to the introduction of subsidised long-term care insurance. We are therefore aiming for a slight increase in gross premiums written to just under €6bn.
Total premium income in primary insurance should amount to around €18.5bn in 2013, while gross premiums written are likely to be slightly higher than €17bn.
The structure of our investments is geared to that of our liabilities, thus limiting the interest-rate risk for the Group. In reinsurance, we are planning to cut the duration marginally in 2013, while in primary insurance, where investments are dominated by life primary insurance, we aim to prolong the average investment period somewhat. In so doing, we can gear our positioning even more closely to the profile of our liabilities. Besides the interest-rate risk, we also take inflation risks into account in our investments. We hedge part of our inflation-sensitive liabilities with inflation-linked bonds and inflation-linked swaps. We intend to keep the total portfolio of inflation-sensitive investments constant and to slightly expand our investments in commodities.
Provided an adequate return can be expected, we aim to invest more in renewable energy and new technologies in 2013 as well. In 2012, we were able to expand Munich Re’s portfolio substantially to around €1bn. To achieve a broader spread of the portfolio ’s main risk drivers, i.e. technical and political risk, we are aiming to continue strongly
Munich Re Group Annual Report 2012 diversifying our investments both regionally and technologically. There will be an add itional focus on infrastructure projects in the next few years. By the end of 2012, Munich Re had invested around €500m. We plan to maintain our real estate portfolio unchanged in terms of both volume and orientation in 2013.
For the coming year, we do not foresee any rapid and appreciable rise in capital market interest rates; regular income from our investments is therefore likely to be a relatively low 3.5% for 2013 as well. We anticipate an annual return on investment of around 3.3%, taking into account the result from the disposal of investments, write-ups and write-downs as well as other income and expenses.
Munich Re (Group) Our assumption for 2013 is that gross premiums written will range between €50bn and €52bn, provided there are no significant changes in exchange rates compared with the end of 2012.
Consolidated balance sheet 152 Consolidated income statement 154 statement of recognised income and expense 155 group statement of changes in equity 156 Consolidated cash flow statement 158 notes to the consolidated financial statements Application of international Financial Reporting standards (iFRss) 159 Declaration of conformity with the german Corporate governance Code in accordance with section 161 of the german stock Companies Act 159 Recognition and measurement 159 Consolidation 166
14 Deferred acquisition costs 211 15 Deferred tax 213 16 other assets 214 17 non-current assets and disposal groups held for sale and sold in the reporting period 216 notes to the consolidated balance sheet – equity and liabilities 19 subordinated liabilities 220 20 unearned premiums 221 21 Provision for future policy benefits 223 22 Provision for outstanding claims 224 23 other technical provisions 228 24 gross technical provisions for life insurance policies where the investment risk is borne by the policyholders 229 25 other accrued liabilities 230 26 bonds and notes issued 234 27 Deposits retained on ceded business 234 28 other liabilities 234 notes to the consolidated income statement 30 income from technical interest 238 31 expenses for claims and benefits 239 32 operating expenses 241 33 investment result 242 34 other operating result 246 35 other non-operating result, impairment losses of goodwill and net finance costs 247 36 taxes on income 248
List of shareholdings as at 31 December 2012 in accordance with section 313 para. 2 of the german Commercial Code 276
B. Investments i. Land and buildings, including buildings on third-party land (3) 3,831 3,889 –58 –1.5 thereof: held for sale (17) – 13 –13 –100.0 ii. investments in affiliated companies and associates (4) 1,467 1,154 313 27.1 thereof: Associates accounted for using the equity method 1,257 924 333 36.0 iV. other securities 1. held to maturity (6) 7 13 –6 –46.2 thereof: held for sale – 52 –52 –100.0 3. At fair value through profit or loss (9) 3,015 2,536 479 18.9
V. Deposits retained on assumed reinsurance (10) 8,967 9,430 –463 –4.9
C. Investments for the benefit of life insurance policyholders who bear the investment risk 5,958 5,093 865 17.0 D. Ceded share of technical provisions (12) 5,730 5,634 96 1.7 thereof: held for sale – 13 –13 –100.0 E. Receivables i. Current tax receivables 572 802 –230 –28.7
F. Cash at banks, cheques and cash in hand 2,860 2,490 370 14.9 G. Deferred acquisition costs (14) gross 9,256 9,386 –130 –1.4
D. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholders (24) 6,258 5,373 885 16.5
F. Liabilities i. bonds and notes issued (26) 259 263 –4 –1.5 ii. Deposits retained on ceded business (27) 2,947 2,726 221 8.1 iii. Current tax liabilities 3,931 3,388 543 16.0
G. Deferred tax liabilities (15) 8,784 9,843 –1,059 –10.8 Total equity and liabilities 258,360 247,580 10,780 4.4
3. Expenses for claims and benefits (31) gross 41,837 42,203 –366 –0.9 Ceded share 846 1,289 –443 –34.4 6. Investment result (33) investment income 14,024 16,571 –2,547 –15.4 investment expenses 5,588 9,815 –4,227 –43.1 thereof: income from associates accounted for using the equity method 82 100 –18 –18.0 9. Deduction of income from technical interest –6,918 –5,797 –1,121 –19.3 12. Other non-operating result (35) –836 –707 –129 –18.2 14. Net finance costs (35) –297 –288 –9 –3.1 thereof: Attributable to Munich Reinsurance Company equity holders 3,195 702 2,493 355.1 Attributable to non-controlling interests (18) 16 10 6 60.0
Consolidated income statement for the financial year 20121 1 Previous year’s figures adjusted pursuant to iAs 8; see “Changes in accounting policies and other adjustments”.
155Consolidated financial statements statement of recognised income and expense €m 2012 Prev. year Consolidated result 3,211 712 Currency translation gains (losses) recognised in equity –67 390 included in the income statement – –
Change resulting from valuation at equity gains (losses) recognised in equity 26 5 included in the income statement – –
Change resulting from cash flow hedges gains (losses) recognised in equity – 1 included in the income statement 1 5
Income and expense recognised directly in equity – – –135 – 753 387 6 – 2 1,013
Total recognised income and expense – – –135 – 753 387 6 702 12 1,725 Change in shareholdings in subsidiaries – – –1 – – – – – –1 –2 Change in consolidated group – – – – – – – – – – Dividend – – – – – – – –1,110 –9 –1,119 Purchase/sale of own shares – – – –323 – – – – – –323 Retirement of own shares – – –999 999 – – – – – –
Currency translation – – – – – –69 – – 2 –67 Unrealised gains and losses on investments – – – – 2,336 – – – 11 2,347 Change resulting from valuation at equity – – 28 – 7 – –9 – – 26 Change resulting from cash flow hedges – – – – – – 1 – – 1 Actuarial gains and losses on defined benefit plans – – –374 – – – – – –8 –382
Total recognised income and expense – – –340 – 2,343 –69 –8 3,195 31 5,152 Change in shareholdings in subsidiaries – – –13 – – – – – –33 –46 Change in consolidated group – – – – – – – – – – Dividend – – – – – – – –1,110 –3 –1,113 Purchase/sale of own shares –3 5 26 93 – – – – – 121 Retirement of own shares – – – – – – – – – –
€m 2012 Prev. year Consolidated result 3,211 712 net change in technical provisions 2,528 9,857 Change in deferred acquisition costs 152 –249 Change in deposits retained and accounts receivable and payable 1,858 –2,544 Change in other receivables and liabilities –630 –1,073 gains and losses on the disposal of investments –651 –1,244 Change in securities held for trading –584 –1,120 Change in other balance sheet items 379 –176 other income/expenses without impact on cash flow –728 1,912 i. Cash flows from operating activities 5,535 6,075 Change from losing control of consolidated subsidiaries 35 498 Change from obtaining control of consolidated subsidiaries –260 –310 Change from the acquisition, sale and maturities of other investments –4,217 –3,223 Change from the acquisition and sale of investments for unit-linked life insurance –361 –489 other 70 –1 ii. Cash flows from investing activities –4,733 –3,525 inflows from increases in capital and from non-controlling interests 121 – outflows to ownership interests and non-controlling interests 43 345 Dividend payments 1,113 1,119 Change from other financing activities 569 –1,510 iii. Cash flows from financing activities –466 –2,974 Cash flows for the financial year (I + II + III) 336 –424 effect of exchange-rate changes on cash 34 14 Cash at the beginning of the financial year 2,490 2,900 Cash at the end of the financial year 2,860 2,490
Additional information income tax paid (net) 242 845 Dividends received 399 416 interest received 6,892 7,144 interest paid 621 738
Munich Re’s consolidated financial statements have been prepared on the basis of Section 315 a paragraph 1 of the German Commercial Code in conjunction with Art­ icle 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 315 a para. 1 of the German Commercial Code. The consoli­ dated financial statements thus also meet all the requirements of IFRSs.
Declaration of conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Companies Act In November 2012, the Board of Management and Supervisory Board of Munich Rein­ surance Company published an updated declaration of conformity with the German Corporate Governance Code as per Section 161 of the German Stock Companies Act and made this declaration permanently available to shareholders on the internet.
Owing to the uncertainties involved in estimates, the discretionary judgements to be made always include a subjective component. This may result in comparable items being measured differently by Munich Re and another company, especially as the range of realistic assumptions can be relatively great in individual cases. However, this does not mean that the measurement is not appropriate – merely that it reflects differing knowledge and assessments of future developments.
Discretionary judgements and estimates are of significance for the following items in particular and are described in more detail in the respective explanatory notes: — Goodwill and other intangible assets — Fair values and impairments of financial instruments — Deferred acquisition costs — Technical provisions — Pension provisions — Deferred tax — Contingent liabilities
The amendments to IAS 12 (rev. 12/2010), Taxes on Income, Deferred Tax: Recovery of Underlying Assets, address the issue that the measurement of deferred tax items depends on whether the carrying amount of an asset is expected to be recovered through use or through sale. In practice, the two are often difficult to distinguish. The amendments provide a solution through the introduction of a rebuttable presumption that recovery of the carrying amount will normally be through sale. These amendments are mandatory for financial years beginning on or after 1 January 2012, and were adopted into EU law in December 2012. As the clarification currently has no practical significance for Munich Re, no consequences resulted from this delay.
The net level premiums for the products of our foreign subsidiaries that fall under FAS 97 were previously shown in accordance with local accounting regulations. We have now recognised these net level premiums as a deposit, without impact on profit or loss, in accordance with the rules of FAS 97. Pursuant to IAS 8.41, the modification has been applied with retroactive effect and the previous year’s figures have been adjusted accordingly. This adjustment has no effect on the consolidated balance sheet. The adjustments in accordance with IAS 8 have the following impacts on the income state­ ment for 2011:
Unless mentioned separately below, the following standards are mandatory for financial years beginning on or after 1 January 2013. Only the amendments published as part of the IFRS Annual Improvement Process and the revised IFRS 9, Financial Instruments, as well as the related changes to the group­specific standards (IFRS 10, IFRS 11, IFRS 12 and IAS 27) have not yet been adopted into European law. The other standards were adopted in June or December 2012.
Consolidated income statement 2011 Changes from as originally adjustments pursuant €m recognised to IAS 8 in 2011 2011 Gross premiums written 49,572 –120 49,452 1. Earned premiums 2. Income from technical interest 5,897 –100 5,797 3. Expenses for claims and benefits 9. Deduction of income from technical interest –5,897 100 –5,797
Originally, IFRS 9 envisaged that the new provisions would be mandatorily effective as from 2013. Since discussions of the still outstanding project phases are taking longer than originally planned, the mandatory effective date of a standard amending IFRS 9 and IFRS 7 (rev. 12/2011) has been deferred to financial years beginning on or after 1 January 2015.
IFRS 10 (05/2011), Consolidated Financial Statements, supersedes the provisions of IAS 27 and SIC 12 and creates a uniform definition for control, irrespective of whether this control is based on company law or on contractual or economic circumstances. There are no longer independent provisions for structured entities (special purpose entities). A situation of control exists when an investor has the ability to direct an in ­ vestee’s relevant activities and is exposed to the returns from those activities. Further­ more, IFRS 10 addresses issues that have not been dealt with until now, including the regulation that a situation of control exists even if an investor holds less than a majority of the voting rights but regularly has a de facto majority of voting rights at the annual general meetings. The effects of the new standard on Munich Re’s consolidated com­ panies are currently being reviewed.
IAS 27 (rev. 05/2011), Separate Financial Statements, now deals only with balance sheet recognition of investments in subsidiaries, joint ventures and associates in separ­ ate single­entity financial statements in accordance with IFRS, including the relevant
Munich Re Group Annual Report 2012 disclosures in the notes. The definition of control, and balance sheet recognition of sub­ sidiaries in consolidated financial statements is now regulated by IFRS 10. The stand­ ard has no effect on Munich Re, as the provisions for single­entity financial statements in accordance with IFRS have remained unchanged.
As mandated by the IASB, application of IFRS 10, IFRS 11 and IFRS 12 and the amend­ ments to IAS 27 and IAS 28 would be mandatory for financial years beginning on or after 1 January 2013. When the standards were adopted into European law, the manda­ tory effective date was deferred by one year, so that the standards concerned have to be applied for the first time by entities domiciled in the European Union for financial years beginning on or after 1 January 2014; voluntary application before that date is permit­ ted.
IFRS 13 (05/2011), Fair Value Measurement, provides guidance on measuring items at fair value if another standard prescribes fair value measurement or fair value disclosure in the notes to the financial statements. The standard thus does not determine what items need to be measured at fair value. IFRS 13 revises the definition of fair value, defining it as the price that would be received to sell an asset or paid to transfer a liabil­ ity in an orderly transaction between market participants at the measurement date. The standard includes detailed information on how to determine the fair value for different types of assets and liabilities. In addition, the standard requires further disclosures in the notes – for instance, the fair value hierarchy thus far only required for financial
The amendments to IAS 32 (rev. 12/2011), Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities, and IFRS 7 (rev. 12/2011), Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities, clar­ ify some issues in relation to the admissibility of offsetting financial assets and finan­ cial liabilities. They also require additional disclosures in the notes to the financial statements. These additional disclosures comprise gross and net amounts related to offsetting as well as amounts for existing rights to offset that do not satisfy the offset­ ting criteria. The new disclosures are mandatory for annual periods beginning on or after 1 January 2013 and the clarifications for annual periods beginning on or after 1 January 2014. We are currently proceeding on the assumption that these changes will have no practical significance for Munich Re.
Cash flows and net assets from obtaining and losing control of consolidated subsidiaries or other operations are shown in the tables below: Number of consolidated subsidiaries1
Other Germany countries Total 1 In addition, 62 German and 2 non­German special funds were included in the consolidated group.
Cash flows arising from obtaining control €m 2012 Prev. year Total consideration for obtaining control –274 –348 Non­cash consideration for obtaining control – – Cash consideration for obtaining control –274 –348 Cash over which control was obtained 14 38 Total –260 –310
Net assets obtained €m 2012 Prev. year Goodwill/gain from bargain purchase 19 44 Other intangible assets 190 130
The sale of our fully consolidated subsidiaries American Modern Life Insurance Company, Amelia, Ohio, and Southern Pioneer Life Insurance Company, Jonesboro, Arkansas, resulted in a gain on disposal totalling €4m, whilst the sale of ERGO Daum Direct General Insurance Co. Ltd., Seoul, produced a loss on disposal of €25m. These are shown under “investment result” in the consolidated income statement. In addition, a loss of €6m from the sale of ERGO Daum Direct General Insurance Co. Ltd., Seoul, previously included in income and expenses recognised directly in equity, had to be reallocated from the “other reserves” to “other non­operating result”.
Further information on our gains and losses from losing control can be found in the notes to the consolidated balance sheets – assets, under (17) Non­current assets and disposal groups held for sale that were sold in the reporting period.
Other assets 37 51 Technical provisions (net) –95 –373 Other liabilities –41 –286
Lecce, in the Apulia region of Italy). A provisional purchase price of €75.2m was paid for the acquisition of SunEnergy. No contingent purchase price adjustments were agreed. The excess of net asset value over consideration paid (“gain from bargain purchase”) of €4.6m arithmetically resulting from the transaction was reversed after expert evaluation, and this has been recognised in “other operating income”.
On 10 August 2012, via its subsidiaries MR RENT UK Investment Limited, London, and Bagmoor Holdings Limited, London, Munich Re acquired 100% of the voting shares in three wind parks in the United Kingdom. The acquired portfolio comprises the wind parks Tir Mostyn in North Wales, Scout Moor near Manchester, and Bagmoor in Lincolnshire.
1 The fair value of the receivables acquired as part of the transactions corresponds to the carrying amount. No defaults were expected at the acquisition date. 2 No contingent liabilities, contingent payments or separate transactions within the meaning of IFRS 3 were identified. 3 The change in the consolidated result cannot be accurately calculated owing to lack of data at the beginning of the year.
IFRS fair values of the assets and liabilities at the acquisition date
Goodwill resulting from the first­time consolidation of subsidiaries is tested for impair­ ment at least annually, in accordance with IAS 36. We additionally carry out ad­hoc impairment tests if there are indications of impairment. For impairment testing, the goodwill is allocated to the cash­generating units or groups of cash­generating units expected to derive benefit from the synergies of the business combination. To ascertain whether there is any impairment, the carrying amount (including allocated goodwill) of a cash­generating unit or a group of cash­generating units is compared with that unit’s or group’s recoverable amount. The recoverable amount is the greater of the fair value less costs to sell and the value in use. If this recoverable amount is lower than the carry­ ing amount, a write­down is made on the goodwill. If the amount of the impairment of a cash­generating unit or group of cash­generating units is greater than the carrying amount of the goodwill allocated, the difference is generally allocated pro rata between the other relevant assets of the unit or group of units on the basis of their carrying amounts. However, the carrying amount may not be reduced below the highest of fair value less costs to sell, the value in use, and zero.
The other intangible assets mainly comprise acquired insurance portfolios, acquired and self­developed software, and acquired brand names, sales networks, client bases and licences.
Loans are non­derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are measured at amortised cost in accordance with the effective interest method. Write­downs for impairments are made in cases where the repayment of a loan can no longer be expected.
Securities at fair value through profit or loss are accounted for at fair value at the balance sheet date. If no quoted prices in an active market are available, fair values (particularly with derivatives) are based on recognised valuation methods. Munich Re uses a range of valuation models for this purpose, details of which may be obtained from the follow­ ing table:
Derivatives Pricing method Parameters Pricing model Equity and index risks Stock options traded on the stock exchange Quoted price – – OTC stock options Theoretical price Listing of underlying shares Black­Scholes (European) Effective volatilities Cox, Ross and Money­market interest rate Rubinstein (American) Dividend yield Monte Carlo simulation Equity forwards Theoretical price Money­market interest rate Present­value method Share price Dividend yield Equity/index futures Quoted price – – Interest-rate risks Interest­rate swaps Theoretical price Swap curve Money­market interest­rate curve Present­value method Swaptions/interest­rate guarantee Theoretical price At­the­money volatility matrix and skew Black­76 Swap curve Money­market interest­rate curve Interest­rate currency swaps Theoretical price Swap curve Present­value method Money­market interest­rate curve Currency spot rates Interest­rate futures Quoted price – – Inflation swaps Theoretical price Zero­coupon inflation swap rates Present­value method Money­market interest­rate curve, swap curve Bond futures Quoted price – – Quoted options on bond futures Quoted price – – Currency risks Currency options Theoretical price At­the­money volatility Garman­Kohlhagen Currency spot rates Money­market interest­rate curve Currency forwards Theoretical price Currency spot rates Present­value method Money­market interest­rate curve Other transactions Insurance derivatives Theoretical price Market values of the cat bonds Present­value method (excluding variable annuities) Interest­rate curve Insurance derivatives Theoretical price Biometric and lapse rates Present­value method (variable annuities) Volatilities Interest­rate curve Currency spot rates Credit default swaps Theoretical price Credit spreads Present­value method Recovery rates ISDA CDS Standard Model Interest­rate curve Total return swaps on commodities Theoretical price Listing of underlying index Index ratio calculation Commodity options Theoretical price Listing of underlying shares Black­Scholes (European) Effective volatilities Cox, Ross and Money­market interest rate Rubinstein (American)
Other investments comprise deposits with banks and tangible assets in renewable energies and forestry investments. Deposits with banks are measured at cost in accord­ ance with the effective interest method. Tangible assets in renewable energies are generally accounted for at amortised cost. The items in question are amortised on a straight­line basis at a rate of at least 5% over a useful life of 20 years at most. In add­ ition, these items are tested for impairment at each balance sheet date and write­ downs made if required. Forestry investments are measured at fair value less estimated costs to sell.
Repurchase agreements and securities lending Under repurchase agreements we, as the lender, acquire securities with the obligation to sell them back to the borrower at a later date. As the risks and rewards from the securities remain with the borrower, they are not posted as such in our accounts but are shown as a receivable from the borrower under “other investments, deposits with banks”. Interest income from these transactions is recognised in the investment result.
Recognition of financial instruments Financial assets are accounted for at the settlement date.
Determining fair values IAS 39 defines the fair value of a financial instrument as the amount for which a finan­ cial asset could be exchanged, or a financial liability settled, between knowledgeable, willing parties in an arm’s length transaction.
All financial instruments recognised at fair value are allocated to one of the valuation hierarchy levels of IFRS 7. This valuation hierarchy provides for three levels. The initial basis for the allocation is the economic investment class. Only if this does not result in an appropriate allocation do we deviate from such an approach in individual cases.
For assets allocated to Level 3, we use valuation techniques not based on inputs observable in the market. This is only permissible insofar as no observable market data are available. The inputs used reflect Munich Re’s assumptions regarding the factors which market players would consider in their pricing. We use the best available infor­ mation for this, including internal company data. The financial instruments allocated to this level of the fair value hierarchy largely comprise investments in private equity, in renewable energy (RENT) as well as in real­estate funds, certain credit structures, and investments in affiliated companies and associates measured at fair value. We also allocate insurance derivatives and derivative components that are separated from the host insurance contract to Level 3
Net investment result The net investment result comprises regular income, income from write­ups, gains and losses on the disposal of investments, other income, write­downs of investments, man­ agement expenses, interest charges and other expenses. Regular income and expenses from investments not measured at fair value through profit or loss are calculated in accordance with the effective interest method, i.e. any premiums or discounts are deducted from or added to the acquisition costs, with impact on profit or loss, until maturity.
The share of technical provisions for business ceded by us is determined from the respective technical provisions in accordance with the terms of the reinsurance agree­ ments; cf. the notes on equity and liabilities item C. Appropriate allowance is made for the credit risk.
Deferred acquisition costs comprise commissions and other variable costs directly connected with acquisition or renewal of insurance contracts. In life business and long­term health primary insurance, acquisition costs are capitalised and amortised over the duration of the contracts. This is done either proportionally to the premium
Under IAS 12, deferred tax assets must be recognised in cases where asset items have to be valued lower, or liability items higher, in the consolidated balance sheet than in the tax accounts of the Group company concerned and these differences will be elim­ inated at a later date with a corresponding effect on taxable income (temporary differ­ ences). Also included are tax assets deriving from tax loss carry­forwards. We take into account the tax rates of the countries concerned and the consolidated company’s respective tax situation; in some cases, for purposes of simplification, we use uniform tax rates for individual circumstances or subsidiaries. Changes in tax rates and tax le gislation that have already been adopted by the government at the balance sheet date are taken into account. Deferred tax assets are recognised if a realisation is probable.
The item issued capital and capital reserve contains the amounts that the equity hold­ ers of Munich Reinsurance Company have paid in on shares. The actuarially calculated value of the own shares held by Munich Reinsurance Company at the balance sheet date is deducted directly from the issued capital. The amount of the acquisition costs in excess of the actuarially calculated value is deducted from the revenue reserves. The capital reserve is reduced by the externally generated costs directly connected with equity capital measures, after taking into account tax effects. Furthermore, the capital reserve contains gains from the sale of own shares by Munich Reinsurance Company.
Own shares held by Munich Re subsidiaries at the balance sheet date have been deducted directly from retained earnings.
Other reserves contain unrealised gains and losses resulting from the recognition of other securities available for sale at fair value and from investments in non­consoli­ dated affiliated companies and in associates that we do not value at equity. These reserves also include unrealised gains and losses from the valuation of associates at equity, differences resulting from the currency translation of foreign subsidiaries’ fig­ ures, and the valuation result from the hedging of cash flows. Write­ups of equity investments available for sale are also recognised in this equity item.
Non-controlling interests are accounted for in the balance sheet as part of equity. These are the shares of third parties in the equity of subsidiaries that are not wholly owned directly or indirectly by Munich Reinsurance Company. Direct minority interests in special funds and in partnerships are recognised under “other liabilities”. The portion of the result attributable to non­controlling interests is shown in the consolidated result.
In the case of contracts as per FAS 120, the provision for future policy benefits com­ prises the net level premium reserve and liabilities for terminal dividends. The net level premium reserve is calculated from the present value of guaranteed policy benefits (including acquired bonuses but excluding claims adjustment expenses) less the pres­ ent value of future net level premiums. The net level premium is the net premium less the portion of the premium envisaged for covering claims adjustment expenses. The actuarial assumptions are generally the same as those used for premium calculation. The provision for terminal dividends is built up proportionally with a fixed share of the expected gross profit margins. The same method is used for this as for determining the amortisation of the deferred acquisition costs.
Other technical provisions mainly include the provision for premium refunds in primary insurance and the provision for profit commission in reinsurance. Provisions for pre­ mium refunds are posted in life and health primary insurance for obligations involving policyholder bonuses and rebates that have not yet been irrevocably allocated to indi­ vidual 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 super­ visory or individual contract regulations. The provision for premium refunds based on national regulations relates only to German primary insurance business. The provision for premium refunds also incorporates the provision for premium loadings and the provision for future premium reductions in German health primary insurance.
This item includes provisions for post-employment benefits. Munich Re companies generally give commitments to their staff in the form of defined contribution plans or defined benefit plans. The type and amount of the pension obligations are determined by the conditions of the respective pension plan. In general, they are based on the staff member’s length of service and salary. Under defined contribution plans, the com panies pay fixed contributions to an insurer or a pension fund. This fully covers the companies’ obligations. Under defined benefit plans, the staff member is promised a particular level of retirement benefit either by the companies or by a pension fund. The companies’ contributions needed to finance this are not fixed in advance. If pension obligations are covered by assets held by a legally separate entity (e.g. a fund or a contractual trust agreement in the form of a two­way trust) – assets that may only be used
Munich Re Group Annual Report 2012 to cover the pension commitments given and are not accessible to creditors – the pen­ sion obligations are shown less the amount of these plan assets. If the fair value of the assets exceeds the related outsourced pension commitments, this reimbursement right is recognised under “other receivables”.
The other provisions included in this item are established in the amount of the probable requirement. Such amounts are not discounted if the interest­rate effect is insignificant.
This item comprises bonds and notes issued, deposits retained on ceded business, cur­ rent tax liabilities, and other liabilities. Financial liabilities are generally recognised at amortised cost. Derivatives (derivative financial instruments, insurance derivatives and derivative components separated from the host insurance contract) are recognised at fair value. Details of how the fair value is determined are provided under assets item B.
The object of our asset­liability management, on which we report on page 41, is to eco­ nomically minimise excess or insufficient cover in foreign currencies within the Group. Insofar as this is done across Group companies with different functional currencies, it produces economically non­existent fluctuations in the consolidated result. Where exchange gains or losses occur in the translation of foreign­currency transactions into the national currencies of the consolidated companies, they are accounted for under “other non­operating income” and “other non­operating expenses” respectively.
Munich Re’s primary insurance segments comprise all the activities of the ERGO Insurance Group (ERGO). Certain primary insurers whose business requires special solution- finding competence are coupled to reinsurance as the risk carrier. We therefore transact their business from within reinsurance and consequently allocate them to the reinsurance segment.
The changeover does not lead to any changes to the consolidated result. The adjustments result in shifts within and between the segments. This applies to both technical and non-technical items.
The segments reported under IFRS 8 are now shown after elimination of all intraGroup transactions (mainly dividend payments, sales, reinsurance transactions, receivables and corresponding interest income).
C. Gross technical provisions for life insurance policies where the investment risk is borne by the policyholder – – – – 6,257 5,372 – – – – 1 1 – – 6,258 5,373
B. Investments I. Land and buildings, including buildings on third-party land 245 257 1,224 1,187 1,393 1,445 777 796 95 109 30 31 67 64 3,831 3,889 Thereof: Held for sale – – – – – 13 – – – – – – – – – 13 II. Investments in affiliated companies and associates 21 89 775 453 132 132 151 98 214 226 93 82 81 74 1,467 1,154 Thereof: Associates accounted for using the equity method 1 75 682 386 109 101 138 86 172 148 90 71 65 57 1,257 924
Reinsurance Primary insurance Munich Health Asset management Total Life Property-casualty Life Health Property-casualty €m 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 2012 Prev. year 3. Expenses for claims and benefits Gross 8,536 7,170 10,393 13,724 7,816 7,107 6,016 5,859 3,653 3,540 5,423 4,803 – – 41,837 42,203
Thereof: Interest and similar income 728 751 1,520 1,615 2,792 2,973 1,277 1,250 291 310 101 126 5 8 6,714 7,033 Interest charges and similar expenses 3 23 13 104 3 29 2 9 1 9 – 3 – – 22 177
Income from associates accounted for using the equity method – 13 16 62 –5 – 5 5 46 –4 14 3 6 21 82 100
Thereof: Attributable to Munich Reinsurance Company equity holders 495 335 2,561 173 165 69 87 23 –18 49 –95 35 – 18 3,195 702 Attributable to non-controlling interests – –1 – –4 –1 –2 – – 14 16 3 1 – – 16 10
Investments in long-term assets per segment1 €m 31.12.2012 Prev. year Reinsurance life 97 89 Reinsurance property-casualty 434 330 Primary insurance life 52 69 Primary insurance health 13 26 Primary insurance property-casualty 161 182 Munich Health 28 115 Asset management 2 7 1 The non-current assets mainly comprise intangible assets (especially goodwill) and our owner-occupied and investment property, as well as investments in renewable energy (RENT).
Allocation of goodwill to cash-generating units For impairment testing, the goodwill is allocated to the cash-generating units or groups of cash-generating units that derive benefit from the synergies of the business combination. At the same time, the unit or group of units to which the goodwill is allocated represents the lowest level at which goodwill is monitored for internal management purposes. In reinsurance, we have allocated the goodwill to divisions or groups of divisions, while in primary insurance it has been allocated to legal entities or groups of legal entities. In the case of Munich Health, goodwill is allocated to the segment bearing that name. Details of our divisions are provided on page 32 f. in the management report.
Our goodwill was fully allocated to the following cash-generating units or groups of cash-generating units: Development of goodwill
Munich €m Reinsurance Primary insurance Health Total ERGO Munich Re Insurance Goodwill from the acquisition of America Other Group Other Other 2012 2012 2012 2012 2012 2012 Gross carrying amount at 31 Dec. previous year 1,062 435 1,754 554 154 3,959 Accumulated impairment losses at 31 Dec. previous year – 27 – 381 40 448 Carrying amount at 31 Dec. previous year 1,062 408 1,754 173 114 3,511 Currency translation differences –16 –5 – – 2 –19
Goodwill allocated across other multiple cash-generating units or groups of cash-generating units is not significant in comparison with the total carrying amount of goodwill in any instance. In cases where the recoverable amounts of these cash-generating units or groups of cash-generating units are based on the same key assumptions, the aggregate carrying amount of the goodwill allocated is not significant in comparison with the total carrying amount of goodwill either. We regard as “significant” within the meaning of IAS 36.134 and IAS 36.135 amounts of 10% or more of total Group goodwill.
Assumptions for determining the recoverable amount in impairment testing Impairment tests for cash-generating units allocated a significant portion of the goodwill were carried out on the basis of the following assumptions: Allocation of goodwill to cash-generating units
The discount rates have been determined in the form of the weighted average cost of capital, with the proportionate cost of capital derived using the Capital Asset Pricing Model (CAPM). Calculations are based on cash flows after consideration of normalised taxes. In the above table, for disclosure purposes, a corresponding pre-tax interest rate is given in each case. Sensitivity analyses were performed for the discount rates, the growth rates for extrapolations, and the cash flows. No potential impairments were identified.
Acquired insurance portfolios Software Self-developed Other €m 2012 Prev. year 2012 Prev. year 2012 Prev. year Gross carrying amount at 31 Dec. previous year 1,359 1,378 342 329 814 774 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 826 774 184 152 605 567 Carrying amount at 31 Dec. previous year 533 604 158 177 209 207 Currency translation differences –4 –1 – – 2 –2 Additions
Reclassifications – – – – – – Impairment losses reversed – – – – – – Amortisation and impairment losses
Disposals Loss of control – – – – – – Other 2 – – – – –
The impairment losses are distributed between the following different Group segments: in primary insurance, – (€19m) is apportionable to property-casualty and €13m (1m) to life; €50m (–) is apportionable to Munich Health.
Miscellaneous Total Self-developed Other €m 2012 Prev. year 2012 Prev. year 2012 Prev. year Gross carrying amount at 31 Dec. previous year 5 5 82 70 3,754 3,866 Accumulated amortisation and accumulated impairment losses at 31 Dec. previous year 5 3 29 20 2,173 2,233 Carrying amount at 31 Dec. previous year – 2 53 50 1,581 1,633 Currency translation differences – – 1 – –2 7 Additions
Reclassifications – – – – – 6 Impairment losses reversed – – – – – – Amortisation and impairment losses
The write-ups are distributed between the following different Group segments: in reinsurance, €4m (1m) is apportionable to life and €18m (1m) to property- casualty; in primary insurance, €9m (5m) is apportionable to life, €1m (–) to health and €1m (–) to property-casualty.
The impairment losses are distributed between the following segments: In reinsurance, – (€2m) is apportionable to life and – (€5m) to property- casualty; in primary insurance, €36m (46m) is apportionable to life, €3m (3m) to health and €1m (1m) to property- casualty.
The fair value of investment property at the balance sheet date amounted to €5,350m (5,324m). Valuations for the directly held portfolio are performed by valuers within the Group, and those for the indirectly held portfolio by external valuers, in keeping with the legal regulations for investment companies. Determining the sustainability of cash inflows and outflows, taking into account the market conditions at the respective property location, is material for the valuation. The fair value is determined individually per item by discounting the future cash flow to the valuation date. Depending on the type and the opportunity/risk profile of the property, discount rates of 3.00% to 5.50% are used for residential buildings, 4.00% to 8.00% for office buildings, and 4.00% to 8.25% for retail.
The aggregated assets of all associates amount to €9,301m (8,429m), liabilities to €5,759m (5,585m), results for the year to €149m (122m), and revenue to €2,285m (1,603m). For associates not accounted for using the equity method, assets amount to €149m (160m), liabilities to €116m (85m), results for the year to €3m (–), and revenue to €127m (120m).
Rating of “other loans” according to carrying amounts €m 31.12.2012 Prev. year
Carrying amounts Fair values €m 31.12.2012 Prev. year 31.12.2012 Prev. year Up to one year 3 6 3 6 Over one year and up to two years 4 3 5 3 Over two years and up to three years – 4 – 4
Munich Re Group Annual Report 2012 7 Hierarchy for the fair value measurement of investments
At 31 December 2012, around 83% of the investments measured at fair value are allocated to Level 1 of the fair value hierarchy, 14% to Level 2 and 3% to Level 3.
The only investments held for trading that are allocated to Level 3 are derivatives. The strong increase in the fixed-interest securities allocated to Level 3 derive mainly from a reassessment of the allocation of CMBSs amounting to €1,800m. By contrast, the reassessment of the level allocation of RMBSs resulted in a much smaller reduction of only €256m.
Investments for the benefit of life insurance policyholders who bear the investment risk 5,093 – – 5,093 1 Including hedging derivatives.
The following table presents the reconciliation from the beginning balances to the ending balances for investments allocated to Level 3.
Gains (losses) recognised in the income statement –8 –26 –2 –1 Gains (losses) recognised in equity 38 – 2 –
Over half the corporate debt securities are covered bonds or issues by development banks and comparable institutions. The remaining portfolio is composed of securities issued by companies outside the banking sector (with each individual risk making up less than 1%), bonds issued by banks and state central savings banks (with state guarantees ), and asset-backed securities/mortgage-backed securities that largely have implicit state guarantees or an above-average rating.
Carrying amounts Unrealised gains/losses Amortised cost €m 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year Fixed-interest securities Government bonds
Other securities at fair value through profit or loss Total Designated as at fair value Held for trading through profit or loss €m 31.12.2012 Prev. year 31.12.2012 Prev. year 31.12.2012 Prev. year Carrying amount at 31 Dec. previous year 8 17 – – 2,066 1,856 Gains and losses –12 222 – – 57 236
Disposal proceeds in the financial year €m 2012 Prev. year Fixed-interest securities 46,079 57,885 Non-fixed-interest securities
Carrying amounts Amortised cost €m 31.12.2012 Prev. year 31.12.2012 Prev. year Up to one year 11,526 10,914 12,131 10,846 Over one year and up to two years 8,747 9,429 8,501 9,282 Over two years and up to three years 10,858 10,303 10,259 10,019 Over three years and up to four years 10,599 9,920 9,984 9,667 Over four years and up to five years 10,679 9,411 10,030 8,862 Over five years and up to ten years 34,145 32,131 30,897 31,066
Securities at fair value through profit or loss comprise securities of €2,846m (2,370m) held for trading and securities of €169m (166m) designated as at fair value through profit or loss.
As at 31 December 2012, Munich Re held collateral for derivatives in the form of securities with a rating of at least AA that may either be sold or transferred as collateral. The fair value of this collateral amounts to €1,154m (668m).
The following table shows the fair values and the related notional amounts of all our open positions, broken down according to risk types. Positive and negative fair values have been netted. At 31 December 2012, the open positions amounted to €1,451m (689m), or 0.6% (0.3%) of the balance sheet total.
Disclosure of derivatives by balance sheet item €m 31.12.2012 Prev. year Qualifying for Fair value hedge accounting Balance sheet item No Investments, other securities held for trading 2,111 1,772 Positive
Open positions 31.12. Periods to maturity in years < 1 1–2 2–3 3–4 4–5 > 5 2012 Prev. year €m Interest-rate risks Traded on the stock exchange
Over-the-counter Fair values 65 107 75 87 301 676 1,311 725
Total interest-rate risks Fair values 71 107 75 87 301 676 1,317 766
Total currency risks Fair values –11 – – – – –3 –14 –35
Total equity and index risks Fair values 38 1 16 – – – 55 82