Net expenses for claims and benefits €bn –38.7 –39.7 –39.9 –41.0 –40.9 Net operating expenses €bn –12.4 –12.0 –12.4 –12.6 –12.0
Off-balance-sheet unrealised gains and losses3 €bn 16.0 17.4 8.7 11.0 5.7
Combined ratio property-casualty Germany % 97.9 95.3 96.7 98.0 Combined ratio international % 104.7 97.3 98.7 99.8 1 Previous years’ figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 For 2013, 2014 and 2015, this contains own shares earmarked for retirement. 3 Including those apportionable to minority interests and policyholders.
4 The figures for 2011 are not adjusted for relief of 1.4 percentage points from economic risk transfer to the capital markets. 5 Excluding health insurance conducted like life insurance.
Corporate governance 021 Report of the Supervisory Board 023 Corporate governance report 028
Combined management report 033 Group 035 Macroeconomic and industry environment 068 Business performance 070 Financial position 097 Stakeholders 105 Risk report 114 Opportunities report 136 Prospects 141 Munich Reinsurance Company (Information reported on the basis of German accountancy rules) 149
More detailed lists of contents are provided on the pages separating the individual sections.
To o ur s ha re ho ld er s 1To our shareholders
Letter to shareholders 3 Notable events in 2015 8 The Board of Management 10 Munich Re shares 12 Our strategy 17
away than ever. In addition, there are ongoing grave risks from terrorism, the continuing pace of climate change, and a cooling of growth in China – to name but a few of the risks from a very long list of uncertainties. Many of these risks are also interlinked, which makes it even more difficult to find a solution to individual crises. Apart from a few individual success stories, such as the climate negotiations in Paris and the compromise with Iran on nuclear issues, global news was dominated by negative reports in 2015.
Overall, Munich Re has made great efforts over the past year to use innovative solutions to cover revised client requirements and new risks. And the uncertainties I mentioned also generate business opportunities, which we try to use to our advantage. We offer our clients innovative coverage concepts for new risks, or risks that have previously not been insured – such as cyber, reputational, non-damage business interruption or terror risks. Of course, we ensure that these covers are conceived in such a
way that the assumption of liability is strictly limited. We are gathering experience, and expanding our products incrementally and prudently. Even for well-known risks – such as flood coverage – we are pushing back the boundaries of insurability with newly designed products in Germany and in the USA. In conjunction with international organisations such as the World Bank, we are developing insurance solutions to help protect less well-off countries from the financial consequences of natural catastrophes. All these innovative approaches give us access to new groups of clients and business opportunities.
The digitalisation of economies unlocks further important potential for innovation – not only on the product side, but also in dealing with our clients. As a Group, we want to take advantage of these opportunities. So we have not only set up teams across the Group for these purposes, but have also established contacts with start-ups and large and small companies across the world which help us to tap digital business opportunities.
The ERGO result suffered a negative impact from significant impairment losses of goodwill, triggered in particular by continuing low interest rates over many years. Markus Rieß took up his appointment as Chairman of the Board of Management of ERGO in the second half of 2015. It is still too early to provide details about the revised strategy for ERGO, but its pillars will be a stronger sales force, exploiting the potential of digitalisation, and a profitable expansion of our international activities.
The consolidated result has once again demonstrated that on account of its capital strength and conservative underwriting and reserving policies, Munich Re is able to remain profitable even under difficult market conditions. Our 2015 result again benefited from the release of reserves, without Munich Re having to deviate from its conservative reserving policies, or to sell off the corporate silverware. Overall, Munich Re not only delivered a very respectable result in 2015, but at the same time took the necessary measures – especially in the area of innovation – to ensure that you, as our shareholders, will remain happy with your investment in the future.
On behalf of Munich Re, MEAG acquires 100% of the shares in three UK photovoltaic plants. These are situated in Southwest Wales, Cornwall and near Cambridge.
6 July 2015 The African drought pool has proven itself in its first year. African Risk Capacity Insurance Company Ltd. (ARC Ltd.) renews its reinsurance programme with Munich Re as one of the leading reinsurers; the scope of cover is increased. This kind of insurance cover has considerable growth potential.
MEAG concludes its first project-financing deal in the renewable energies sector for the refinancing of a pumped-storage power station in Massachusetts, USA. Owing to their predictable yields, infrastructure investments such as these are well suited to the long-term liabilities of insurers like Munich Re.
Further African countries are expected to participate in the programme. In addition, the cover is to be extended to flood, windstorm and perhaps also to pandemic risks.
To our shareholders Notable events 27 March 2015 ERGO receives the market research institute YouGov’s insurance industry service innovation prize for its insurance cover for residential buildings in extremely flood-prone areas. The quality seal is awarded to particularly innovative companies. ERGO’s flexible coverage offers access to insurance to residents of regions susceptible to flooding that were thus far considered more or less uninsurable with conventional products.
With effect from 16 September 2015, the Supervisory Board of ERGO Versicherungsgruppe AG appoints Markus Rieß to the ERGO Board of Management and also as its Chairman. At the same time, Munich Re’s Supervisory Board appoints him to the Company’s Board of Management, where he will be responsible for primary insurance/ ERGO and MEAG’s third-party business.
1 August 2015 MedNet, a Munich Health software and services company, begins operations in Egypt and expands its existing activities to a total of eleven countries in the Middle East and Eastern Europe.
The ERGO Insurance Group sells its Italian subsidiary ERGO Italia along with the insurers ERGO Previdenza and ERGO Assicurazioni to the private equity investor Cinven.
Startupbootcamp’s first Insurance Accelerator Program is launched in London. ERGO is one of the programme’s many partners from the international financial services sector that are offering collaborations with start-ups.
Jörg Schneider Chief Financial Officer Financial and Regulatory Reporting Group Controlling Corporate Finance M&A Integrated Risk Management Group Legal Group Taxation Investor and Rating Agency Relations
In the first few months of the year, the stock markets witnessed a steep rise, with many indices hitting new record highs in March. Geopolitical crises and the ongoing debate about Greece did not significantly curb the positive impulses from the European Central Bank’s monetary measures. A weak euro and low oil prices resulted in higher profit expectations, in particular with regard to export-oriented European companies.
Fearing a cooling of the global economy, the stock markets suffered major losses in the third quarter. While the Dow Jones and DAX were able to rally in July, the weak growth figures released by China in mid-August were mainly responsible for the subsequent collapse in prices and rising volatility. This trend was reinforced by uncertainty about an imminent increase in interest rates in the USA and turmoil following the diesel emissions scandal towards the end of this quarter. The DAX hit its low for the year on 24 September at 9,428 points.
October was one of the best months for stock exchanges in recent years. The ECB stated that it would continue – and expand – its quantitative easing policy, whilst the Federal Reserve indicated that its first moderate increase in interest rates was unlikely to be followed by further steps for the time being. The mid-November terror wave did not have any impact on the markets, but the further decline in oil prices in December and its uncertain consequences for the global economy weighed on sentiment. The Fed’s increase of interest rates did not have any significant effect on prices. The DAX closed the year at 10,743 points.
In the year under review, the performance of reinsurance company shares exceeded that of primary insurance companies in most cases. Overcapacity and intense com petition, paired with stagnating demand, were responsible for significant pressure on margins in the reinsurance market. Investment income was also down owing to per sistently low interest-rate levels. Nevertheless, given the good capitalisation of European reinsurers in particular, investors continued to regard their higher dividends, ongoing share buy-back programmes and special dividend payouts as important investment criteria.
The value of Munich Re’s shares increased appreciably in 2015, despite the challenging environment, thus reaffirming their attractiveness as an investment. The price performance of Munich Re’s shares was underpinned by operating earnings that were still robust and by the fact that our original profit guidance was again exceeded – also thanks to relatively low major losses. Munich Re’s capitalisation continued to be very comfortable, so that a new share buy-back programme totalling €1bn was launched by the Board of Management in June 2015. The Board remained committed to disciplined and responsible capital management in line with shareholders’ interests.
Munich Re’s shares closed the year at €184.55, equivalent to an increase of 11.3%. Including the dividend proposed for the 2015 financial year, the return was a gratifying 15.8%. By comparison, the DAX 30 rose by 9.6%, whilst the European insurance index increased by 19.7%. Taking a longer-term view, the return on Munich Re shares including dividends has thus grown more strongly than the European insurance index over the last five-year period.
Munich Re shares DAX 30 DJ EURO STOXX Insurance (total return) Munich Re shares (total return) Source: Datastream
Munich Re’s communication with the capital markets is consistently given very good ratings by analysts and investors. For many years, the team has done extremely well in various rankings of investor relations departments of the European insurance industry.
From a sustainability perspective, Munich Re shares also remain an interesting investment. Since 2001, Munich Re has been continually listed on the Dow Jones Sustainability Index (DJSI) and the FTSE4Good. It is also listed on the MSCI Global Sustainability, the STOXX ESG Leaders and the Euronext World 120, and it is a member of the ETHIBEL Pioneer and Excellence investment registers.
Munich Re’s rating by specialised sustainability rating agencies, e.g. RobecoSAM, Sustainalytics, Vigeo and MSCI, has been consistently excellent, making the company one of the best in the insurance sector. In 2015, Munich Re came out top compared with its peers in the same market capitalisation category of the Sustainalytics rating.
Active capital management is an integral component of our business policy. We therefore strive to give our shareholders an appropriate share in our corporate success. Our policy is to at least maintain – and where possible even to increase – our level of dividend of the previous year. The last time we reduced our dividend was in 1970; we use share buy-backs as a flexible means of managing our capitalisation.
With a dividend yield of approximately 4.5% (dividend for the 2015 financial year in relation to the year-end share price), Munich Re shares remain an attractive equity investment in the DivDAX, a subindex of Deutsche Börse AG featuring the 15 DAX companies with the highest dividend yields.
Munich Re shares are no-par-value registered shares. First admitted to trading on the stock exchange in Munich on 21 March 1888, they are today traded on all German stock exchanges.
Around 206 million Munich Re shares with a total volume of some €36bn were traded on German stock exchanges in the year under review, putting our shares in 11th place among the DAX stocks. In terms of market capitalisation, we ranked 10th with freefloat market capitalisation of around €31bn.
At the end of December 2015, a total of 196,000 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 16.0% were in the hands of private investors.
Year-end closing price € 184.55 165.75 Annual performance (excluding dividend) % 11.3 3.5 Beta 250 relative to DAX (daily, raw) % 0.6 0.8 Market capitalisation at 31 December €bn 30.8 28.7 Market value/equity at 31 December1 1.0 0.9 Average trading volume ’000 813 700 Earnings per share € 18.73 18.31 Dividend per share € 8.25 7.75 Dividend yield at 31 December % 4.5 4.7 Dividend payout (status at 2 March 2016) €bn 1.3 1.3 1 Including minority interests.
Our business as an insurer and reinsurer is the professional handling of risk. We create value by using our extensive risk knowledge and sophisticated underwriting techniques to make risks from many different areas of private and business life manageable – for our clients and for us.
We combine primary insurance and reinsurance under one roof. This set-up allows us to cover all 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 market cycles in individual insurance and reinsurance segments, and in national markets. We thus aim to secure an attractive return while simultaneously maintaining relatively low volatility. We aim to build lasting value for our shareholders, clients and staff.
The risks that we write differ greatly in nature. Their predominant non-correlation in terms of potential loss occurrence enables us to balance the risks in the portfolio over time, across regions and across fields of business. This diversification benefit is key for our success. The size and mix of the risks assumed mean we can cover a comparatively large number of risks with the capital available. This broad diversification and a risk underwriting strategy geared to profitability enable us to generate stable and sustainable profits and insulate ourselves to a large extent from the fluctuations of the capital markets.
— The Group’s business model covers the relevant sections of the insurance industry’s value chain
— A forward-looking and responsible approach is an integral part of our corporate strategy
Our strategy ility strategy, which is l challenges and use ustainable solutions. overnance aspects ansaction of insurance es and government and
We write our business directly with primary insurers and also via brokers. In addition to traditional reinsurance business, we participate in insurance pools, public-private partnerships, and business in specialist niche segments, and also as a primary insurer. Through our operating field Risk Solutions, we offer our clients in industrial and majorproject business a wide range of specialised products, customised insurance solutions and services, which we manage from within our reinsurance organisation. Our clients thus have direct access to the expertise, innovative strength and capacity of a leading global risk carrier.
Thanks to our capital management expertise, we are also a sought-after partner for products geared to our clients’ balance-sheet, solvency and rating-capital requirements, as well as their risk models. Our reputation in the market and our global, client-focused set-up give us quick and direct access to all clients.
We also develop innovative business ideas in cooperation with external partners, and with selected start-ups that we provide with targeted support. We do so by taking advantage of the opportunities of digitalisation and modern data analysis techniques. This is a key component in the ongoing development of our core business in reinsurance that will enable us to maintain our position as a leading provider.
Munich Re’s primary insurance operations are concentrated in the ERGO Insurance Group. ERGO offers a comprehensive range of insurances, pension products and services. It is an internationally operating insurance group and one of the leading providers in its domestic market of Germany.
More information about our Group-wide activities in the area of corporate responsibility can be found at www.munichre.com/cr-en
In its domestic market of Germany, ERGO has a diversified sales landscape and sales organisation. This includes its own sales channels, such as self-employed sales agents and direct sales staff, and external sales partners – for instance, brokers, cooperation partners and banks. Its aim is to offer the right channel to every private and corporate client. This encompasses digital media, such as portals and apps.
Corporate governance report 028 How we view corporate governance 028 What rules apply to Munich Re? 028 Corporate legal structure 029 Board of Management 029 Collaboration between Board of Management and Supervisory Board 030 Supervisory Board 030 Annual General Meeting 031 Share trading and shares held by Board members 031
In the financial year 2015, the Supervisory Board fulfilled all the tasks and duties incumbent upon it by law and under the Articles of Association and its rules of procedure. All members of the Supervisory Board and of the committees attended more than half of the respective meetings. We con tinually monitored the Board of Management in its conduct of the business, and gave advice on all matters of importance for the Group. No inspection measures in accordance with Section 111 (2) sentence 1 of the German Stock Corporation Act (AktG) were required at any time.
In an extraordinary meeting held on 9 June, we decided to appoint a new member of the Board of Management with effect from 16 September 2015 and to reallocate responsibilities within the Board of Management accordingly.
On 15 July, we discussed implementation of the law regarding equal opportunities for men and women in management positions, and determined a target for female members of the Board of Management. We also discussed changes to the Board of Management’s rules of procedure and decided they were to be implemented with effect from 16 September 2015. We set the personal objectives for variable remuneration for 2015 for the newly appointed Board member, discussed the focal points of human resources work within the Group, and were briefed on the 2014 compensation report in accordance with the German Remuneration Regulation for Insurance Companies (VersVergV). We also heard a report on the strategic direction and business development at ERGO International.
On 14 October, we discussed corporate governance issues, including the annual efficiency review, additions to the fixed objectives of the Supervisory Board regarding its composition and specification of the regular limit of length of membership on the Supervisory Board, and the resolution regarding the Declaration of Conformity. The Board of Management also reported in detail on the Group’s innovation initiative and presented current initiatives in property-casualty reinsurance in the European and Latin American markets. There was also a report on Munich Re’s investment management.
On 8 December, our decisions included changes to the rules of procedure for the Audit Committee. After a comprehensive discussion, we also decided on remuneration for the Board of Management as from 1 January 2016 and the financial targets for members of the Board of Management for 2016. The ERGO CEO reported on the status and focal points of the ERGO strategy project. We looked into the Group’s risk strategy in the course of the annual report on Munich Re’s risk situation by the Group Chief Risk Officer. The Board of Management also reported on Group planning for 2016–2018, and provided explanations in cases where actual business performance deviated from the planning for the year under review.
At its four meetings in 2015, the Standing Committee dealt with the preparation of the respective Supervisory Board meetings and topics of corporate governance. In addition, on the basis of a comprehensive questionnaire the Standing Committee carried out a review of the efficiency of the Supervisory Board’s work in 2015, and determined that overall the reporting by the Board of Management and the work of the Supervisory Board was efficient and appropriate. A regular report by the Chairman of the Board of Management covered changes to the shareholder structure and the status of the share buy-back programme. The Committee also received the annual report on expenses for donations and sponsoring.
The Audit Committee met six times in 2015, and two of these meetings were attended by the external auditors. At the meetings attended by the auditors, the Committee discussed the Company and Group financial statements, the Company and Group management report, the auditor’s report and the Board of Management’s proposal for the appropriation of the net retained profits for the financial year 2014. The Audit Committee also considered the 2015 quarterly financial reports and the 2015 half-year financial report, which it reviewed in conjunction with the auditor. Other key tasks of the Committee consisted in monitoring the Group’s risk situation and risk management on an ongoing basis, and developing a risk strategy. In addition to quarterly written reports, the Committee also obtained detailed verbal information from the Group Chief Risk Officer on several occasions. Further issues discussed regularly were the internal control system and compliance topics. The Head of Group Audit informed the members of the Committee about the outcome of the audits for 2014 and the audit planning for 2015. The Committee received regular updates on the current status of individual compliance issues and the progress of audits. The members of the Committee took advantage of the opportunity – in the absence of the Board of Management – to confer amongst themselves or with the Head of Group Audit, the Group Chief Compliance Officer, the Group Chief Risk Officer and the external auditors. The Audit Committee also reviewed and monitored the auditors’ independence, and received regular reports on auditing and non-audit-related services. Following a resolution by the full Supervisory Board, the Chair of the Committee commissioned KPMG with the audit for the 2015 financial year and also commissioned the auditor’s review of the 2015 half-year financial report.
Changes in the Board of Management Dr. Markus Rieß was appointed to the Board of Management of Munich Reinsurance Company with effect from 16 September 2015. At the same time, he was appointed to the Board of ERGO Versicherungsgruppe AG. As well as being responsible for primary insurance/ERGO, he was also given responsibility for Third Party Asset Management (TPAM).
Company and Group financial statements for 2015 KPMG Bayerische Treuhandgesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft duly audited the Company and Group financial statements and the combined management report for the Company and the Group as at 31 December 2015 and issued them with an unqualified auditor’s opinion. The respective reports and the Board of Management’s proposal for appropriation of the net retained profits were subsequently submitted directly to the members of the Supervisory Board. At its meeting on 3 February 2016, the Audit Committee had the opportunity to confer in detail about the preliminary year-end figures as at 31 December 2015. On 14 March 2016, 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 in advance the Company and Group financial statements, the combined management report 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. The Chair of the Audit Committee briefed the full Supervisory Board about the outcome of its consultations at the balance sheet meeting.
Further information on corporate governance is included in the Statement on Corporate Governance pursuant to Section 289a of the German Commercial Code (HGB).
In Germany, where Munich Reinsurance Company has its headquarters, corporate governance rules are set out in the Stock Corporation Act (AktG) and the German Corporate Governance Code.
The German Corporate Governance Code contains the main legal rules to be observed by listed German companies. In addition, it includes recommendations and proposals based on nationally and internationally recognised standards of good and responsible management. Every year, pursuant to Section 161 of the Stock Corporation Act (AktG),
Besides this, the supervisory requirements for (re)insurance companies, especially the German Insurance Supervision Act (VAG) and the European supervisory regulations (Solvency II implementing rules) are placing additional demands on corporate governance. They include specific rules on various issues such as business organisation or the qualifications and remuneration of members of the Board of Management, Supervisory Board members and other individuals.
Also applicable to Munich Reinsurance Company is a co-determination agreement concluded pursuant to the German Act on the Co-Determination of Employees in Cross-Border Mergers (MgVG) and governing employee co-determination on the Supervisory Board.
By adopting international guidelines such as the UN Global Compact, the Principles for Responsible Investment (PRI) for the investments we make and the Principles for Sustainable Insurance (PSI) for our core business, we demonstrate how committed we are to corporate responsibility.
Pursuant to Article 16 of the Articles of Association, the Board of Management consists of at least two members; beyond this, the number of members is determined by the Supervisory Board. When appointing the Board of Management, the Supervisory Board pays due regard to diversity. At the end of 2015, the Board of Management of Munich Reinsurance Company had ten members, two of whom were women.
An overview of the composition of the Board of Management and the distribution of responsibilities can be found on page 45
In compliance with Munich Reinsurance Company’s Articles of Association, the Supervisory Board has 20 members. Half are representatives of the shareholders, elected by the Annual General Meeting. The other half are elected representatives of the Group’s employees in the European Economic Area (EEA).
— Future nominations of candidates for election to the Supervisory Board should also take into account that, as a rule, at the time of election no candidate should already have been on the Supervisory Board for a continuous period of more than ten years. Normally, Supervisory Board members should not serve on the Board for a continuous period of more than 12 years.
The aforementioned objectives apply to the Supervisory Board as a whole. Shareholder and employee representatives will each contribute towards meeting these objectives. The Supervisory Board’s Nomination Committee, which selects candidates for the shareholder representatives, and the European Electoral Board, which is responsible for the election of the employee representatives, both have a corresponding catalogue of criteria at their disposal. Besides the objectives mentioned, the catalogue includes criteria such as special professional skills and personal qualities, as well as the requirement of time availability of the candidates.
The Supervisory Board is of the opinion that all 20 of its members are to be regarded as independent within the meaning of Section 5.4.2 of the German Corporate Governance Code. The Supervisory Board is not aware of any business or personal relationship between a member and the Company, its governing bodies, a controlling shareholder or
An overview of the composition of the Supervisory Board can be found on page 45 ff. More details about the work of the Supervisory
Munich Re Group Annual Report 2015 an entity affiliated with such a shareholder, as a result of which a major and not only temporary conflict of interest could arise. The Supervisory Board assumes that the employee representatives on the Supervisory Board elected in accordance with the Act on the Co-Determination of Employees in Cross-Border Mergers and the co- determination agreement are independent as a matter of principle.
The principle of “one share, one vote” applies at the Company’s Annual General Meeting. With the aim of making it easier for shareholders to take part and exercise their voting rights, the Company provides the option of online participation at the Annual General Meeting and a postal vote (also electronically).
Munich Reinsurance Company is obliged to publish information of this kind on its website without undue delay.
C om bi ne d m an ag em en t r ep or t
Group 035 Group structure 035 Important tools of corporate management 041 Governing bodies of Munich Re 045 Remuneration report 049
Stakeholders 105 Clients and client relationships 105 Staff 108 Shareholders 110 Environment and society 111
Prospects 141 Comparison of the prospects for 2015 with the result achieved 141 Outlook for 2016 143
Munich Reinsurance Company (Information reported on the basis of German accountancy rules) 149 Market environment and major factors of influence 149 Business performance 149 Financial position 155 Corporate governance statement in accordance with Section 289a of the German Commercial Code (HGB) 157 Further information 157
The reinsurance companies of the Group operate globally and in virtually all classes of business. We offer a full range of products, from traditional reinsurance to innovative solutions for risk assumption. Our companies conduct their business from their respective headquarters and via a large number of branches, subsidiaries and affiliated companies. The reinsurance group also includes specialty primary insurers in niche segments, whose business requires special competence in finding appropriate solutions. These primary insurers have the words “Risk Solutions” added to their logo.
In ERGO, we combine all Munich Re’s primary insurance activities with the exception of health insurance business outside Germany, which is handled by Munich Health, and the monoliners in reinsurance. Some 73% (75%) of gross premiums written by ERGO derive from Germany, and 27% (25%) from international business – mainly from central and eastern European countries. ERGO has also extended its activities to Asian markets such as India, China, Vietnam and Singapore.
— Munich Health continues to sharpen its focus in order to tap into growth opportunities in the international health insurance market
Munich Reinsurance Company and ERGO Versicherungsgruppe AG are under unified control within the meaning of the German Stock Corporation Act (AktG). The relevant statutory regulations, control agreements and Group directives govern the distribution of responsibilities and competences for key decisions between Group management and ERGO.
Munich Re is already catering to an ever-increasing demand for capital optimisation, and other complex solutions for clients. This is a decisive element in our value proposition. Since 1 July 2015, we have bundled this expertise in the business unit Capital Partners in the Special and Financial Risks division.
The Germany, Asia Pacific and Africa division conducts property-casualty business with our clients in Germany, Africa, Asia, Australia and the Pacific Islands.
North America American Family Home Insurance Company, Jacksonville, Florida American Modern Home Insurance Company, Amelia, Ohio American Modern Insurance Company of Florida, Inc., Jacksonville, Florida American Modern Insurance Group, Inc., Amelia, Ohio American Modern Select Insurance Company, Amelia, Ohio American Modern Surplus Lines Insurance Company, Amelia, Ohio American Southern Home Insurance Company, Jacksonville, Florida American Western Home Insurance Company, Oklahoma City, Oklahoma Beaufort Underwriting Agency Ltd., London Bell & Clements Ltd., London First Marine Insurance Company, Amelia, Ohio Global Standards, LLC, Dover, Delaware Groves, John & Westrup Ltd., London HSB Engineering Insurance Ltd., London HSB Group, Inc., Dover, Delaware HSB Solomon Associates LLC, Dover, Delaware HSB Specialty Insurance Company, Hartford, Connecticut MSP Underwriting Ltd., London Munich Re Holding Company (UK) Ltd., London Munich Reinsurance America, Inc., Wilmington, Delaware3 Munich Reinsurance Company of Canada, Toronto, Ontario Munich Re Underwriting Ltd., London NMU Group Ltd., London Roanoke Group Inc., Schaumburg, Illinois Temple Insurance Company, Toronto, Ontario The Boiler Inspection and Insurance Company of Canada, Toronto, Ontario The Hartford Steam Boiler Inspection and Insurance Company of Connecticut, Hartford, Connecticut The Hartford Steam Boiler Inspection and Insurance Company, Hartford, Connecticut The Princeton Excess and Surplus Lines Insurance Company, Wilmington, Delaware The Midland Company, Cincinnati, Ohio
Munich Re’s second pillar is primary insurance business. Via ERGO, we offer products from all the main classes of insurance: life insurance, German health insurance, and in nearly all lines of property-casualty insurance, as well as travel insurance and legal protection insurance. These products – in combination with the provision of assistance, other services and individual consultancy – cover the needs of private and corporate clients.
Segments In the ERGO International segment, we bundle almost all primary insurance activities outside Germany. In November 2015, we agreed to sell ERGO Italia to private-equity investor Cinven. ERGO Italia includes the insurance companies ERGO Previdenza S.p.A., Milan, ERGO Assicurazioni S.p.A., Milan, and two service companies. The sale still has to be approved by the supervisory authorities. After a legislative change in India, ERGO will increase its shareholding in the joint venture HDFC ERGO – the country’s fourth l argest non-government property insurer – to 48.7%. The purchase agreement was signed in December 2015. The purchase still has to be approved by the supervisory authorities. We report on business with insurances of the person in Germany in the segment ERGO Life and Health Germany. This includes ERGO Direkt companies’ activities in life, health and property-casualty insurance, as well as travel insurance. In the ERGO Property-casualty Germany segment, we bundle German property-casualty insurance business including legal protection insurance, with the exception of direct insurance.
1 A detailed list of shareholdings can be found on page 291 ff. in the notes to the consolidated financial statements. 2 The companies listed are mainly subsidiaries and branches outside Germany with equity capital exceeding €5m. 3 Units that also transact business in Munich Health and are therefore allocated proportionately to reinsurance.
Munich Reinsurance Company of Africa Ltd., Johannesburg Munich Holdings of Australasia Pty. Ltd., Sydney Munich Mauritius Reinsurance Co. Ltd., Port Louis Munich Re, Hong Kong3 Munich Re, Kuala Lumpur Munich Re, Kuala Lumpur (Retakaful Branch) Munich Re, Seoul3 Munich Re, Singapore3
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 Munich Health brand. With a diverse range of local units in primary insurance and reinsurance, Munich Health straddles the full spectrum of the health insurance value chain.
Life and Health Germany DKV Deutsche Krankenversicherung Aktiengesellschaft, Cologne ERGO Direkt Krankenversicherung AG, Fürth ERGO Direkt Lebensversicherung AG, Fürth ERGO Direkt Versicherung AG, Fürth ERGO Lebensversicherung Aktiengesellschaft, Hamburg ERGO Pensionskasse AG, Düsseldorf EUROPÄISCHE Reiseversicherung Aktiengesellschaft, Munich Victoria Lebensversicherung Aktiengesellschaft, Düsseldorf Vorsorge Lebensversicherung Aktiengesellschaft, Düsseldorf Vorsorge Luxemburg Lebensversicherung S.A., Grevenmacher
Primary insurance and reinsurance activities are transacted separately under the umbrella of Munich Health to ensure close alignment with the needs of our clients, and to strengthen our market position. With the sale of DKV Luxembourg in the first quarter of 2015, we further streamlined our portfolio of primary insurance units, focusing strictly on markets with growth potential or sufficient scale.
1 A detailed list of shareholdings can be found on page 291 ff. in the notes to the consolidated financial statements. Only Group companies with equity capital generally exceeding €5m are listed.
Apollo Munich Health Insurance Company Ltd., Hyderabad Daman – National Health Insurance Company, Abu Dhabi Daman Health Insurance – Qatar LLC, Doha, Qatar DKV Belgium S.A., Brussels 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 Storebrand Helse ASA, Lysaker Unión Médica la Fuencisla, S.A., Compañía de Seguros, Saragossa
Munich Re’s objective is to analyse risks from every conceivable angle and to assess and diversify them, creating lasting value for shareholders, clients, and staff through high profits in relation to the risks assumed. With our entrepreneurial culture, we aim to increase the Munich Re share price on a sustained basis. This is the aim of our active capital management and the consistent application of value-based management systems.
The framework for any business activity is our risk strategy, from which we derive various limitations and reporting thresholds. A key element of this is our economic capital resources, which we determine in harmony with the Solvency II supervisory regime, which came into force in 2016. We observe a range of important additional conditions. These include national accounting regulations, tax aspects, liquidity requirements, supervisory parameters, and rating agency requirements. These conditions may even determine a unit’s short-term orientation.
Our value-based management is characterised by the following aspects: — We assess business activities not only according to their earnings potential but also relative to the extent of the risks assumed. Only the risk-return relationship reveals how beneficial an activity is from the shareholder point of view.
Contrasting aspects have to be evaluated when selecting suitable target figures. On the one hand, target figures for investors, staff, and the public should be simple and easy to understand. On the other hand, the often complex economic realities should be reflected as closely as possible in order to emphasise added value as the Group’s overriding guiding principle. The parallel use of different performance indicators is thus unavoidable.
The two main performance metrics at Group level are economic earnings and the return on risk-adjusted capital after tax (RORAC).
Economic earnings The starting point for value-based management is the economic value added in a fixed period which we determine based on the key performance indicator economic earnings. These correspond with the change in eligible own funds under Solvency II, adjusted for items that do not represent economic value added in the period, such as capital measures. The economic earnings satisfy the Solvency II supervisory regime, which came into force on 1 January 2016.
Details of our capital management are provided on page 99 f.
Information on the calculation of available capital and capital measures can be found on page 129 f.
In particular, economic earnings comprise the contribution to profits from our new business and changes in the value of in-force business against the previous year’s assessment. Also considered is the development of eligible own funds owing to the effect of changed capital market parameters on the assets and liabilities sides of the Solvency II balance sheet.
Return on risk-adjusted capital (RORAC) To highlight Munich Re’s value orientation, we also use the after-tax return on riskadjusted capital (RORAC). With the entry into force of Solvency II as of 1 January 2016 and the changes associated with this, we have adjusted the calculation to the key indicators used under Solvency II.
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 latter refers to the additional available economic equity. This corresponds to the surplus of eligible own funds reduced by the subordinated liabilities and the solvency capital requirement multiplied by 1.75. Any excess of liabilities over assets is not taken into consideration.
Information on the internal risk model is provided on page 122 ff.
1 To calculate the RORAC, we use the capital figures at the beginning of the period under consideration. That is why, for the 2015 financial year, the calculation is still based on the indicators previously used, in particular economic risk capital (ERC) and additional available economic equity.
Other performance indicators Value added We use value added as a component of economic earnings for corporate management in property-casualty reinsurance and for Munich Health. The respective value added (adjusted for random fluctuation) is determined as follows: The adjusted result is derived from the income statement and consists primarily of the technical result, the normalised investment result and the remaining non-technical result. It contains value-based adjustments, including the smoothing of expenditure for major losses over time and the recognition of future claims expenses at their present value. We compare the result adjusted in this way with the requisite cost of capital.
Combined ratio The combined ratio is regularly posted for property-casualty business and international health business. Calculated as the percentage ratio of the sum of expenses for claims and benefits plus operating expenses to earned premiums (all of which are net, i.e. after reinsurance cessions), the combined ratio is the sum of the loss ratio and the expense ratio. A combined ratio of 100% means that premium income was exactly sufficient to cover claims and costs. Expenses for claims and benefits mainly include paid claims, the change in claims provisions, and the bulk of other underwriting expenses. Operat- ing expenses chiefly comprise the costs arising in the acquisition of new business and for the ongoing administration of insurance contracts.
In addition to these purely financial performance factors, non-financial performance measures like innovation, speed of processes, staff training level and client satisfaction also play a part. In the long term, a firm can only be successful if it operates sustainably, looking to the future. On the basis of a comprehensive understanding of value creation with short-term and long-term, financial and non-financial parameters, we closely link strategy and operative planning by defining our strategies in structured overviews or “scorecards”, from which we derive initiatives, performance measures and responsi bil ities. The scorecards have four areas: “financial”, “market and client”, “process” and “employee”. We promote an entrepreneurial culture among our staff through the clear allocation of responsibility and accountability, recognising to the greatest extent possible how much the individual, unit or field of business contributes to increasing value in the long term. Our incentive systems for staff, executives and Board members support this orientation: in general, the higher the hierarchical level, the more remuneration is based on performance.
Dr. jur. Hans-Jürgen Schinzler (Honorary Chairman) Former Chairman of the Supervisory Board
Prof. Dr. oec. Dr. iur. Ann-Kristin Achleitner Member since 3 January 2013, last re-elected 30 April 2014 Scientific Director of the Center for Entrepreneurial and Financial Studies (CEFS) at the Technical University of Munich
Dr. jur. Benita Ferrero-Waldner Member since 12 February 2010, last re-elected 30 April 2014 President of the Euroamérica Foundation, Spain Partner in the law firm of Cremades & Calvo Sotelo, Spain
Prof. Dr. rer. nat. Ursula Gather Member since 30 April 2014 Rector of TU Dortmund University
Gerd Häusler Member since 30 April 2014 Chairman of the Supervisory Board of BayernLB
Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Member since 22 July 1999, last re-elected 30 April 2014 President of acatech – German Academy of Science and Engineering
Wolfgang Mayrhuber Member since 13 December 2002, last re-elected 30 April 2014 Chairman of the Supervisory Board of Deutsche Lufthansa AG
Ulrich Plottke Member since 30 April 2014 Employee of ERGO Versicherungsgruppe AG
Anton van Rossum Member since 22 April 2009, last re-elected 30 April 2014 Chairman of the Supervisory Board of Royal Vopak NV, Netherlands Member of the Board of Credit Suisse Group AG, Switzerland (until 24 April 2015)
Gabriele Sinz-Toporzysek Member since 30 April 2014 Employee of ERGO Beratung und Vertrieb AG
Standing Committee Dr. Ing. E. h. Dipl. Ing. Bernd Pischetsrieder (Chair) Prof. Dr. rer. nat. Dr. Ing. E. h. Henning Kagermann Wolfgang Mayrhuber Marco Nörenberg Andrés Ruiz Feger
Dr. rer. pol. Thomas Blunck – Global Aerospace Underwriting Managers Ltd. (GAUM), United Kingdom (Chair) New Reinsurance Company Ltd., Switzerland2 (Chair)
2 Own group company within the meaning of Section 18 of the German Stock Corporation Act (AktG).
Prof. Dr. oec. Dr. iur. Linde AG Engie S.A. (formerly GDF SUEZ Ann-Kristin Achleitner METRO AG S.A.), France
2 Own group company within the meaning of Section 18 of the German Stock Corporation Act.
The full Supervisory Board decides on the remuneration system for the Board of Management, and reviews it regularly. The Personnel Committee of the Supervisory Board, comprising the Chairman of the Supervisory Board, one shareholder represent- ative and one employee representative, prepares the resolutions for the full Supervisory Board.
Basic remuneration The basic remuneration comprises a fixed cash compensation for the financial year, paid out as a monthly salary.
Remuneration in kind/fringe benefits Remuneration in kind and fringe benefits include – in particular – company cars, insurance premiums and health screening examinations, and are reviewed against market practice at regular intervals. 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 disclosed in the annual report using expenditure as the basis of valuation.
Variable remuneration 30% annual performance (for 100% performance evaluation/ achievement of objectives)
In the second year, on con dition that 50% of the net amount paid out is invested by the Board member in Munich Re shares that must be held for at least a four-year period 70% multi-year performance (for 100% performance evaluation/ achievement of objectives)
Processes have been laid down for specifying objectives and assessing their achievement. These processes require review by the external auditor, who checks the criteria for measuring the envisaged financial objectives and whether their achievement has been assessed in accordance with the guidelines established by the Company. The outcome of this review is notified to the Supervisory Board.
Achievement of objectives and overall performance is measured at the end of the oneyear and three-year periods in question, there being no adjustment of targets during these periods. The corridor for the achievement of the individual objectives and for the overall annual and multi-year performance is 0–200%. Payouts are made at the end of the 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 a fixed part of the paid-out variable remuneration in Munich Reinsurance Company shares.
Variable remuneration based on multi-year performance For the multi-year performance remuneration component, three-year targets based on the financial results of the reinsurance, ERGO and Munich Health fields of business and on individual performance are fixed every year. The Supervisory Board also assesses the overall performance of the whole Board of Management and the individual Board members. This allows for a response to developments during the three- year appraisal period that are beyond the influence of Board members, and which can also be taken into account along with performance not included in the agreement of objectives. Full achievement of the multi-year objectives (100%) allows for payment of 70% of the overall target amount for variable remuneration.
Category of objective Share1 Assessment basis Parameters Collective contribution 25%–60% to corporate success Group objective Derived from key performance indicators Return on risk-adjusted capital, RORAC2 in external reporting and other important portfolio and performance data Business-field objectives
– Life reinsurance – Value added by new business – Change in the value of in-force business
Personal objectives Personal objectives per Board member Special focal points such as – Pricing and cycle management – Client management – Individual leadership Overall performance evaluation 20% Overall performance of individual Assessment by Supervisory Board taking Board members and of the Board of into account Section 87 of the Stock Management as a whole Corporation Act (AKtG) and the German Corporate Governance Code
Weighting of remuneration components In the case of 100% achievement of objectives, the weightings of the individual components in terms of total remuneration were as follows: basic remuneration 30%, variable remuneration 70%, of which 30% was based on annual performance and 70% on multi-year performance.
Severance cap and change of control The members of the Board of Management have no contractual entitlement to severance payments. If the Board member’s activities on the Board are terminated
– Reinsurance Value-based economic Components of economic earnings:2 performance indicators: – Value added – Property-casualty reinsurance – Value added by new business – Life reinsurance – Change in the value of in-force business
The members of the Board of Management are also members of the Munich Re pension scheme, which is a defined contribution plan.
Benefit: — In the case of defined contribution plans: Annuity based on the policy reserve or payment of the policy reserve as a lump sum.
— In the case of a combination between defined benefit plans and defined contribution plans: Vested pension from the defined benefit plan and annuity from the policy reserve under the defined contribution plan or payment of 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 is revoked. Permanent incapacity to work means that the Board Members are incapacitated for a period of longer than 12 months and it is probable that they will be permanently unable to fully perform the duties conferred on them.
Benefit: — In the case of defined contribution plans: 80% of the insured occupational pension up to the age of 59 or 61, with subsequent occupational pension.
— In the case of a combination between defined benefit plans and defined contribution plans: Vested pension from the defined benefit plan and 80% of the insured occupational pension benefit up to age 59, with subsequent occupational pension based on the defined contribution plan.
Benefit: — In the case of defined contribution plans: Annuity based on the policy reserve or payment of the policy reserve as a lump sum at the date the pension benefit is claimed.
Vested benefits for occupational pension, disability pension and surviving dependants Vested benefits are paid upon the Board member reaching the age of 60 or 62, in the case of incapacity to work, or in the event of the Board member’s death.
The level of the target overall direct remuneration 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 for the appropriateness of compensation are the respective Board member’s duties, the Board member’s personal performance, the performance of the Board as a whole, and the financial situation, performance and future prospects of Munich Re. Other criteria are the relevant comparative benchmarks for Board remuneration and the prevailing remuneration structure at Munich Reinsurance Company. The Supervisory Board takes account of the level of Board salaries in relation to the level of salaries paid to senior managers and to general staff members over a period of time, and also determines how senior managers and general staff are to be classified for the purpose of this comparison. The consideration of what level of remuneration is appropriate also takes into account data from peer-group (DAX 30) companies. New Board members are placed at a level which allows sufficient potential for development of the remuneration in the first three years.
Fixed and variable remuneration components The members of Munich Reinsurance Company‘s Board of Management received remuneration totalling €23.4m (21.6m) for fulfilment of their duties in respect of the parent company and its subsidiaries in the financial year. Total remuneration thus shows an increase of around €1.8m compared with the previous year‘s figure, which was adjusted for the remuneration of a Board member who had left the Board as at the end of 31 December 2014. The increase in total remuneration is especially due to the fact that there has been an additional member on the Board of Management since September 2015 and that the remuneration for two Board members appointed during the course of 2014 was taken into account in full for the first time in 2015.
2 The amounts paid out in 2015 were for multi-year performance 2012–2014, those paid out in 2014 were for 2011–2013. 3 Remuneration in kind/fringe benefits including travel expenses for flights home to the family owing to the maintenance of two households and relocation costs. 4 Remuneration in kind/fringe benefits for 2015 including anniversary payment. 5 The compensation components that Markus Rieß received for his work at ERGO Versicherungsgruppe AG are included in the total remuneration. Other: Compensation, payable in four equal instalments, for the forfeited variable remuneration from the previous employer.
Remuner- Basic ation in Annual Multi-year Financial remuner- kind/fringe perform- performName year ation benefits ance1 ance2 Other Total thereof for Munich Reinsurance Company 94,063 801 72,691 750,000 917,555
Pension entitlements Personnel expenses of €6.1m (4.9m) were incurred in the financial year to finance the pension entitlements for active members of the Board of Management. Of these, €1.8m was apportionable to defined benefit plans and €4.3m 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 100% performance evaluation as per DRS 17 (revised 2010), corridor 0–200%
Defined benefit plan Present value Personnel of defined expenses Financial Defined benefit as at for Name year benefit1 31 December provisions2 2014 – – –
The basic remuneration, remuneration in kind/fringe benefits and pension expenses (sum of personnel expenses for defined benefit plans and defined contribution plans) are in accordance with German Accounting Standard No. 17 (DRS 17). There are some deviations with regard to the variable remuneration for annual and multi-year performance.
Markus Rieß Board member (Joined: 16.9.2015) Total1 thereof for Munich Reinsurance Company
Remuneration in kind/fringe benefits 7,430 7,430 7,430 – 801 801 801 –
Multi-year variable remuneration Multi-year performance 2014–2016 – Multi-year performance 2015–2017 395,828 0 791,656 153,635 0 307,270
Multi-year variable remuneration Multi-year performance 2012–20141 1,173,060 – 1,745,625 Multi-year performance 2013–20153 974,943 – 1,462,415 Long-term Incentive Plan 20074 242,774 381,490 Long-term Incentive Plan 20094
Multi-year variable remuneration Multi-year performance 2012–20141 – – 1,173,060 Multi-year performance 2013–20153 – – 974,943 Long-term Incentive Plan 20074 52,029 Long-term Incentive Plan 20094 392,406
The Company result bonus gives employees a share in corporate success. The key indicator used for the Company result bonus is RORAC. The targets correspond to the Group objective for the variable remuneration of members of the Board of Management. Depending on the degree to which the RORAC target is met, an aggregate amount is calculated that can be distributed among staff as a bonus. The higher the management level, the higher the share of the Company result bonus. The way this bonus works ensures that the performance of Munich Re as a whole is systematically reflected in the remuneration of all staff and that the bonus amount bears a reasonable relationship to overall corporate performance.
Members of the Audit Committee each receive an additional €45,000; members of the Personnel Committee each receive an extra €27,000; and members of the Standing Committee each receive an additional €13,500. The Chairs of these committees receive double the amounts stated for members. No additional remuneration is paid for serving on the Nomination Committee or the Conference Committee.
— Moderate growth in the global economy — Interest rates still at a very low level — Solid overall growth of global premium income in primary insurance — Prices in property-casualty reinsurance continue to fall
In December 2015, the US Federal Reserve fundamentally changed the course of US monetary policy by increasing the key interest rate for the first time in many years. By contrast, the European Central Bank (ECB) further intensified its very expansionary monetary policy throughout the year by buying bonds on a large scale and cutting its deposit rate even further to its most recent level of –0.3%.
Currency translation effects had a positive impact on investment performance, with the value shown for investments translated at period-end exchange rates. On 31 December 2015, the euro stood at US$ 1.09, down by 10.2% compared with the 2014 year-end rate (US$ 1.21). The euro was down year on year by 9.8% against the Japanese yen and by 5.1% against the British pound sterling, but up by 6.9% against the Canadian dollar.
Inflation-adjusted premium income in the German insurance industry stagnated in 2015 according to provisional estimates, especially due to a significant decrease in single-premium volume in life insurance business. Private health insurance also posted only moderate growth. As in previous years, overall premium income development was bolstered by solid growth in the property-casualty segment.
— Increase of 3.1% in gross premium income — Major-loss expenditure again well below projected range — Decrease in investment result of 5.8% — Return on risk-adjusted capital (RORAC) of 11.5% (13.2%) after tax — Proposed dividend increase to €8.25 (7.75) per share
The consolidated profit for 2015 exceeded the target we set ourselves. The figure of €3.1bn almost reached the very good level of the previous year. In property-casualty reinsurance, our profit was really pleasing at €2.9bn, with major losses again remaining well below the volume we expected. Life reinsurance contributed €0.3bn to the consolidated result; it was impacted by very high expenditure for two mortality claims. The ERGO segments contributed an overall loss of €0.2bn, including on account of goodwill impairment. At €0.1bn, Munich Health’s result met our expectations.
The return on risk-adjusted capital (RORAC) totalled 11.5% for the 2015 financial year, compared with 13.2% in 2014. The RORAC for 2015 was thus below our long-term target of 15%. This target, which we set for the first time in 2006 when market interest rates were significantly higher, is difficult to reach in the current environment of very low interest rates. We were able to exceed our other result target for 2015, namely to achieve a profit in the range of €2.5–3bn, by posting a total of €3.1bn.
Return on risk-adjusted capital (RORAC) and economic earnings 2015 Prev. year Change %
Economic earnings were attributable to factors from new and in-force business deriving from underwriting, and to the development of the economic parameters. The latter are strongly influenced by currency gains and positive effects from bonds and investments in real estate and infrastructure. These contrasted in particular with losses in market values due to increased credit risk spreads. Releases of tax provisions for prior years also continued to have a positive effect on the result.
Gross premium income was up on the previous year. This was partly on account of the development of exchange rates.
Expenditure for major losses, particularly from natural catastrophes, was again well below the expected range. This is also reflected in the combined ratio for property- casualty reinsurance, which amounted to 89.7% (92.7%) for the full year.
Reinsurance property-casualty % 89.7 92.7 ERGO Property-casualty Germany % 97.9 95.3 ERGO International % 104.7 97.3 Munich Health2 % 99.9 98.8
Taxes on income €m –476 312 – Consolidated result €m 3,122 3,170 –1.5 Investments €bn 215.1 218.9 –1.8 Insurance-related investments €bn 9.2 8.5 8.3 Net technical provisions €bn 198.5 198.4 0.0
In the 2015 financial year, we posted a consolidated result of €3.1bn (3.2bn), which came close to equalling the very good figures of the previous year. Although the result in property-casualty reinsurance is excellent, negative figures emanated from a goodwill impairment in the ERGO Life and Health Germany segment.
Consolidated result 2015 Prev. year Change €m €m % Reinsurance life 345 409 –15,5 Reinsurance property-casualty 2,915 2,483 17,4 ERGO Life and Health Germany –329 269 – ERGO Property-casualty Germany 214 176 21,8 ERGO International –112 –276 59,3 Munich Health 88 109 –18,9
Assets under management for third parties 31.12.2015 Prev. year Change €bn €bn % Third-party investments 14.1 13.9 1.1
Thereof: External institutional investors 10.5 10.8 –3.0 Thereof: Private-client business 3.6 3.1 15.1
— Increase in gross premiums written of 4.9% to €10.5bn due to currency translation effects
The increase in gross premium volume is attributable to the fact that the foreign currencies pertinent for Munich Re’s business operations appreciated against the euro. We generated around 90% of premium in foreign currencies, of which 37 percentage points were in Canadian dollars and 25 percentage points in US dollars.
If exchange rates had remained unchanged, our premium income would have decreased by 2.5%. Large-volume treaties are a key factor in our business and have a significant influence on premium development. Our clients conclude them to reduce their capital requirements. Last year, some of these treaties were terminated as planned or renewed with a lower volume.
In our traditional reinsurance business, premium development was largely stable in the year under review. The ongoing low-interest-rate phase and the sluggish economy in many of our key markets had a dampening impact on our clients’ business and curbed demand for reinsurance. By contrast, in Asia our new business continued to develop very positively.
By contrast, in Canada, Asia and the European markets, our business showed very satisfactory results. In the USA and Australia, our business largely developed as expected after negative effects had burdened the result in 2014.
At €898m (811m), the investment result was above the level for the previous year. The increase is attributable to higher regular income, which was favourably affected in particular by currency translation effects, and to improved gains on derivatives. Inflation and equity derivatives showed lower losses than in the previous year.
Key figures 2015 Prev. year Change % Gross premiums written €m 10,536 10,040 4.9 Share of gross premiums written in reinsurance % 37.3 37.5 Share of international business in gross premiums written % 96.7 96.2 Operating result €m 500 459 9.0 Consolidated result €m 345 409 –15.5
In life reinsurance, we operate on a global basis and have local offices in most of our important markets. The focus of our business activities is on traditional reinsurance solutions that concentrate on the transfer of mortality risk. Moreover, in the last few years we have been increasingly active in the market for living benefits products. These include products such as disability, long-term care, and critical illness, where demand has grown significantly. Finally, several years ago we began to provide a limited amount of capacity for longevity risks. Until now, we have offered this only in the United Kingdom, where the existing market environment is good.
In addition, we continuously expand our tailor-made structured concepts for clients seeking to optimise their capitalisation, liquidity or specific items on their balance sheet. In this area, we have responded especially to the changes in supervisory regulations such as Solvency II in Europe. With these products, we met with particular success in Europe, Asia and North America in 2015.
Rapidly increasing digitalisation, and its impact on the insurance industry, have become a key issue. We are investing in this area by expanding our data sources and enhancing our analytical methods. Our aim is to support our clients in making their sales processes and risk assessment more efficient and improving their claims management.
Premium income in Europe totalled €2.1bn (2.1bn), of which €1.2bn (1.0bn) was from our branch in the United Kingdom, and a further €344m (377m) from Germany. The technical result was satisfactory overall.
In Asia, our premium income climbed to €910m (870m). The technical result developed very well and reached a record level.
On the African continent, our South African subsidiary Munich Reinsurance Company of Africa Ltd. posted an increase in premium volume to €187m (164m). The technical result was again within the expected range.
Key figures 2015 Prev. year Change % Gross premiums written €m 17,680 16,730 5.7 Share of gross premiums written in reinsurance % 62.7 62.5 Share of international business in gross premiums written % 96.2 95.4 Loss ratio % 57.0 60.2
The consolidated result in property-casualty reinsurance increased slightly compared with the previous year. The operating result, which includes the investment and technical result, also rose. The technical result totalled €3,116m (2,392m). Expenditure for major losses was again well below the expected range. Adjusted for commissions, Munich Re’s customary review of reserves resulted in a reduction in the claims provisions for prior years by around €1,200m for the full year, which is equivalent to around 7.2 percentage points of the combined ratio. This positive development related to almost all lines in our portfolio. The safety margin in the reserves remained unchanged at a high level in 2015.
At €897m, man-made major losses were up on the previous year’s figure (€625m) and slightly higher than the expected level, accounting for 5.3% (3.9%) of net earned premiums. The explosion at Tianjin harbour in China (€175m) and a dam failure in Brazil (€156m) were by far the two largest individual losses of the year. Extensive losses resulted from a fire in a South Korean warehouse (€51m), and we reserved €45m for a marine loss. A fire in a US refinery (€36m) also had an impact on our result.
The investment result amounted to €2,046m (1,785m). The increase was largely a consequence of a significant improvement in the net balance of derivatives. Especially inflation and equity derivatives, and derivatives on fixed-interest securities, showed lower losses than in the previous year. Additionally, in the third quarter we realised a positive one-off effect of around €220m from the acquisition of almost all the shares in 13th & F Associates Limited Partnership Columbia Square, Washington, D.C. (13th & F).
The combined ratio improved year on year thanks to low major-loss expenditure and the positive run-off of provisions for basic losses.
Key figures 2015 Prev. year Change % Gross premiums written €m 3,607 3,588 0.5
Key figures 2015 Prev. year Change % Gross premiums written €m 3,279 3,452 –5.0
Key figures 2015 Prev. year Change % Gross premiums written €m 6,817 6,702 1.7
The division’s premium income was up year on year. The bundling of marine is a key reason for the increase in premiums. This effect was curtailed by lower premium income in agricultural business derived from the negative development of commodity prices for agricultural products. The low claims burden and the positive run-off of provisions for basic losses contributed to a considerable improvement in the division’s combined ratio. This includes the cost of Group-wide retrocession, which totals 2.3 percentage points.
In the ERGO Life and Health Germany segment, we report on German life business, German health business and German direct business.
The decrease in overall premium income was due in particular to continuing poor market conditions driven by low interest rates. Gross premiums written also went down in the past financial year. The decrease in this segment was mainly attributable to lower single-premium income in life insurance.
Health Germany 55% (54%) Life Germany 34% (36%) Direct business Germany 11% (10%)
Key figures 2015 Prev. year Change €m €m % Total premium income1 4,016 4,363 –8.0 Gross premiums written 3,214 3,553 –9.6 Technical result –25 –160 84.4 Operating result 6 53 –88.7 1 Total premium income includes not only gross premiums written but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the applicable statutory accounting guidelines.
New business Life Germany 2015 Prev. year Change €m €m % Regular premiums 189 207 –8.6 Single premiums 670 848 –21.0
In Health Germany, we report on domestic health insurance with the exception of direct insurance business. Our worldwide travel insurance activities are also included under this category. Approximately 91% of the premium income in Health Germany derives from health insurance, and around 9% from travel insurance.
German direct business encompasses direct life, health and property-casualty insurance business transacted in Germany. Life insurance accounts for approximately 46% of the premium income in this field of business. Approximately 39% of the premium income derives from health insurance, and around 15% from property- casualty insurance.
Key figures 2015 Prev. year Change €m €m % Total premium income 5,202 5,250 –0.9 Gross premiums written 5,202 5,250 –0.9
Key figures 2015 Prev. year Change €m €m % Total premium income1 1,104 1,117 –1.2 Gross premiums written 1,011 1,009 0.2 Technical result 71 84 –15.5 Operating result 72 79 –8.9 1 Total premium income includes not only gross premiums written but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the applicable statutory accounting guidelines.
New business direct life Germany 2015 Prev. year Change €m €m % Regular premiums 29 29 –1.2 Single premiums 98 131 –25.1
Annual premium equivalent1 38 42 –8.4 1 The annual premium equivalent corresponds to the regular premium income plus 10% of single-premium volume.
Premium income increased slightly compared with the previous year. Performance varied from one class of business to the next: we posted higher premium income in fire and property insurance (+8.5%) and third-party liability insurance (+0.3%). By contrast, premium volume saw a decline in personal accident insurance (–2.6%), legal protection insurance (–1.2%) and motor insurance (–0.4%). In personal accident and legal protection business, the reduction of business in force was partly responsible for the decreased premium.
— Increase in overall premium income to €4.4bn — Combined ratio of 104.7% up on the previous year — Reduced investment result of €447m — Consolidated result of –€112m
At €1.99bn (2.03bn), overall premium income from international life insurance business decreased by 1.9% year on year. The growth in Poland contrasted with decreases in premium income in particular in Belgium and Austria. In terms of annual premium equivalent, new international life business in 2015 was down by 17.5% on the previous year. We posted premium volume of €2.4bn (2.2bn) in international property- casualty business. The increase in premium volume is due especially to growth in Poland and in Turkey. The property-casualty insurer ERGO Insurance Pte. Ltd., Singapore (ERGO Insurance), acquired in 2014, accounted for €34m (15m) of the overall premium volume in the past financial year.
Key figures 2015 Prev. year Change % Total premium income1 €m 4,382 4,213 4.0 Gross premiums written €m 3,947 3,809 3.6 Share of gross premiums written by ERGO % 23.9 22.8 Loss ratio % 65.3 58.5 Expense ratio % 39.4 38.8 Combined ratio % 104.7 97.3 Operating result €m 68 278 –75.5 Consolidated result €m –112 –276 59.3
Thereof attributable to non-controlling interests €m 11 13 –12.5 1 Total premium income includes not only gross premiums written but also savings premiums for unit-linked life insurance and capitalisation products in accordance with the applicable statutory accounting guidelines.
At the end of 2015, we sold our Italian subsidiary ERGO Italia along with the insurers ERGO Previdenza and ERGO Assicurazioni to the private equity investor Cinven, resulting in an expected loss on disposal totalling €82m. The sale is subject to approval by the competent authorities. The transaction is another step towards ERGO’s aim of reducing its traditional life insurance business involving guaranteed products in Germany and abroad.
Also at the end of 2015, we acquired an additional 22.9% of the shares in HDFC ERGO General Insurance Company (HDFC ERGO) from our joint-venture partner Housing Development Finance Corporation (HDFC) in India. Upon completion of the transaction, we will own a 48.7% share. The acquisition is subject to approval by the supervisory authorities. Through the acquisition, ERGO is strengthening its presence in India, one of the target markets of its international growth strategy.
The technical result in the ERGO International segment decreased to €33m (136m). The main reason for the reduction was the year-on-year increase in expenditure in Turkey, Belgium, and Poland. The investment result for the past financial year was €447m (662m). The decrease is primarily due to write-downs of fixed-interest secur ities and to losses on derivatives, the latter deriving mainly from interest-rate and equity hedging transactions. The operating result consequently declined overall. On the other hand, the consolidated result improved on the previous year, which had been impacted by write-downs on goodwill of €445m.
The higher combined ratio is primarily due to an increased loss ratio, which is partly attributable to new regulations issued by the Polish supervisory authority governing claims settlement in Poland. Higher allocations to claims provisions in Turkey and the UK had an additional negative effect. In international property-casualty business, the expense ratio also saw a rise, not least because of the disproportionate increase in acquisition costs in the UK. Paid claims and the change in claims provisions totalling €1,373m (1,152m), along with net operating expenses of €828m (763m) compared with net earned premiums of €2,103m (1,968m).
— Gross premiums written of €5.6bn up slightly on previous year — Higher combined ratio of 99.9% — Improved investment result of €118m — Consolidated result down to €88m
Key figures 2015 Prev. year Change % Gross premiums written €m 5,623 5,342 5.3 Share of international business in gross premiums written % 99.0 98.6 Loss ratio1 % 84.5 82.0 Expense ratio1 % 15.4 16.8 Combined ratio1 % 99.9 98.8 Operating result €m 80 118 –32.3 Consolidated result €m 88 109 –18.9
At €24m (77m), the technical result was significantly below the level of the previous year. The decreased result is a consequence of considerably higher claims expenditure in individual segments of our reinsurance business in the USA. A significantly higher investment result of €118m (87m) resulted from a subsequent purchase price adjustment from the sale of the Windsor Health Group, and the fact that the previous year had been impacted by write-downs on associates.
— High portfolio weighting of government bonds with very good credit ratings — Net on- and off-balance sheet unrealised gains down, but at a very high level of €26.5bn
Investment mix 31.12.2015 Prev. year Change €m €m % Land and buildings, including buildings on third-party land 4,317 3,732 15.7 Investments in affiliated companies 145 274 –46.9 Investments in associates and joint ventures 1,132 1,285 –11.9
Other securities at fair value through profit or loss Held for trading
Designated as at fair value through profit or loss Fixed-interest 165 204 –19.1 Non-fixed-interest 193 1 >1,000.0
Other investments 8% (8%) Shares and equity funds 5% (4%) Real estate 2% (2%) Participating interests 1% (1%)
Over half of our fixed-interest portfolio is invested in government bonds. In the current financial year, we have mainly made new investments in US, French and Spanish government bonds. The purchase of government bonds from emerging markets is also part of our balanced investment strategy. Reductions focused on our holdings of bonds from German and Italian issuers, the latter chiefly via the classification of ERGO Italia as a disposal group. The vast majority of our government bonds continue to come from countries with a high credit rating. As part of our risk management, we gear our risk capital requirements and limits to the ratings of the relevant issuers, but we do not treat any credit exposure as risk-free. Approximately 46% of our government bond portfolio is made up of German and US bonds, with 9% from Italian, Spanish, Portuguese and Irish issuers. We do not hold any government bonds from Greece, Cyprus or Argentina.
Our portfolio of government bonds, covered bonds and corporate bonds has a good rating structure: as at 31 December 2015, approximately 84% were rated AAA to A.
Senior bonds 79 81 Loss-bearing bonds 6 5 Subordinated bonds 15 14 1 Presentation essentially shows fixed-interest securities and loans at market value. The approximation is not fully comparable with the IFRS figures.
In 2015, regular income increased slightly against the previous year, despite the decreased value of the investment portfolio. Positive currency translation effects and higher dividend income were able to compensate for lower interest payments from fixed-interest securities. Our reinvestment return was 1.8% (2.1%). Due to the low levels of interest-rates in the financial year, yields on new investments remain far lower than the average return on our existing portfolio of fixed-interest investments.
In the 2015 financial year, through active asset management we posted net gains of €2,693m (2,629m) on non-derivative investments. These derive primarily from our portfolio of fixed-interest securities – most notably government bonds – and our equity portfolio. The year-on-year improvement in our result from disposals was due chiefly to higher gains realised on fixed-interest securities, and to a positive one-off effect from acquiring almost all the shares in 13th & F Associates Limited Partnership Columbia Square, Washington D.C. (13th & F). The result was negatively impacted by the expected loss from the sale of ERGO Italia, which we are showing as a disposal group at the reporting date.
In the financial year, we posted a negative balance totalling –€1,226m (–1,068m) from write-ups and write-downs of derivatives and losses on the disposal of derivatives. This result is mainly on account of negative figures from equity, inflation, commodity and interest-rate derivatives, particularly from ERGO’s interest-rate hedging. In the previous year, the interest-rate derivatives were still showing a positive effect, and the losses for commodity derivatives are higher year on year.
1 Details of the result by type of investment are shown on page 264 f. in the notes to the consolidated financial statements. 2 Return in % p.a. on the average market value of the investment portfolio at the quarterly reporting dates.
Development of Group equity 31.12.2015 Prev. year Change €m €m % Issued capital and capital reserve 7,418 7,417 0.0
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 example, 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 €9.1bn (8.4bn). In addition, there were contingent liabilities.
The composition of our subordinated liabilities can be found in the notes to the consolidated financial statements on page 240 f.
Information on contingent liabil ities is provided on page 286 f. in the notes to the consolidated financial statements
The structure of our technical provisions and other liabilities is the basis for Munich Re’s investment strategy, the main focus of which is asset-liability management (ALM). With ALM, we aim to ensure that macroeconomic factors influence the value of our investments and that of our technical provisions and liabilities in the same way. This stabilises our position against capital market fluctuations. 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 where possible.
To configure our economic ALM as effectively as possible, we also use derivative financial instruments in order to hedge investment products against fluctuations on the interest-rate, equity and currency markets. Under IFRS accounting, we recognise fluctuations in the value of these derivative products 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.
More details on ALM as a tool of corporate management are available on page 43 f.
Information in accordance with Section 315 (4) of the German Commercial Code (HGB) and explanatory report of the Board of Management
Munich Reinsurance Company has not been notified, nor has it otherwise learned, about any direct or indirect shareholdings in the Company that exceeded 10% of the voting rights as at 31 December 2015.
The legal parameters for the appointment and dismissal of members of the Board of Management are specified in the Company’s co-determination agreement, Articles 13 and 16 of the Articles of Association, Sections 84 and 85 of the German Stock Corporation Act (AktG), and Sections 24, 47 and 303 of the German Insurance Supervision Act of 2016 (VAG). Munich Re’s co-determination agreement and Articles of Association follow the legal tenets of the German Co-Determination Act (MitbestG). 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 determined by the Supervisory Board. There are currently ten members of the Board of Management. The Supervisory Board appoints the members of the Board of Management pursuant to Section 84 of the Stock Corporation Act and may dismiss them at any time for good cause. On initial appointment, members of the Board of Management are usually given contracts for a term of three to five years, and extensions of up to five years are possible. For the appointment or dismissal of members of the Board of Management, Article 13 (3) of the Articles of Association stipulates a two-thirds majority of the votes cast on the Supervisory Board. If the requisite majority is not obtained in the initial resolution, the appointment or dismissal of the Board of Management requires a simple majority of the votes cast. The second resolution is only possible following a suitable period of reflection and after the issue has been dealt with in the competent committee, but is thereafter also possible by written consent in lieu of a meeting. In exceptional cases, members of the Board of Management may also be appointed by a court of law, pursuant to Section 85 of the Stock Corporation Act.
The German Stock Corporation Act contains general provisions governing amendments to the Articles of Association (Section 124 (2) sentence 2, and Sections 179–181 of the Act). These state that only the Annual General Meeting can make resolutions on changes to the Articles of Association. In order to be carried, such a resolution must receive the votes cast by at least three-quarters of the share capital represented in the vote. The Articles of Association may stipulate a different capital majority (higher or lower) or other requirements, but the Company’s Articles of Association do not provide for any such special features.
Powers of the Board of Management with particular regard to the option of issuing or buying back shares The powers of the members of the Board of Management are defined in Sections 71 and 76–94 of the Stock Corporation Act (AktG). The Board of Management has the following powers to issue and buy back shares: — The Annual General Meeting of 23 April 2015 authorised the Company, pursuant to Section 71 (1) no. 8 of the Stock Corporation Act, to buy back shares until 22 April 2020 up to a total amount of 10% of the share capital. The shares acquired, plus other own shares in the possession of the Company or attributable to the Company in accordance with Section 71a ff. of the Stock Corporation Act, may at no time amount to more than 10% of the share capital. In accordance with the provisions of the authorisation, the shares may be acquired in various ways. The Company may buy back shares amounting to a maximum of 5% of the share capital using derivatives. The Board of Management is authorised to use shares thus acquired for all legally permissible purposes, in particular those specified in the authorisation, whilst excluding subscription rights. Among other things, the Board of Management is empowered under Section 71 (1) no. 8 of the Stock Corporation Act to retire the shares without requiring further approval from the Annual General Meeting. By resolution of 11 March 2015, the Board of Management decided to utilise this authorisation to acquire own shares. Around 4.1 million shares had been acquired by 31 December 2015 at a purchase price of €698m.
— Under Article 4 (2) of the Articles of Association, the Board of Management is authorised to increase the share capital at any time up to 22 April 2020 by an amount of up to €10m by issuing new shares against cash contribution (Authorised Capital Increase 2015). The subscription right of shareholders is excluded insofar as this is necessary to allow the shares to be issued to employees of Munich Reinsurance Company and its affiliated companies.
Munich Reinsurance Company’s Articles of Association are also available on the internet at www.munichre.com/
Munich Re is subject not only to the supervisory requirements applying to individual insurance companies but also to supervision at Group level.
Munich Reinsurance Company is provided on page 281 ff. in the notes to the consolidated financial statements
31.12.2015 Prev. year Change % Eligible capital of the Group €bn 31.4 30.6 2.5 Adjusted solvency ratio % 315.6 307.9
Outflows from investing activities were determined by payments for the acquisition of investments. They exceeded the inflows from the sale and/or maturity of investments by €566m.
Consolidated cash flow statement 2015 Prev. year Change €m €m % Cash flows from operating activities 4,327 7,527 –42.5 Cash flows from investing activities –1,030 –4,939 79.1 Cash flows from financing activities –2,337 –2,694 13.3 Cash flows for the financial year 960 –106 –
Depending on the clients’ wishes, we work directly with them or via the reinsurance brokers they commission. We maintain relationships with all relevant reinsurance brokers at local operating and strategic level, and develop these contacts systematically in order to adapt them to changing circumstances. We view brokers as competent representatives of our clients and key know-how partners in developing new, clientcentric solutions.
ERGO attends to the needs of private, commercial and industrial clients, with private clients making up the bulk of its customers. ERGO offers them products and services in connection with old-age provision and saving schemes, protection of property, health, legal cover, and travel insurance. Clients can contact us through a wide range of channels: via full-time self-employed agents, through brokers, via the internet, by phone for direct insurance, or via various corporate partners.
ERGO’s brand proposition “To insure is to understand” expresses the primary insurance group’s strong client orientation and aim of focusing systematically on customers’ actual requirements. We chart the implementation of the brand proposition in the ERGO customer report, which was published for the fourth time in April 2015.
In keeping with this motto, ERGO is developing new solutions to respond to new trends and client expectations. In particular, ERGO is expanding its services in a targeted manner to meet the needs of the growing number of internet-savvy consumers, using its many years of experience in direct sales. The range of products for sale online was further expanded in 2015. With live chat and WhatsApp or its Chinese equivalent WeChat, clients can use an increasing number of digital channels to contact the company. Further digital services such as independent settlement of dental cleaning costs simplify and accelerate processes for clients and companies.
You will find the ERGO customer report for 2015 at www.ergo.com/en/ Unternehmen/Overview/
Our clients can also outsource extensive elements of their business operations to Munich Health – from claims handling to management of medical networks (hospitals, medical centres, etc.). Our MedNet service units act as specialist Third Party Administrators (TPAs), particularly in the Middle East and southern Europe.
MEAG handles the investment activities of Munich Re and ERGO as their asset manager. Its range of services includes advice on strategic asset allocation, the tactical implementation of this, and the selection of the individual investments. It also offers its competence to other institutional and private investors. MEAG is represented in Europe, North America (MEAG New York) and Asia (MEAG Hong Kong) and manages all important asset classes. As well as the more traditional classes such as bonds, equities, currencies and real estate, these now also include forestry, infrastructure, renewable energies and new technologies, as well as two sustainability funds.
MEAG’s Mandate Management Division is the interface between MEAG’s various units on the one hand, and the Group’s insurance companies and MEAG’s external clients on the other. The Division advises the Group on strategic investment issues and is responsible for tactical asset management. The disciplined investment process means that MEAG’s retail funds also achieve a generally above-average performance, leading to corresponding recognition from independent fund-rating agencies.
Munich Re’s position as a knowledge leader is promoted by the systematic development of outstanding specialists in business-relevant knowledge areas. One key element of this is a wide range of up-to-date seminars and workshops. Internal training events provided by our in-house experts are an invaluable resource, especially with respect to fast-developing current topics such as the digitalisation of the insurance industry. Specific entry programmes ensure that specialists recruited from the external labour market, such as engineers with broad professional experience, receive a sound induction to reinsurance business. In this manner, we can provide our clients with specific expert know-how and ensure that knowledge within the organisation remains up to date.
Moreover, the starting shot for human resources initiatives in ERGO’s sales force sounded in 2015: for example, we are currently strengthening the sales focus of our initial training course.
Important topics were also broached at MEAG in 2015: The Employer Branding project was launched to determine the company attributes valued by its staff members. The result was a fitting slogan for communications: “All the assets – one team”, meaning that as an asset manager, MEAG handles not only securities but also real estate and the new “illiquid” assets. MEAG staff members are clearly supporting this as a team.
The challenges of today’s working world are characterised by rapidly-changing trends, internationalisation, dynamic team structures, increased mobility and rapid changes in the market. Staff also increasingly want to enjoy more individuality and a better work-life balance at the various stages of their lives. In order to meet these demands, the reinsurance group also launched flexible models for working hours and leaves of absence for managerial staff in 2015.
Another key emphasis of diversity management is the improvement of opportunities for women in management positions. Here, within the framework of the self- commitment of the DAX 30 companies and four years before the statutory obligation arising from the Law on Equal Participation of Men and Women in Private-Sector and Public-Sector Management Positions (FührposGleichberG), Munich Re (Group) has set itself the objective of achieving a quota of women in leading positions in Germany of 25% by the end of 2020. At the end of December 2015, the percentage of women was 23.5%.
The number of staff in the Group increased marginally year on year owing to individual regional factors in the fields of business.
Shareholders At the end of the year, our register of shareholders listed around 196,000 shareholders (previous year: 180,000). The vast majority of shares were held by institutional investors such as banks, insurers or investment companies; around 16.0% (14.3%) were in the hands of private investors. At around 64%, the percentage of foreign investors was somewhat lower than in the previous year. Our shareholders also include sustainability-minded investors.
Over 41 36–40 31–35 26–30 21–25 16–20 11–15 6–10 1–5 Below 1
Rest of Europe 34.5% (33.7%) North America 12.5% (12.4%) Asia and Australasia 2.1% (1.8%) Africa, Middle East 0.6% (1.2%) Latin America 0.3% (0.3%)
Our corporate strategy geared to a sustained increase in value is accompanied by ongoing and open communication with all capital market participants. The main task of Investor and Rating Agency Relations at Munich Re is to cultivate contact with existing shareholders and attract new ones. At the same time, we ensure that due account is taken of our investors’ opinions and preferences in internal decision-making processes. We chiefly use roadshows and investor conferences to initiate and intensify dialogue with institutional investors, our main focus being on financial centres in Europe and North America. We regularly supplement our investor relations activities with special events, such as the analysts’ meeting we organised in London on the topic of Solvency II. We also offer regular forums for exchanges between investors who systematically gear their investment strategy to sustainability criteria.
North America 27% Germany 36% Rest of Europe 23% UK 13% Other countries 1%
Our strategy: Group-wide environmental management and climate protection In 2012, a uniform environmental management system based on the international standard DIN ISO 14001 was introduced and made binding Group-wide for Munich Re’s locations. Our environmental guidelines, CO2 reduction targets, standardised Groupwide processes and organisational structures, which anchor our approach in all fields of business, are components of this management system. Thus, we are continually improving our environmental performance while at the same time supporting and developing environmentally conscious behaviour amongst all Group staff.
We exceeded the Group-wide target for the period 2009–2015 (saving 10% of CO2 emissions per staff member and achieving carbon neutrality by 2015). With an employee coverage of more than 80%, we succeeded in cutting approx. 14% of CO2 emissions per staff member between 2009 and 2015 by reducing our consumption of energy, water and paper, and by avoiding business travel and waste. A further 10% of CO2 emissions were cut back by using electricity from renewable sources. Unavoidable CO2 emissions are offset by CO2 certificates from carefully selected projects with significant social impact. Munich Re (Group) has thus been carbon-neutral since 2015.
— We will improve the quality and transparency of our environmental data via external audits
— We will continuously review and improve the energy efficiency of buildings, technical equipment, consumables, the vehicle fleet, etc.
Further information on our environmental management can be found online at www.munichre.com/environment
Successful projects undertaken during the past financial year include the following: In the Franco-German initiative POC21 (proof of concept), a professional cooperation accompanied by various representatives from non-governmental organisations (NGOs), research institutions and industry, over one hundred creative minds and young experts from all around the world designed innovative solutions for a climate-neutral and resource-efficient future. The twelve projects selected in advance, whose prototypes were developed into market-ready offerings, came from the energy, food, mobility, communication, recycling management and domestic sectors. Munich Re supported these projects as a corporate partner.
Munich Re has also made a commitment to refugees in Germany and is promoting the medium and longer-term integration of asylum seekers in Germany with several initiatives. Targeted cooperations with Caritas, the Red Cross and ArrivalAid e.V. direct our support to where it is needed. For example, staff members with knowledge of Arabic and volunteer helpers were placed with social centres and reception facilities in Munich and the surrounding area. The association Horizont e.V. received support for numerous special projects in Munich to expand its ongoing refugee aid provision. In cooperation with the German Red Cross, ERGO donated money and needs-based gifts in kind from staff members to a number of reception facilities near its administrative centres. Integration days with refugees were offered as part of the corporate volunteering programme.
With regard to natural disasters and the impact of climate change, Bangladesh is one of the countries most at risk in the world. In partnership with the United Nations University (UNU-EHS) in Bonn, Munich Re Foundation supports the International Centre for Climate Change and Development (ICCCAD). In addition to research on the resilience of the people in Bangladesh, the primary aim is to preserve basic living standards – for example, communities in risk zones should be protected against storms and floods. Experience from the previous early-warning projects in Mozambique helps those responsible in the cooperation to tailor appropriate systems and processes to the people affected. The latest work results clearly show that numerous adaptation measures are required to effectively prepare the country and its people for environ- mental changes in the long term.
Organisational structure As required for Solvency II, Munich Re has a risk management function (RMF) at Group level in addition to the key functions of Compliance, actuarial and Group Audit. It is part of the Integrated Risk Management Division (IRM) and reports to the Chief Risk Officer (Group CRO). In addition to the Group functions, there are risk manage- ment units in the fields of business, each headed up by its own CRO. Our extensive documentation, guidelines and instructions ensure that staff in our risk management structure and the Group as a whole are kept informed of our risk strategy and the RMF’s organisation and processes. This provides the basis for active management of the risks we incur.
Group level Ensuring that risk management and risk governance systems are in place and continuously enhanced at Group level is one of the most important tasks of the Group Committee of the Board of Management.
The Group Committee normally meets as the Group Risk Committee, on which it is joined by the Group CRO and representatives from the fields of business with responsibility for risk management. The Group Risk Committee is responsible for ensuring that risk management and risk governance systems are in place and continuously enhanced both at Group level and in the fields of business.
— Risk situation manageable and under control — Capital position still comfortable — Internal risk model certified for use under Solvency II
We determine our risk strategy by defining risk appetites for a series of risk criteria. These criteria are based on the capital and liquidity available and on our earnings target within specified volatility limits, and the risk appetites provide a frame of reference for the Group’s operating divisions: — Whole portfolio criteria relating to the entire portfolio of risks are designed to protect our capital and limit the likelihood of an economic loss for the year. Of particular importance is the financial strength criterion, which is the ratio of eligible own funds to the solvency capital requirement under Solvency II.
— Supplementary criteria are used to limit the loss amounts for individual risk types and potential accumulations, such as natural hazards, terrorism and pandemics, and also to limit market, credit and liquidity risks that could endanger Munich Re’s ongoing viability.
— Other criteria support our objective of preserving Munich Re’s reputation and protecting its future business potential. These criteria encompass limits for individual risks that, although they would not threaten Munich Re’s existence, could cause lasting damage to the confidence that clients, shareholders and staff have in the Group.
The risk appetite laid down ensures that an appropriate balance is maintained between business opportunities and risks incurred. Our business model of combining primary insurance and reinsurance ensures that – even in particularly difficult markets – we are 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.
Implementation of strategy and the risk management cycle The risk appetite defined by the Board of Management is reflected in our business planning and integrated into the management of our operations. If capacity shortages or conflicts with our system of limits and rules arise, defined escalation and decisionmaking processes must be followed. These have been designed to ensure that the interests of the business are reconciled with risk-management considerations.
Our implementation of risk management at operational level embraces the identification, measurement, analysis and assessment of risks, which provide a basis for risk reporting, limits and monitoring. Risk identification is performed by means of appropriate processes and indicators, which are complemented by expert opinions and assessments by selected, highly experienced managers. Our ad-hoc reporting process provides for staff to report risks to the central risk management function (IRM) at any time.
Our internal model is based on economic principles and has been certified as the internal Group model for the purposes of calculating the solvency capital requirement under Solvency II. Depending on their materiality and effect, certain changes to our internal model must be approved by the supervisory authorities before they are applied. We are in regular communication with the authorities regarding any intended changes. We also validate the results produced by our internal risk model with the help of standard models, and the models of rating agencies and commercial modelling companies, and take part in industry surveys.
Our financial strength is an important criterion for the success of our business. In addition to our internal requirements, our objective is the second-highest rating for financial strength from each of the main agencies that rate us. Meeting this objective is a supplementary parameter of our corporate management and risk strategy, 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.
The risk and control assessments are performed at least annually by managers, specialists and staff in the relevant departments.
The Audit Committee of the Supervisory Board regularly calls for reports on changes to the risk and control landscape
The accounting process is to a large degree dependent on IT systems, which are subject to ongoing controls aimed at protecting against unauthorised access and guaranteeing the effectiveness and stability of the information and communication processes. 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. Group Audit regularly audits data management in the accounting systems to ensure that it is being performed in a proper and orderly manner.
In connection with the introduction of Solvency II, we prepare the prescribed quantitative and descriptive risk reports for both the general public and the supervisory authorities. In future, risk reporting for external purposes will be based on these reports.
Our general definition of risk is possible future developments or events that could result in a negative deviation from the Group’s prognoses or targets. According to our 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 each business unit and legal entity, taking account of its individual riskbearing capacity. There are significant risks in the following risk categories: Underwriting risk: Property-casualty The property-casualty risk category encompasses the underwriting risks in the property, motor, third-party liability, personal accident, marine, aviation and space, and credit classes of insurance, together with special classes also allocated to property-casualty. Underwriting risk is defined as the risk of insured losses being higher than our expect- ations. 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.
Further information on risks in property-casualty business can be found on page 276 ff. in the notes to the consolidated financial statements
In particularly critical areas, the underwriting authorities granted to the operating units are restricted by mandatory Group-wide instructions or limited budgets.
Random annual fluctuations in insurance benefits can lead to short-term falls in the value of the portfolio. This applies particularly to expenses, which can rise as a result of exceptional one-off events such as a pandemic.
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 can be highly dependent on conditions in the capital markets.
We use appropriate limit and early-warning systems in our asset-liability management to manage market risks. By means of stress tests and sensitivity and duration analyses, we simulate market fluctuations and devise strategies for counteracting them where necessary. Derivatives such as equity futures, options and interest-rate swaps, which are used in particular for hedging purposes, also play an important role in our management of the risks.
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). There are also volume limits for securities lending and repurchase transactions. Investments in asset-backed securities (ABSs) are also controlled through volume limits separate from the counterparty limit system. Groupwide rules for collateral management, for example for OTC derivatives and catastrophe bonds issued, enable the associated credit risk to be reduced. Exposure to issuers of interest-bearing securities and credit default swaps (CDSs) in the financial sector is additionally limited by a financial sector limit at Group level.
We manage the default risk in the area of retrocession and external reinsurance through the Retro Security Committee.
Operational risk We define 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
An overview of the discount rates used for the technical pro visions is available in the notes to the consolidated financial statements on page 274.
Strategic risk We define strategic risk as the risks arising from making incorrect business decisions, implementing decisions poorly, or being unable to adapt to changes in the operating environment. The existing and new potential for success in the Group, and the fields of business in which it operates, involves strategic risks, which we manage by discussing significant strategic issues and decisions in our Strategy Committee and regularly monitoring the implementation of the decisions taken. The Strategy Committee comprises the members of the Group Committee, the Chief Executive Officers (CEOs) of the fields of business and the Head of Group Development. IRM is additionally involved in the operational business planning and in the processes for mergers and acquisitions.
The action we take to monitor and limit reputational risk ranges from the general identification and recording of reputational risks arising out of operational risks for the purposes of the ICS to establishment of whistleblower procedures.
Actual reputational issues arising out of specific incidents are evaluated in the fields of business by Reputational Risk Committees. A legal entity’s Compliance Officer can always be consulted on any matter relating to the assessment of reputational risks.
There is also a Group Compliance Committee, which deals with compliance and reputational issues and risks at Group level, with a view to standardising the way they are handled throughout the Group. The Committee mainly considers reputational risks that have been notified by the business units. We have also set up the Group Corporate Responsibility Committee, which concerns itself with identifying and undertaking a general analysis of sensitive issues and defining our position on them. The assessments it makes are used as a basis for strategic decisions taken by units in the Group.
We manage our business on the basis of a consolidated Group view, using a comprehensive internal risk model to determine the capital needed to ensure that the Group is able to meet its commitments even after extreme loss events. For the 2015 year-end, we have calculated the solvency capital requirement (SCR) under the new Solvency II regulatory regime on the basis of our certified internal model. The capital requirements of the previous year are also shown on the basis of the SCR, which corresponds to the economic risk capital (ERC) divided by a factor of 1.75. The SCR figures shown in this report for the end of 2014 are estimates based on our application for certification including the remaining model changes for 2015.
The solvency capital requirement is the amount of eligible own funds that Munich Re needs to have available, with a given risk appetite, to cover unexpected losses in the following year. The solvency capital requirement corresponds to the value at risk of this economic profit and loss distribution over a one-year time horizon with a confidence level of 99.5%. This metric thus equates to the economic loss for Munich Re that, given unchanged exposures, will be statistically exceeded in no more than one year in every 200. Munich Re’s objective is to maintain a level of solvency capital that is at least 1.75 times and hence substantially in excess of the solvency capital requirement. This conservative approach provides our clients with a high level of safety.
In the course of the introduction of Solvency II, the following were the main changes affecting the solvency capital requirement: the change from using swap rates to the risk-free interest rates required under Solvency II (EIOPA curves), the application of rules for the recognition of capital fungibility and transferability in determining eligible own funds rather than in determining the solvency capital requirement, and the recognition of the loss absorbency of deferred taxes. In line with the procedure for determining eligible own funds, we use neither the volatility adjustment nor the matching adjustment to the risk-free yield curve in calculating the solvency capital requirement. We also make no use of the transitional measures for risk-free interest rates or technical provisions.
Our risk model is based on specially modelled distributions for the risk categories property-casualty, life and health, market, credit and operational risks.
We use primarily historical data for calibration, complemented in some areas by expert estimates. Our historical data cover a long period to take account of our one-year time horizon and to provide a stable and appropriate estimate of our risk parameters. We also take account of the diversification effects we achieve through our broad spread across the different risk categories (underwriting, market, credit and operational risks) and our combination of primary insurance and reinsurance business. We also take into account dependencies between the risks, which can result in higher capital requirements than would be the case if no dependency were assumed.
Diversification effect –7.4 –7.1 –2.1 –2.6 0.0 –0.1 Tax –2.0 –1.9 –0.7 –0.5 –0.1 0.0
Diversification Group 31.12.2015 Prev. year 31.12.2015 Prev. year Change €bn €bn €bn €bn €bn %
Munich Re Group Annual Report 2015 was substantially determined by two countervailing factors: the depreciation of the euro, which led to an increase in the solvency capital requirement, and the decrease in the solvency capital requirement for the ERGO field of business.
— The solvency capital requirement for market risks decreased by €0.1bn. The increase of €0.3bn for the reinsurance field of business resulted from a higher equities exposure. The solvency capital requirement in the ERGO field of business was down €0.7bn. As in the life and health risk category, the final implementation of the remaining model changes in accordance with the application for certification and the favourable development of the investment portfolio contributed in more or less equal measure to the reduction.
— The solvency capital requirement for credit risks decreased by €0.4bn, primarily owing to the ERGO field of business. In this risk category too, the reduction in the risk resulted from the final implementation of the remaining model changes in accordance with the application for certification and the advantageous development of the investment portfolio, which led to an increase in the risk-mitigating effect of profit sharing.
We manage our risk exposure actively. This includes restricting our exposure, for example by setting limits and budgets for natural catastrophe risks, with our experts developing scenarios for possible natural events taking into account the scientific factors, occurrence probabilities and potential loss amounts. On the basis of these models, the impact of various events on our portfolio is calculated and represented in mathematical terms in the form of a stochastic model. These models form the basis for the SCR calculation for the “large and accumulation losses” category – comprising not only natural hazard scenarios, but also man-made losses – and for the limits and budgets for accumulation losses. Our internal risk model treats the accumulation-risk scenarios as independent events.
Market risks Market risks are established using a scenario-based simulation calculation. The calibration of the scenarios, which depict the possible future values and dependencies of the financial instruments concerned, is based on historical weekly capital-market data (going back to 1999).
Atlantic Hurricane Aggregate VaR (return period: 200 years) €bn (before tax), retained
Earthquake Los Angeles Aggregate VaR (return period: 200 years) €bn (before tax), retained
Equity risk The market value of our investments in equities, including participating interests, was €12.1bn (12.4bn) as at 31 December 2015. As at that date, the ratio of equities to total investments on a market-value basis was 5.2% (5.2%) before taking derivatives into account and 4.8% (4.3%) after derivatives. The higher equities position after derivatives compared to the previous year is reflected in a rise in the solvency capital requirement.
In the ERGO field of business, the favourable performance of the investment portfolio reduces the general interest-rate risk. The final implementation of the remaining model changes in accordance with the application for certification resulted not only in this further reduction, but also in a change in the recognition of the general and specific interest-rate risk.
Reinsurance ERGO Diversification 31.12.2015 Prev. year 31.12.2015 Prev. year 31.12.2015 Prev. year €bn €bn €bn €bn €bn €bn
General interest-rate risk 3.1 3.8 –0.7 –18.4 Specific interest-rate risk 3.5 3.1 0.4 12.9
In 2015, we changed the methodology for calculating own funds (previously “available financial resources”) to that prescribed under the Solvency II regime applicable from 1 January 2016. Since then, we have compared the solvency capital requirement with the eligible own funds.
The solvency balance sheet prepared in accordance with Solvency II forms the basis for the calculation of the eligible own funds. This balance sheet is used to determine the excess of the Group’s assets over its liabilities, with both assets and liabilities being valued according to the principles of Solvency II, i.e. essentially at market value.
Goodwill and other intangible assets cannot be recognised as assets in the solvency balance sheet as they might not retain their value in crisis situations. Surplus funds, on the other hand, can be included in the solvency balance sheet if they are provided for under national regulations and meet the requirements of own funds classification under Solvency II. They are accumulated profits that have not yet been allocated for payment to policyholders or claimants. Examples are provisions for unallocated premium refunds and terminal bonuses in German life insurance.
The Solvency II ratio of 302% (277%) was up by 25 percentage points on the previous year, emphasising Munich Re’s financial strength. In line with the Solvency II standard, the solvency capital requirement was based on a value at risk with a confidence level of 99.5%.
The solvency ratio for the regulatory solvency requirement in accordance with Solvency I, which was applied for the last time as at 31 December 2015, can be found on page 103
In monitoring the country risks, we do not simply rely on the usual ratings, but perform independent analyses of the political, economic and fiscal situation in key countries in which bonds might potentially be issued. Our experts also evaluate and draw conclusions from the movements in the market prices of the bonds or derivatives issued by the country concerned. On this basis, and taking account of the investment requirements of the fields of business in the respective currency areas and countries, proposals for limits or action to be taken are submitted to the Group Investment Committee. These limits are mandatory throughout the Group for investments and the insurance of political risks.
Current developments in some emerging countries are also giving rise to considerable uncertainty. The large increases in debt in the past, principally in the private sector, falling commodity prices, the tightening of US monetary policy and the resultant risk of capital outflows are posing problems for some emerging countries, notably China, Brazil, Turkey and South Africa.
Apart from the political imponderables in Europe and the situation in the emerging countries, international crises such as the situations in the Middle East and Ukraine are also creating increased uncertainty.
Pandemics Another example of an overarching accumulation is a serious pandemic, which would expose Munich Re – like other companies in the insurance industry – to risks resulting from a marked increase in mortality and morbidity and from disruptions in the capital markets. We counter this risk by analysing our overall exposure in detail (scenario analysis) and defining appropriate measures to manage the risks.
Climate change represents one of the greatest long-term risks of change for the insurance industry. In our Corporate Climate Centre, we analyse and assess this risk and are developing and coordinating a holistic strategic approach. The findings are available to all fields of business, the Group and reinsurance development units, Corporate Underwriting, Integrated Risk Management and the investment management areas (asset-liability management and MEAG).
Our early identification of risks also covers emerging risks, i.e. those that change or arise as a result of legislative, socio-political, scientific or technological changes, and that may have unmeasured or unknown effects on our portfolio. The degree of uncertainty as to the extent of damage and probability of occurrence is by its nature very high for these risks.
We identify trends and faint signals in many ways, including systematic trend research, using Munich Re’s knowledge management. Regular structured discussions are held in our emerging-risks think tank and our global emerging-risk community, a group of experts who investigate the possible impact of emerging risks on Munich Re. They look at interconnections and interdependencies between different risks and other consequences linked directly or indirectly to emerging risks. Cooperation with external partners, such as the CRO Forum’s Emerging Risks Initiative, complements our internal early-warning system.
One example of an emerging risk is cyber risk. The growing use of information technology in society and the economy is having serious repercussions. The rapid progress is changing our working life and social behaviour, and creating new conditions for industry, trade, transport and the supply of energy and raw materials. Healthcare systems and international economic and political relations are likewise changing constantly as a result of the rapid advances in IT. In our management of emerging risks, we monitor these developments very closely, at the same time both devising appropriate risk-management methodologies and creating new business opportunities.
We also systematically capture risks potentially arising out of environmental, social responsibility and governance (ESG) issues. In addition to the advice and support on ESG risks provided by our Corporate Responsibility unit, the Group Corporate Responsibility Committee identifies and prioritises particularly sensitive issues and has analyses carried out involving all relevant experts in the Group.
As a consequence of increasing global dependencies and the rapid spread of technological innovations, events that test the limits of traditional scenario-based risk management are occurring frequently. Both the occurrence of an event and its potential consequences are increasingly difficult to predict. Current examples are the Ukraine conflict and the war in Syria, which are not only having dramatic consequences for the populations, infrastructure and economies in the countries directly affected. The
Climate change represents one of the greatest long-term risks of change for the insurance industry
Munich Re Group Annual Report 2015 repercussions of these conflicts are being felt worldwide in the form of migration and changing geopolitical stability, indirectly affecting the economic conditions in which we operate. Such chains of events will take on greater importance in future. We therefore adopt a system-based approach to analyse dependencies in complex risks, for which we have developed our Complex Accumulation Risk Explorer software (CARE). Using this method, risks and their interaction can be made more transparent and at least partially quantified.
In December 2009, Munich Re’s Spain and Portugal branch lodged an appeal against the Spanish antitrust authority (Comisión Nacional de la Competencia – CNC) in respect of an administrative order imposing a fine of €15.9m for alleged collusion restricting competition. The court of last instance has now confirmed that the accusation of conduct in violation of antitrust law on the part of Munich Re was unfounded and the fine has been overturned.
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. The recent developments indicate that malicious liability claims are being contested in US legal circles with increasing resolve. However, it is too early to say whether and to what extent this will have favourable implications for future losses 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 asbestos-related diseases and similar liability complexes. Although 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.
Risk of legal changes On 19 December 2013, the Court of Justice of the European Union (CJEU) had ruled that the limitation period for the “policy model” for life insurance within the meaning of Section 5a (2) sentence 4 of the German Insurance Contract Act (VVG) (old version) contravened European law. On 7 May 2014, the German Federal Court of Justice (BGH)
In addition to the SIFI issue, the FSB and the IAIS (International Association of Insurance Supervisors) are working on a Common Framework (ComFrame), which is expected to become the international standard for the supervision of large insurance groups operating internationally from 2019. One of the objectives of ComFrame will be to enable the diverse activities of such groups to be captured better through efficient cooperation and coordination between regulators, leading to harmonisation of the supervisory processes worldwide. An important component of ComFrame will be a new global capital requirement – the Global Insurance Capital Standard (ICS). There are already initial thoughts on the requirement, and high-level principles have been proposed. Introduction of the standard is also expected to involve higher regulatory requirements.
In May 2015, the American Modern Insurance Group (American Modern) concluded a “Regulatory Settlement Agreement” with 49 US states and the District of Columbia regarding “force-placed business”. In the Agreement, American Modern undertook to pay a net penalty of US$ 6m and is setting up a compensation fund of around US$ 20.4m for debtors and policyholders affected. American Modern also undertook to change certain business practices by 31 March 2016. If it does not do so, the abovementioned penalty payable will be increased by US$ 6m.
Balance sheet risks Balance sheet risk is the risk of our annual results or our capital being adversely affected by unforeseen reductions in the value of our assets or increases in our liabilities. It arises primarily out of changes in capital-market parameters or an unforeseen need to adjust assumptions relating to insurance liabilities that could lead to reserves having to be strengthened. In addition, changes in the general macro economic environment may affect the cash flows achievable from assets. Assets include goodwill arising on firsttime consolidation of subsidiaries, which is subjected to regular impairment tests. Changes in the assumptions on which we have based our calculations could result in decreases in asset values in the future.
In accordance with the prescribed processes, our Board committees explicitly defined the risk appetite for significant risk categories in the year under review, and quantified it with key figures. We determined and documented the risk appetite across the Group hierarchy and communicated it throughout the Group. During the whole of 2015, risk exposures were regularly quantified and compared with the risk appetite. We assess Munich Re’s risk situation to be manageable and under control.
We are aiming to generate promising business opportunities for our core business by taking account of environmental, social and governance (ESG) aspects in the valueadded chain of our core business. Constantly evolving markets and changes in client behaviour call for flexibility in terms of coverage and solutions. The requisite change in perspective with regard to new, innovative products and processes is supported by our cooperation with young and creative start-ups and impact hubs. A direct and transparent dialogue with clients is very important. Where possible, we integrate realisable options and aspects into our business practices after looking at them closely in context. In cooperation with forward-looking partners, we systematically work to gain a deeper understanding of emerging business sectors with potential client segments.
— Development of emerging economies provides options for expanding and further diversifying the portfolio
The field of reinsurance offers many development opportunities, despite an environment that is still highly competitive. Given the regulatory requirements that are constantly becoming more stringent, many insurers face the significant challenge of sustainably managing their capital relief and optimisation programmes, and diversifying as best they can. Thanks to our strong capital base, innovative strength and professional expertise, we are well-placed to be a long-term strategic partner for our clients, with a wide range of products and services from all-round consultancy to tailor-made reinsurance and capital market solutions.
There are long-term opportunities for expansion in our core business of reinsurance. The demand for insurance is rising, since values and insurance density are increasing steeply as a result of growing industrialisation, in particular in many regions exposed to natural hazards. We are excellently positioned thanks to our competence in the analysis of major loss events and the product solutions available on this basis.
Successful new developments, especially for covering economic risks, are another option for generating additional profitable business. We are constantly working together with our clients on pushing back the limits of insurability. The expansion of digital networking and the rapid rate at which hardware and software are evolving is opening up significant business avenues, for instance in the area of non-damage business interruption insurance or cyber risk coverage. Our experts have been working for many years on cyber risks and enhanced cover options. We now offer a broad spectrum of reinsurance solutions in this field and are also able to cover accumulation perils such as virus-related losses.
A major impact on our business also derives from severe natural catastrophes. We expect climate change to lead to an increase in weather-related natural catastrophes in the long term, with the impact from weather extremes such as floods or seasonal water shortages varying from one region to another. Our risk-management competences and highly developed risk models allow us to better assess these risks and to develop new solutions for our clients.
The positive economic dynamics and low levels of insurance penetration in many emerging markets also provide opportunities for profitably expanding and further diversifying our business portfolio. In growth markets such as Latin America and Asia in particular, we operate as one of the leading reinsurers and also increasingly participate in primary insurance activities. In India, for instance, we have strengthened our presence and business activities in the non-life reinsurance segment in Mumbai. In addition, niche and specialty insurers that are part of the Risk Solutions unit, such as Hartford Steam Boiler, Corporate Insurance Partners, Watkins Syndicate and American Modern, are also expected to generate promising synergies in product development
We are constantly working together with our clients on pushing back the limits of insurability.
Munich Re Group Annual Report 2015 outside the reinsurance field of business and significant, sustained growth thanks to international innovation networks and outstanding levels of expertise. In addition, this segment offers us valuable opportunities to diversify our risks and expand our portfolio profitably, as its cycle is insulated from that of the reinsurance market and its exposure to natural hazards is minor.
There are also additional opportunities in attractive niche markets. Crop failure insurance, for example, is seeing strong growth based on public-private partnerships (SystemAgro), since the provision of food to a growing world population and the consequences of climate change are increasing farmers’ need to protect themselves against financial risks. As a market leader in this area, Munich Re has built up competence and established sustainable insurance concepts together with supervisory authorities and primary insurers.
Customers are increasingly purchasing insurance cover via traditional and online channels in parallel, and so we are offering our products through a variety of channels and expanding direct sales in all classes of business. The demands of our customers are rising in terms of contact offers, smooth transitions between channels and the rapid processing of applications. We intend to utilise the resultant opportunities rapidly and systematically. To do so, we are largely building on the competence of ERGO Direkt and taking advantage of intra-group knowledge-sharing.
We are taking account of increasing demand for digital products in our research and development activities. ERGO is investing heavily in the development of e-services, and it has already implemented various measures. We would like to provide our customers with tailored access to the various sales channels. For this purpose, the functional scope and user-friendliness of digital access channels will be expanded. We will also
We aim to make use of opportunities in attractive niche markets.
We are taking account of increasing demand for digital products in our research and development activities.
In the medium term, we are striving for the highest possible level of automatic processing to improve process security, efficiency and quality across the whole value chain and with new digital customer interfaces. Our processes will be geared to rapid and – ideally – immediate handling.
In our domestic market of Germany, our independent agents continue to be the core of our market presence. The further development of our customer advice and care processes to meet the individual requirements of customers and interested parties provides us with the opportunity to boost our sales.
As in industrialised countries, digitalisation is also playing a major role in developing and emerging economies. Mobile solutions for smart phones are helping to offset shortcomings in healthcare infrastructure. Mobile apps can be used to secure targeted access to, and the payment of, medical care, thus paving the way for setting up and expanding basic healthcare in many cases. Digitalisation and advanced data management play a major part in the service concepts we develop and the way we expand our business. It is our aim to utilise the new digital opportunities to ensure the sustainable insurability of health risks. In this context, we intend to expand the disease management and prevention programmes of our health primary insurance companies to cover a wider scope of healthcare services in the interests of our clients. Our overall expectation is that, in addition to digitalisation, which will mainly have an impact on user behaviour, fundamental client requirements and expectations will shift away from pure cost coverage for illness towards health maintenance. The traditional business model of health insurance will change – and new business opportunities will emerge for us.
We not only provide our products and services to the insurance companies within our Group, but also achieve above-average performance in managing investment portfolios for institutional investors in accordance with our sustainable investment philosophy. We continue to see good growth opportunities in business with institutional clients, whose conservative and safety-oriented requirements are similar to ours on account of specific needs and preferences. Our target clients include insurance companies, pension funds, pension schemes for liberal professions, church institutions, foundations, selected banks, and industrial companies. We see additional growth potential in the sale of award-winning MEAG retail funds through multipliers such as asset managers, umbrella fund managers and banks.
— Consolidated result envisaged for 2015 achieved at €3.1bn — Dividend proposal for 2015: €8.25 per share — Expected return on investment of around 3% for 2016 — Consolidated result of €2.3–2.8bn envisaged for 2016
At €4.0bn, our technical result significantly surpassed our target of almost €3bn, mainly due to lower-than-average major-loss expenditure and loss reserve releases in reinsurance.
Our long-term objective of a 15% return on our risk-adjusted capital (RORAC) after tax across the cycle of the insurance and interest-rate markets is difficult to achieve in the current environment of very low interest rates on low-risk investments. We are very satisfied with the RORAC of 11.5% for 2015, as well as with the return of 10.0% on total IFRS capital (return on equity, ROE).
An excellent combined ratio of 89.7% in property-casualty reinsurance presented a significant improvement on the envisaged ratio of around 98%. Above all, this was due to lower-than-expected expenditure for major natural catastrophe losses and reserve releases for basic losses from prior years. Munich Re was able to release loss reserves – after adjustments for commissions – in the amount of around €1.2bn for the full year, corresponding to around 7.2 percentage points of the combined ratio.
Gross premium in reinsurance as a whole should be in the range of €26–28bn overall in 2016, i.e. below last year’s figure, although currency translation effects could potentially have a considerable impact on this estimate. In reinsurance, the consolidated result
Gross premiums written €bn 47–49 Consolidated result €bn 2.3–2.8 Combined ratio property-casualty reinsurance % 98 Combined ratio ERGO Property-casualty Germany % 95 Combined ratio ERGO International % 99 Return on investment1 % around 3 1 Excluding insurance-related investments.
We see further good development opportunities in life reinsurance. Stimuli will derive in particular from the dynamic expansion of the Asian life insurance markets and from the ongoing privatisation trends in provision for old age, long-term care and disability. We also expect increasing demand for the management of investment risks in life insurance portfolios. By contrast, the continuing weak performance of primary insurance in many established markets has also curbed demand for reinsurance, and we are seeing increasing pressure on prices here.
For 2016, we are expecting gross premiums written in life reinsurance to be in the range of €9–10bn. We are adhering to our objective of achieving a technical result of around €400m.
In property-casualty reinsurance, we are currently experiencing unrelenting competition as a result of stagnating demand, excess supply from traditional reinsurers and the influx of alternative capital. Especially smaller-scale providers have come under pressure, which has recently led to an accumulation of takeovers and mergers in the industry.
For 2016, we anticipate that gross premiums written in property-casualty reinsurance will be in the range of €17–18bn, which is roughly at the same level as last year. Taking into account the low major-loss expenditure in the first two months of 2016, we expect a combined ratio of around 98% of net earned premiums, anticipating reserve releases for losses from prior years in the order of four percentage points while maintaining an unchanged safety margin. The increase of more than eight percentage points on the ratio achieved in 2015 is mainly due to the fact that 2015 saw randomly fewer major losses from natural catastrophes than expected, and that loss reserves for prior accident years could be released on a large scale. For 2016, before the year started we anticipated major losses in the order of some €2bn, which corresponds to 12% of net earned premium.
Also, we are still seeing slight pressure on prices: as in the previous year, the renewal negotiations at 1 January 2016 were again marked by an oversupply of reinsurance capacity and good capitalisation of most market players. In January, treaties with a volume of €9.1bn – more than half of our treaty business in property-casualty reinsurance – were up for renewal. The premium volume generated by renewed business increased slightly by 1% to €9.2bn. We adhered to our profit-oriented underwriting policy and were able to more than compensate for volume reductions through attractive new business and innovative coverage concepts – despite the continuing difficult market environment. Thanks to the very close relations with our clients, we were also able to design a number of customised capital-relief solutions – such as where there were short-term capital requirements following an acquisition.
ERGO Insurance Group will be given a new organisational structure. ERGO Versiche rungsgruppe AG will be renamed ERGO Group AG. German, international, and direct and digital business will be managed in three separate units under the umbrella of the newly named ERGO Group AG. In addition to the existing ERGO International AG, there will be two new holding companies: traditional German business will be concentrated in ERGO Deutschland AG; the third pillar, ERGO Digital Ventures AG, will be responsible for all of the group’s digital and direct activities, including ERGO Direkt business. ERGO will thus modernise its structure and strengthen the basis for innovation and consistent strategic and operational management. We see good opportunities for ERGO overall, not only in evolving foreign markets but also in various sectors of the German market.
In our Health Germany field of business, we anticipate a marginal increase in gross premiums written to €5–5.5bn. The demand for private provision is still growing in Germany against the backdrop of an aging population. The need for nursing care and insurance products that cover these services remains high and will continue to grow. We aim to achieve our growth targets by designing new products in long-term care insurance and supplementary insurance, and by making improvements in comprehensive insurance.
Gross premiums written in the segment Property-casualty Germany should be somewhat over €3bn. We continue to attach great importance to risk-commensurate prices, and are consistently implementing measures to improve the earnings situation. We also intend to further expand personal lines business, which is marked by a highly competitive environment, and to advance our market position in commercial and industrial insurance lines. The combined ratio in property-casualty business in Germany should improve to around 95%, provided major losses remain within normal bounds.
We project that the leading central banks will take diverging measures in 2016. The resulting effects on the world economy in combination with high geopolitical risks will continue to lead to uncertainties and price volatility in the capital markets. We hedge this volatility by means of a widely diversified investment portfolio. The ongoing very low interest rates will continue to have an impact on the whole insurance industry and other large investors in 2016.
The duration of the investment portfolio is a key lever of our asset-liability management. We gear the duration of our investments to the duration of our liabilities. As a result, both sides of the economic risk-based balance sheet – important for managing our business – respond similarly to changes in interest rates, whilst there may be significant fluctuations in the consolidated balance sheet under IFRS. Over the course of the year, we will make the fine-tuning of our portfolio dependent on our current market assessments, whilst rigorously adhering to our fundamental strategy of gearing assets to the structure of our liabilities.
For 2016, we expect interest-rate levels overall to remain very low overall, and hence generate lower regular income from reinvestment of fixed-interest securities and loans. We also intend to only minimally change our moderate equity-backing ratio of 5.2%, so that write-down risks will continue to be limited. Regular income from our investments should come to somewhat less than 3%, or at least 0.1 percentage points lower than last year. Taking into consideration the result from the disposal of investments, writeups and write-downs, and other income and expenses, we expect the investment result to be lower than last year at around €7bn, equivalent to an annual investment return of around 3%.
Due to the strong diversification of our assets, we are well set up for very different capital market scenarios.
As regards the economic value added in terms of economic earnings, we anticipate a pleasing albeit lower figure than in 2015, in line with the IFRS results projected for the Group and the fields of business. This forecast is based on the assumption of stable capital markets and unchanged modelling parameters, and a normal major-loss incidence over the rest of the year. On the basis of current interest-rate developments, we anticipate poorer result contributions from life primary insurance than from the other segments.
In the period from June 2015 to the end of February 2016, we bought back shares with a value of €867m; another €133m are to be used for share buy-backs before the Annual General Meeting in April 2016. We are using this measure to return unneeded capital to shareholders. Despite the buy-backs, our good capital position will allow us to continue paying attractive dividends and selectively utilising opportunities for profitable growth. Since November 2006, Munich Re has carried out share buy-backs with a total volume of €8.9bn. Subject to approval by the Annual General Meeting, the dividend will rise by 50 cents to €8.25 per share.
Information on economic earnings can be found on page 41 f.
149Combined management report Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
The macroeconomic and industry environment of Munich Reinsurance Company essentially corresponds to that of the Group.
In the past financial years, the composition of the accounting result of Munich Reinsurance Company has developed as follows: Information on the business evironment can be found on page 68 f.
Change in claims equalisation provision and similar provisions –676,931 –1,429,603 52.6 Underwriting result for own account 517,432 –822,766 –
Taxes on income and profit, and other taxes 701,728 548,680 27.9 Profit for the year 2,577,995 2,005,885 28.5 Profit brought forward from previous year 47,274 46,451 1.8 Withdrawals from other revenue reserves 0 0 – Allocations to revenue reserves –1,248,807 –712,030 –75.4 Net retained profits 1,376,463 1,340,305 2.7
In property-casualty reinsurance, man-made major losses totalled €771m (572m), equivalent to 5.4 (4.0) percentage points of net earned premiums.
The combined ratio, which reflects the relation of claims and costs to net earned premiums, came to 91.2% (95.9%). Given the below-average expenditure for major losses and low expenditure for basic losses, the combined ratio in property-casualty reinsurance was better than in the previous year.
In life reinsurance, large-volume treaties have a significant impact on the premium development of our business. Last year, some of these treaties were terminated as planned or renewed with a lower volume. Positive currency translation effects overcompensated for this development. By contrast, overall premium development in our traditional reinsurance business was largely stable in 2015. The prolonged low- interestrate phase and sluggish economies in many of our key markets had some impact on our clients’ business and curbed demand for reinsurance. In Asia, we also saw positive effects on our business from continued market growth.
The reduced result is mainly a consequence of increases in provisions for future policy benefits in the area of international long-term care business, high expenditure for two mortality claims, a change in the allocation of administration expenses, and commuted reinsurance treaties. In Canada, Asia and the European markets, we posted very satisfactory results. In the USA and Australia, our business largely developed as expected after negative effects had affected the result in 2014.
In liability business, we succeeded in boosting premium volume in the year under review. The increase was due to positive currency translation effects and a large- volume intra-Group reinsurance agreement with Munich Re America. The technical result before claims equalisation provisions was significantly lower than in the previous year owing to reduced loss reserve releases and strongly increased major- loss expenditure.
Health 2015 Prev. year Change % Gross premium written €m 3,567 3,349 6.5 Combined ratio % 100.2 99.7 Underwriting result before claims equalisation provision and similar provisions €m –8 11 –
Third-party liability 2015 Prev. year Change % Gross premium written €m 1,974 1,651 19.6 Combined ratio % 110.5 100.8 Underwriting result before claims equalisation provision and similar provisions €m –190 –14 <–1,000
153Combined management report Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
Motor reinsurance showed a rise in premium income attributable not only to positive currency translation effects, but also to the conclusion of the large-volume intra- Group reinsurance treaty with Munich Re America. On the other hand, a negative effect derived from the planned reduction of a large customised reinsurance treaty in Australia in 2014. The technical result before claims equalisation provisions improved significantly, and was largely attributable to the reserve release for losses from prior accident years and to reduced major-loss expenditure compared with the previous year.
Premium income in aviation reinsurance, which comprises the aviation and space classes, was higher in the year under review, especially on account of positive currency translation effects. The result in aviation reinsurance was up significantly on the previous year, chiefly due to increased premium volume and lower major-loss expenditure.
Fire 2015 Prev. year Change % Gross premium written €m 3,579 3,354 6.7 Combined ratio % 66.4 76.6 Underwriting result before claims equalisation provision and similar provisions €m 1,012 704 43.8
Under other classes of business, we subsume the remaining classes of property reinsurance: burglary, plate glass, hail (including agricultural reinsurance), water damage, contingency, windstorm, livestock, householders’ and homeowners’ comprehensive reinsurance, and credit and fidelity guarantee reinsurance.
Capital-market interest rates in the established markets increased slightly in 2015, but developments in the course of the year were marked by significant volatility. The further relaxation of ECB monetary policy and the end of the US zero-interest-rate policy played a key role in this regard. As a consequence, the euro depreciated substantially against the US dollar. During the year, stock markets were also subject to increased fluctuations, but overall they showed moderately positive development. In the period under review, the EURO STOXX 50 climbed by around 4%, the Dow Jones fell by around 2%, and the DAX 30 was up by around 10%. In the first quarter of 2015, yields on ten-year German government bonds fell to a historic low; in the second quarter, they climbed markedly, and fell again marginally in the third quarter. Interest rates were slightly higher at the end of the year than at the beginning.
Engineering 2015 Prev. year Change % Gross premium written €m 823 804 2.4 Combined ratio % 89.7 113.3 Underwriting result before claims equalisation provision and similar provisions €m 76 –103 –
155Combined management report Munich Reinsurance Company (Information reported on the basis of German accountancy rules)
The investment result for the 2015 financial year fell by €855m. Higher regular income and a lower impact from other income/expenses were only partly able to compensate for the decrease in the extraordinary result, which is largely attributable to write-downs totalling €1,071m of directly and indirectly held shares in ERGO Ver sicherungsgruppe AG.
In the 2015 financial year, the tax-free elements of Munich Reinsurance Company’s pre-tax result – such as tax-free investment income and tax-free gains on the disposal of equities and special equity funds – exceeded taxable income. The Company’s taxable income is therefore negative. Munich Reinsurance Company’s tax income derives from a revaluation of provisions for tax risks for prior years.
Investment result €m 2015 Previous year Regular income 3,411 3,117 Write-ups and write-downs –1,479 117 Realised gains/losses on the disposal of investments 672 579 Other income/expenses –276 –630
The shareholders’ equity of Munich Reinsurance Company as determined under German GAAP accounting is effectively protected against the risk of loss arising from a random accumulation of losses by a claims equalisation provision totalling €9,764m (9,117m). Given our robust capitalisation according to all calculation methods, we intend – subject to the approval of the Annual General Meeting – to pay our shareholders a dividend that is €0.50 higher than in the previous year at €8.25 per share, or a total of €1,329m, from Munich Reinsurance Company’s net retained profits for the 2015 financial year.
By contrast, owing to lower premium income the maximum amounts allowed for the claims equalisation provision had to be reduced in some classes: by €82m in motor (previous year: increase of €166m), by €81m in credit (previous year: increase of €24m), and by €36m in marine (previous year: increase of €75m).
The business performance of Munich Reinsurance Company is largely subject to the same risks and opportunities as the performance of the reinsurance field of business presented in the consolidated financial statements. Munich Reinsurance Company generally participates in the risks of its shareholdings and subsidiaries in accordance with its respective percentage interest held. Munich Reinsurance Company is integrated in the Group-wide risk management system and internal control system of the Group.
The principles regarding the structure and design of the compensation system of Munich Reinsurance Company correspond to those of the Group.
The Statement on Corporate Governance can be found on our website at www.munichre.com/cg-en
Under the share buy-back programme decided on by Munich Reinsurance Company’s Board of Management in March 2015, we repurchased a further 1.1 million Munich Re shares with a volume of €169m from the balance sheet date to the end of February 2016.
The projections by Munich Reinsurance Company about the future development of its business are subject to the same influences as the reinsurance life and reinsurance property-casualty segments presented in the consolidated financial statements.
Fi na nc ia l s ta te m en ts a nd n ot es
Consolidated balance sheet 162 Consolidated income statement 164 Statement of recognised income and expense 165 Group statement of changes in equity 166 Consolidated cash flow statement 168
Assets A Intangible assets 184 B Investments 184 C Insurance-related investments 188 D Ceded share of technical provisions 189 E Receivables 189 F Cash at banks, cheques and cash in hand 190 G Deferred acquisition costs 190 H Deferred tax assets 190 I Other assets 190 J Assets held for sale 191
Segment reporting Segment assets 200 Segment equity and liabilities 200 Segment income statement 202 Non-current assets by country 204 Investments in non-current assets per segment 204 Gross premiums written 205
Notes to the consolidated balance sheet – Assets 02 Other intangible assets 209 03 Land and buildings, including buildings on third-party land 211 04 Hierarchy for the fair value measurement of investments 212 05 Investments in affiliated companies, associates and joint ventures 218 07 Other securities available for sale 221 08 Other securities at fair value through profit or loss and insurance-related investments 222 09 Deposits retained on assumed reinsurance 226 10 Other investments 226
Other information 42 Related parties 281 43 Personnel expenses 281 44 Long-Term Incentive Plan 281 45 Mid-Term Incentive Plan 284 46 Remuneration report 285 47 Number of staff 286 48 Auditor’s fees 286 49 Contingent liabilities, other financial commitments 286 50 Significant restrictions 287 52 Events after the balance sheet date 289 53 Earnings per share 290 54 Proposal for appropriation of profit 290
List of shareholdings as at 31 December 2015 pursuant to Section 313 (2) of the German Commercial Code (HGB) 291
II. Investments in affiliated companies, associates and joint ventures (5) 1,278 1,559 –281 –18.0 Thereof: Associates and joint ventures accounted for using the equity method 1,125 1,280 –155 –12.1
IV. Other securities 2. At fair value through profit or loss (8) 2,551 2,169 382 17.6
Consolidated financial statements Consolidated balance sheet 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”. 2 For previous year's figures, see Notes to the consolidated balance sheet – Assets (16) Non-current assets and disposal groups held for sale and sold during the reporting period.
II. Deposits retained on ceded business (27) 1,521 2,673 –1,152 –43.1 III. Current tax liabilities 2,018 2,729 –711 –26.1
Ceded share –1,910 –1,603 –307 –19.2 2. Income from technical interest (30) 6,803 7,503 –700 –9.3 3. Expenses for claims and benefits (31)
Thereof: Income from associates and joint ventures accounted for using the equity method 375 77 298 386.6 7. Insurance-related investment result (34) 140 414 –274 –66.1 9. Other operating expenses (35) –941 –875 –66 –7.5 10. Deduction of income from technical interest –6,803 –7,503 700 9.3 13. Other non-operating result (36) –532 –496 –36 –7.2 14. Impairment losses of goodwill (36) –452 –445 –7 –1.7 15. Net finance costs (36) –238 –228 –10 –4.4 16. Taxes on income (37) –476 312 –788 –
Consolidated income statement for the financial year 20151 1 Previous year’s figures adjusted owing to IAS 8; see “Changes in accounting policies and other adjustments”.
Unrealised gains and losses on investments Gains (losses) recognised in equity –933 3,889 Recognised in the consolidated income statement –888 –1,228
Change resulting from valuation at equity Gains (losses) recognised in equity –40 9 Recognised in the consolidated income statement 0 0
II. Items where income and expenses recognised directly in equity are not reallocated to the consolidated income statement 266 –521
Equity attributable to Munich Reinsurance Company Non-controlling Total equity holders interests equity
Total recognised income and expense 0 0 –505 0 2,658 1,431 –5 3,152 40 6,771 Change in shareholdings in subsidiaries 0 0 1 0 0 0 0 0 –3 –2
Income and expense recognised directly in equity 0 0 266 0 –1,841 1,415 1 0 10 –150
I. Cash flows from operating activities 4,327 7,527 Change from losing control of consolidated subsidiaries 36 0 Change from obtaining control of consolidated subsidiaries –67 –113 Change from the acquisition, sale and maturities of other investments –566 –4,431 Change from the acquisition and sale of investments for unit-linked life insurance contracts –446 –411
II. Cash flows from investing activities –1,030 –4,939 Inflows from increases in capital and from non-controlling interests 0 0 Outflows to ownership interests and non-controlling interests –1,005 –1,392 Dividend payments –1,295 –1,257 Change from other financing activities –37 –45
Thereof: Cash not attributable to disposal group1 3,955 2,912 Cash attributable to disposal group 86 0
Particularly in insurance and reinsurance, the use of estimates for measuring technical provisions is of substantial significance, given that measurement is invariably based on models and the development of future cash flows from insurance contracts cannot be conclusively predicted. But judgement and estimates play a significant role in the case of other items as well.
Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the German Stock Corporation Act (AktG) In November 2015, the Board of Management and Supervisory Board of Munich Re insurance Company published an updated Declaration of Conformity with the German Corporate Governance Code in accordance with Section 161 of the Stock Corporation Act (AktG) and made this Declaration permanently available to shareholders on the internet at www.munichre.com/cg-en.
Discretionary judgement and estimates are of significance for the following items in particular, and are described in greater detail in the respective explanatory notes: — Consolidated group — Goodwill and other intangible assets — Fair values and impairments of financial instruments — Deferred acquisition costs — Technical provisions — Pension provisions — Deferred tax — Contingent liabilities
Consolidated balance sheet 31.12.2014 Changes due as originally to adjustments recognised in 2014 31.12.2014 €m Assets H. Deferred tax assets 7,601 5 7,606 Equity and liabilities A. II. Retained earnings 13,005 –14 12,991 A. IV. Consolidated result attributable to Munich Reinsurance Company equity holders 3,153 –1 3,152 C. III. Provision for outstanding claims 56,342 20 56,362
Thereof: Attributable to Munich Reinsurance Company equity holders 3,153 –1 3,152
The following standards are mandatory for Munich Re for the first time in the 2016 financial year. They were adopted into European law in November 2014, and in November and December 2015. Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) has not yet been adopted into European law; this process is expected to be completed in the second quarter of 2016.
In June 2014, the IASB published the IFRS Agriculture: Bearer Plants, Amendments to IAS 16 and IAS 41. The amendments bring bearer plants that are only used to grow agricultural produce within the scope of IAS 16. These are thus accounted for in the same way as property, plant and equipment. Currently, the amendments do not appear to be relevant for Munich Re.
In August 2014, Equity Method in Separate Financial Statements (Amendments to IAS 27) was published. This again permits entities to use the equity method to account for investments in subsidiaries, associates and joint ventures in their separate financial statements. The amendment is not applicable to Munich Re.
In December 2014, Investment Entities: Applying the Consolidation Exception (Amendments to IFRS 10, IFRS 12 and IAS 28) was issued. The amendments clarify the consolidation exception where a parent company meets the definition of an investment company. This amendment is unlikely to have any material effects on Munich Re.
IFRS 9 (07/2014), Financial Instruments, replaces IAS 39 as regards the requirements relating to recognition and measurement of financial instruments. Under this revision, in future the categorisation of financial assets will be made on the basis of contractual cash flow characteristics and the business model of the asset held. Accordingly, subsequent measurement is made at amortised cost, at fair value without impact on profit or loss, or at fair value through profit or loss.
The provisions of IFRS 9 are associated with extensive additional disclosures required in the appendices that were adopted in IFRS 7, Financial Instruments: Disclosures. The provisions are mandatory for financial years beginning on or after 1 January 2018. Due to the great importance of this standard for Munich Re, we have established a project to analyse the provisions in detail and to set up the required implementation processes.
As expected, the revision of the IFRS governing recognition and measurement of insurance contracts (IFRS 4 phase II) will be released at the end of 2016 or the beginning of 2017, but application of the new rules is not expected to be mandatory before 2020. Due to the close interlinking of underwriting liabilities and investments of insurance companies, it is essential to have an aligned valuation of these line items in the balance sheet in order to prevent balance sheet distortions. For this reason, the insurance industry has been pressing for a postponement of the mandatory first application of IFRS 9 for the industry until application can be aligned with the insurance standard. The IASB is considering these concerns and is currently discussing the different possibilities of how these circumstances could be properly taken into account. A corresponding standard amending IFRS 4, Insurance contracts, will probably be published during the course of 2016. This would give a defined circle of insurance companies the possibility of postponing the first-time application of IFRS 9 to 2021, or earlier if the new insurance standard is mandatory from an earlier date. Munich Re is proceeding on the assumption that it will make use of this option.
The Amendments to IFRS 10 and IAS 28 (09/2014), Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, govern the recognition of gains or losses for transactions between an investor and an associate or joint venture dependant on whether the sale concerns a business or just assets that do not constitute a business. The IASB has postponed the mandatory effective date indefinitely. This amendment is unlikely to have any material effects on Munich Re.
In January 2016, the IASB published the new IFRS 16, Leases. Under the new rules, lessees will in future be required to account for most of their leases in their balance sheets. They will consequently have to recognise a right-of-use asset and a lease liability. There will be no distinction any more between finance and operating leases. On the other hand, the lessors’ accounting will remain largely the same as under the current rules, and a distinction will continue to be drawn between finance and operating leases. IFRS 16 will be mandatory for financial years beginning on or after 1 January 2019. We will evaluate the impact of the new provisions on Munich Re in due course.
The Amendments to IAS 12 (01/2016), Recognition of Deferred Tax Assets for Unrealised Losses published in January 2016 include clarifications that unrealised losses on debt instruments that are measured at fair value under IFRS and measured at cost for tax purposes may give rise to a deductible temporary difference. This applies regardless of whether or not the asset is held to maturity or sold. The IASB also determined that normally for all deductible temporary differences there should be an assessment as to whether the asset is likely to generate sufficient taxable income in the future in order for the deferred tax asset to be applied. An independent assessment should only be made if and to the extent that tax law differentiates between different types of taxable profits. We do not expect this regulation to have a substantial impact on Munich Re’s consolidated financial statements. The changes will be mandatory for financial years beginning on or after 1 January 2017.
Munich Reinsurance Company directly or indirectly holds all the voting rights in most of the entities included in the consolidated group. In a few cases, when assessing whether control exists, there are some non-Group shareholders, but Munich Reinsurance Company directly or indirectly holds a clear majority of the voting rights. In these cases, no significant judgement or assumptions were made as to whether the entities are to be included.
Pursuant to IFRS 10, investment funds are included in the consolidated financial statements if they are controlled by Munich Re. In assessing the need to consolidate shares in investment funds, we take particular account of the degree of variability in the remuneration of the fund manager, of dismissal rights, and of the role of the investors in committees and bodies of the investment fund. This can sometimes result in an assessment that we do exercise control even though the shareholding is below 50%.
In assessing whether control exists for structured entities, we focus our analysis on the decisions still to be made within the corresponding unit and on the agency relationships between the parties. For structured entities established by us to issue catastrophe bonds, we focus above all on our relationship to the trustees and our possibilities to influence their decision-making. Generally, we do not control such structured entities, even if we hold their bonds.
A list of all our shareholdings can be found in the section “List of shareholdings as at 31 December 2015 in accordance with Section 313 (2) of the German Commercial Code (HGB)”.
Further information on our gains and losses from losing control can be found in the notes to the consolidated balance sheets under Assets (16) Non-current assets and disposal groups held for sale and sold in the reporting period.
On 1 January 2015, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the solar park companies KS SPV 23 Limited, London, England, and Countryside Renewables (Forest Heath) Limited, London, England, from BayWa r.e. 205. Projektgesellschaft mbH, Gräfelfing, Germany and BayWa r.e. 149. Projektgesellschaft mbH, Gräfelfing, Germany. The solar parks have a total installed capacity of 22.7 megawatts (MW).
Other assets 5 66 Technical provisions (net) 0 –101 Other liabilities –106 –29
Cash flows arising from losing control €m 2015 Prev. year Total consideration for losing control 37 0 Non-cash consideration for losing control 0 0 Cash consideration for losing control 37 0 Cash over which control was lost –1 0
On 1 March 2015, via its subsidiary MR RENT-Investment GmbH, Munich, Munich Re acquired 100% of the voting shares in the solar park company Cornwall Power (Polmaugan) Limited, London, England from BayWa r.e. 148. Projektgesellschaft mbH, Gräfelfing, Germany. The solar park has a total installed capacity of 5 MW.
On 23 July 2015, via its subsidiary Victoria Investment Properties Two L.P., Atlanta, USA, Munich Re acquired as an investment measure an additional 18% of the capital of 13th & F Associates Limited Partnership Columbia Square (13th & F), Washington, D.C., USA, from Hines Columbia Square (Hines), L.P., Houston, USA, thereby increasing our shareholding to 98%. Furthermore, the shareholding of Hines, the previous general managing partner, was converted into the non-voting interest of a limited partner, enabling us to obtain 100% of the voting shares and control over the company, which is the property management and holding company of an office building in Washington, D.C. The fair value of Munich Re’s shareholding in 13th & F immediately prior to the time of acquisition totalled €325m. A revaluation of this shareholding resulted in a positive one-off effect of €220m, which was recognised as income from investments in associates. A purchase price of US$ 82.0m (€75.3m) was paid for the acquisition of the shares, of which US$ 80.2m (€73.6m) was in cash. The fair value of the non-controlling interest in the acquired company was set at €8m, by discounting the future cash flow attributable to the non-controlling interests as a result of the transaction at the valuation date.
The IFRS fair values of the assets and liabilities of the acquired company at the time of acquisition are as follows: IFRS fair values of the assets and liabilities at the acquisition date €m 13th & F Purchase price 75 Assets acquired 463
Liabilities assumed –57 Other reserves 0 Liabilities –57 Deferred tax liabilities 0 Other liabilities2 0
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.
The balance sheet date of the consolidated companies is generally 31 December. Some of the investment funds have different balance sheet dates. These funds are consolidated on the basis of interim accounts as at 31 December. Acquisitions are accounted for by the purchase method. In order to determine the equity capital at the time of acquisition, we measure the acquired identifiable assets and liabilities of the subsidiary at fair value. The consideration transferred in exchange for the acquired shares is netted against the equity capital apportionable to the Group at the time of acquisition. Any residual positive amount is capitalised as goodwill. Results generated by the subsidiaries after their first consolidation are included in Group equity. Amounts relating to intra-Group transactions (receivables and liabilities, expenses and income between consolidated companies) are eliminated unless they are determined as not being material.
Investments in associates and joint ventures are valued by the equity method, provided that the shares are of material importance for a true and fair picture of Munich Re’s financial position. Information on the measurement of investments in associates and joint ventures can be found under Assets – B Investments – Investments in associates and joint ventures.
Munich Re has interests in both consolidated and unconsolidated structured entities. An interest in an unconsolidated structured entity is classified as such where Munich Re receives variable returns from relevant activities of the structured entity but does not control that entity.
Investment funds As part of its investment activities Munich Re invests in investment funds on its own behalf, and on behalf of policyholders under unit-linked life insurance. Investment funds are mainly financed by issuing redeemable shares or units.
Munich Re invests above all in mutual and specialised funds in Germany and in other countries that invest in securities and real estate. Some of the investment funds are managed by MEAG MUNICH ERGO AssetManagement GmbH, others by fund managers outside the Group. They also include investments in infrastructure (including renewable energies and new technologies) and private equity.
On behalf of our policyholders, we invest in numerous investment funds for unit-linked life insurance that are mainly managed by companies which are not related parties of Munich Re. These funds are mostly equity and bond funds.
Securitisation vehicles Munich Re invests in debt securities that are issued by secu ritisation vehicles which are not set up by Munich Re. Munich Re also uses securitisation vehicles to issue catastrophe bonds, and it also invests in third-party catastrophe bonds. Securitisation vehicles finance themselves by issuing securities.
In order to protect its own portfolio, Munich Re also uses alternative risk transfer in addition to traditional retrocession. Under this process, underwriting risks are transferred to the capital markets with the assistance of securitisation vehicles. The sole purpose of these vehicles is to securitise underwriting risks, mostly in the area of natural catastrophes, and to issue catastrophe bonds. Depending on the design of the risk transfer agreement with the securitisation vehicle, the transaction is classified as a derivative or as an insurance contract. Derivatives are recognised under “other securities at fair value through profit or loss” or under “other liabilities”. Agreements designated as insurance contracts are not recognised in the balance sheet until a loss has occurred, and they are shown under “ceded share of technical provisions”.
At fair value through profit or loss 0 0 0 0 0
Managed fund assets MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH also manages investment funds for private clients and institutional investors, for which it receives a management fee. The management fees are recognised in the consolidated income statement (commissions). The maximum exposure to loss relates to the loss of future management fees. Fund management activities generated income of €33m (28m) in the 2015 financial year. The value of fund assets under management provides information about the size of the unconsolidated structured entities. As at 31 December 2015, the managed fund assets amounted to €3,507m (3,073m), and Munich Re itself also holds a small interest in these funds.
The other intangible assets mainly comprise acquired insurance portfolios, acquired and self-developed software, and acquired sales networks, client bases and brand names.
Munich Re Group Annual Report 2015 on a straight-line basis in accordance with the component approach, depending on the weighted useful life for their specific building class. The underlying useful lives mainly range between 40 and 55 years. If the recoverable amount of land and buildings falls below their carrying amount, the carrying amount is written down to the recoverable amount. Impairment losses are recognised as investment expense in the consolidated income statement, and reversals of impairment losses as investment income.
Investments in affiliated companies that we do not consolidate because they are not material are generally carried at their fair values. If the investments are quoted on a stock exchange, we use the share prices at the balance sheet date; for unquoted investments, the fair value is measured using the discounted earnings or net asset value method. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
Investments in associates and joint ventures are valued by the equity method at the Group’s proportionate share of their net assets. The earnings of the associate or joint venture attributable to the Group are included in the investment result. As a rule, the equity and annual result from the most recent individual or consolidated financial statements of the associate or joint venture are used; in the case of the annual financial statements of important associates or joint ventures, appropriate adjustments are made to ensure they conform with Munich Re’s accounting policies; exceptional transactions of material importance for a true and fair picture of the financial position of the associate or joint venture are recognised in the same financial year. Investments in associates and joint ventures that are not material for assessing the Group’s financial position are generally accounted for at fair value. To determine the fair value, we use the share prices at the balance sheet date if the investments are quoted on a stock exchange; for unquoted investments, the fair value is measured using the discounted earnings or net asset value method, other valuation methods customary in the market or expert opinions on company valuation. Changes in the fair value are recognised in “other reserves” under unrealised gains and losses.
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.
Determining fair values IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. All investments and other items that are recognised at fair value, and such investments and other items that are not recognised at fair value but for which a fair value is disclosed in the notes, are allocated to one of the fair value hierarchy levels of IFRS 13. This valuation hierarchy provides for three levels.
Impairment Impairments in value are recognised as an expense in the income statement. At each balance sheet date, we assess whether there is any substantial objective evidence of impairment of a financial asset or group of financial assets. As the recognition of value impairments – both on the merits and in terms of amount – is based on discretionary judgement and estimates, we have established a process that guarantees that at every reporting date all investments that might be subject to impairment are identified and tested for impairment. On the basis of these test results, a list of investments will be prepared for which an impairment must be recognised; this list will then be verified once again with the involvement of management.
Investments for unit-linked life insurance contracts Investments for policyholders under unit-linked life insurance are measured at market value. Unrealised gains or losses from changes in fair value are included in the insurance-related investment result. They are matched by corresponding changes in the technical provisions (see Equity and liabilities D – Technical provisions for unit-
Munich Re Group Annual Report 2015 linked life insurance [gross]), which are included in the technical result. The change in technical provisions also includes changes from additional premium components. Recognising these investments at fair value, with impact on profit or loss, avoids mismatches that would otherwise occur due to different measurement of the corresponding provisions.
Other insurance-related investments This refers to investments that are not utilised for asset-liability management. It includes insurance-linked derivatives, derivatives to hedge variable annuities, weather and commodity derivatives, and physical gas. Insurance-linked derivatives include derivatives embedded in variable annuities, the derivative components of natural catastrophe bonds and from securitisations of mortality and morbidity risks, individually structured insurance-linked derivatives, and derivative components which are separated from their host insurance contract in accounting. This category also includes retrocessions in the form of derivatives to hedge insurance risks assumed. Insurance risks are defined as risks which – in a modified form – can also be covered by an insurance contract within the meaning of IFRS 4. Other insurance-related investments are accounted for at fair value, although we recognise changes in value in profit or loss. For physical gas, the fair value is reduced by estimated sale costs. If no quoted prices in an active market are available, fair values are based on recognised valuation methods. Munich Re uses a range of valuation models for this purpose. Information on the valuation models and processes can be found in the notes to the consolidated balance sheet under Assets (4) Hierarchy for the fair value measurement of investments.
Deferred acquisition costs comprise commissions and other variable costs directly connected with acquisition or renewal of insurance contracts. In accordance with IFRS 4, we do not use shadow accounting for deferred acquisition costs in life primary insurance. In life business and long-term health primary insurance, acquisition costs are capitalised and amortised over the duration of the contracts. This is done either proportionally to the premium income (FAS 60) or proportionally to the respective contracts’ expected gross profit margins calculated for the relevant year of the contract term (FAS 97, 120). The allocation of individual contracts to the FASs concerned is shown under Equity and liabilities – C Gross technical provisions. In determining the amount of amortisation, we take into account an actuarial interest rate and changes resulting from the disposal or withdrawal of contracts from the portfolio. In propertycasualty business, short-term health primary insurance and health reinsurance, the deferred acquisition costs are amortised on a straight-line basis over the average term of the policies, from one to five years. Deferred acquisition costs are regularly tested for impairment using a liability adequacy test as per IFRS 4; see Equity and liabilities – C Gross technical provisions.
Other assets are generally carried at amortised cost. The owner-occupied property recognised under other assets is accounted for as outlined under Assets – B Investments – Land and buildings. Plant and equipment is amortised mainly on a straight-line basis, the underlying useful lives ranging between 1 and 50 years. Where required, impairment losses are recognised or reversed for the Group’s owner-occupied property, plant and equipment. These impairment losses or impairment losses reversed are distributed between the functional areas.
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 consolidated subsidiaries that are not directly or indirectly wholly owned by Munich Reinsurance Company. Direct minority interests in investment funds and in partnerships are recognised under “other liabilities”. The portion of the result attributable to non-controlling interests is shown in the consolidated result.
The technical provisions are shown as gross figures in the balance sheet, i.e. before deduction of the ceded share; see the explanatory remarks on Assets – D Ceded share of technical provisions. The ceded share is calculated and accounted for on the basis of the individual reinsurance agreements. Acquisition costs for insurance contracts are capitalised and amortised over the terms of the contracts; see Assets – G Deferred acquisition costs. The measurement of technical provisions is based on US GAAP FAS 60, FAS 97 and FAS 120. Credit insurance contracts are accounted for in accordance with the rules of IFRS 4.
The provision for future policy benefits in long-term underwriting business is posted for the actuarially calculated value of obligations arising from policyholders’ guaranteed entitlements. As well as life insurance, this concerns portions of health and personal accident insurance, insofar as the business is conducted like life insurance. Measurement is usually based on the prospective method, by determining the difference between the present values of future benefits and future premiums. The actuarial assumptions used for their calculation include, in particular, assumptions relating to mortality, disablement and morbidity, as well as assumptions regarding interest-rate development, lapses and costs. These are estimated on a realistic basis at the time the insurance contracts are concluded and they include adequate provision for adverse deviation to make allowance for the risks of change, error and random fluctuations. The actuarial assumptions are adjusted if this is shown by a liability adequacy test in accordance with IFRS 4 to be necessary.
In primary insurance, measurement is generally carried out individually for each risk. For German life primary insurance, biometric actuarial assumptions based on the tables of the German Association of Actuaries (Deutsche Aktuarvereinigung e. V.) are used. We also largely use the tables of the national actuarial associations for the rest of the primary insurance business. The actuarial interest rate employed for discounting in life primary insurance is limited by the respective maximum actuarial interest rate prescribed by the supervisory authorities. In health primary insurance, discount rates are chosen that reflect the best estimate of expected investment income, less a safety margin.
The measurement of the provisions for future policy benefits depends on the type of contract, being based either on FAS 60 (life primary insurance without performancerelated participation in surplus, health primary insurance and the bulk of reinsurance treaties), on FAS 97 (life primary insurance based on the universal life model, unitlinked life insurance and life reinsurance for assumed policies based on FAS 97) or on FAS 120 (life primary insurance with performance-related participation in surplus).
For all other contracts as per FAS 97, an account is kept to which net level premiums and interest earnings are credited and from which risk premiums and administration expenses are debited, not all credits and debits being contractually fixed at the time the contracts are concluded. The provision for future policy benefits for life primary insurance where policyholders bear the investment risk themselves (unit-linked life insurance) is shown separately under Equity and liabilities – D Gross technical provisions for unit-linked life insurance.
Other technical provisions mainly include the provision for premium refunds in primary insurance and the provision for profit commission in reinsurance. Provisions for premium refunds are posted in life and health primary insurance for obligations involving policyholder bonuses and rebates that have not yet been irrevocably allocated to individual contracts at the balance sheet date. Where these provisions are posted on the basis of national regulations, a retrospective approach is usually taken based on supervisory or individual contract regulations. 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.
Besides this, there are provisions for deferred premium refunds, which are posted for the amounts apportionable to policyholders from the valuation differences between IFRS and local GAAP on the basis of the expected future participation quotas. For unrealised gains and losses on investments available for sale, which are recognised directly in equity (see Assets – B Investments – Fixed-interest or non-fixed-interest securities available for sale), the resultant provision for deferred premium refunds is also posted without impact on profit or loss; otherwise, changes in this provision are recognised in the income statement.
All technical provisions are regularly subjected to a liability adequacy test in accordance with IFRS 4. If current experience shows that the provisions posted on the basis of the original assumptions – less the related deferred acquisition costs and the present value of the related premiums – are inadequate to cover the expected future benefits, we adjust the relevant technical provisions with recognition in profit or loss and disclose this under impairment losses/unscheduled changes in the notes to the consolidated balance sheet; see Notes to the consolidated balance sheet – Assets (2) Other intangible assets, Assets (13) Deferred acquisition costs, and Equity and liabilities (21) Provision for future policy benefits. The appropriateness of unearned premiums and of the provision for outstanding claims is assessed in relation to the realistically estimated future amount to be paid. The appropriateness of the provision for future policy benefits is assessed on the basis of realistic estimates of the actuarial assumptions, the proportional investment result and – for contracts with participation in surplus – the future profit sharing.
This item includes provisions for post-employment benefits and similar obligations. 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 companies 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 two-way trust) – assets that may only be used to cover the pension commitments given and are not accessible to creditors – the pension obligations are shown less the amount of these plan assets. If the fair value of the assets exceeds the related outsourced pension commitments, this reimbursement right is recognised under “other receivables”.
Tax liabilities for current taxes are posted – without discounting – in accordance with the probable tax payments for the year under review or previous years.
Under IAS 12, deferred tax liabilities must be recognised if asset items have to be valued higher, or liabilities items lower, in the consolidated balance sheet than in the tax accounts of the reporting company, and these differences will be eliminated at a later date with a corresponding impact on taxable income (temporary differences); see the notes on Assets – H Deferred tax assets.
Liabilities to be transferred together with disposal groups are recognised in this item.
In contrast to this, currency translation differences are largely recognised in profit or loss in our subsidiaries’ individual financial statements, and shown under “other non-operating result”. This involves the translation of foreign currency items into the respective functional currency in accordance with IAS 21. An excess of assets over liabilities in a particular foreign currency results on balance in a gain if that currency appreciates, and in a loss if it falls in value. The reverse applies if cover is insufficient.